On economic stimulus, Sweden sets a good example

Charlie Arlinghaus

August 21, 2013

As originally published in the New Hampshire Union Leader

Both the state and the country can better focus their efforts on budgets and economic development by following the example and the reasoning of that bastion of conservative economics called Sweden.

In the face of economic crisis, advocates of what they call “stimulus” suggest it is the only alternative to the horrible-sounding “austerity” — as if our only two choices are to give ourselves completely to bureaucrats and administrators to spend as they wish or to subsist on bread and water.

The finance minister of Sweden chose to reject both choices. Anders Borg of Sweden’s right-of-center Moderate Party looks like American magician Penn Jilette, complete with ponytail and earring. But he sounds like Milton Friedman (to be fair, on economics, so does the libertarian-minded Jilette).

While most of Southern Europe got into trouble following the advice of professional advice-givers like the International Monetary Fund, Sweden chose to focus on jobs. According to Borg, “we can see that very little of the stimulus went to the economy. But they are stuck with the debt.” Sweden chose to permanently cut taxes to bring its economy back. Their goal was to create a climate to attract business owners and entrepreneurs.

“Ownership is a production factor. Entrepreneurs are a production factor,” Borg noted. “It is problematic if you drive out entrepreneurs from your country because they are the source of job creation.”

Sweden cut taxes four times (and has proposed a fifth cut this week). After a 20 percent cut in its corporate tax rates, Sweden’s top rate is about half of ours.

The results are worth noting. Sweden’s economic growth has been dramatically higher than the rest of the Euro region’s despite labor costs that, while lower than the European average, are 20 percent higher than in Germany and 40 percent higher than in the United States. In the last two years, the Swedish Kroner has gained 35 percent compared to the Euro.

Borg doesn’t see growth and tax cuts as inconsistent with fighting deficits. His advice to “keep dealing with the deficit because deficits destroy everything else” is consistent with their experience. Swedish debt has declined by 50 percent as a share of the economy during a time when U.S. debt has more than doubled by the same measure.

This idea is neither new nor exclusively Swedish. After the relatively anemic growth of the 1950s and early 1960s, President Kennedy proposed a permanent cut to income tax and corporate tax rates in the United States. Kennedy said “every dollar that is released from taxation that is spent or invested will help create a new job and a new salary. And these new jobs and new salaries can create other jobs and other salaries and more growth for an expanding American economy.”

Kennedy specifically touted his 25 percent cut to the top rate as a means to turn budgetary deficits into budgetary surpluses. In fact, income tax collections went up by 85 percent in the first five years after the cuts came into effect. Real economic growth was twice the post-war average during the nine-year boom that followed.

What the Democratic Party’s Kennedy and the Moderate Party’s Borg have in common is a focus on job growth. More jobs for more people is a better stimulus than any plan to give this department or that commission some spending that was denied in the last budget debate.
At the federal level, this means taxes should go down, not up. At the state level, it means fewer programs and fewer regulations. The most innovative program is one that reduces barriers to entrepreneurs and job creators investing their own money here instead of somewhere else.