Saturday, December 17, 2005

The Economic Fallacies of Nuder

Swedish Social Democratic Finance Minister Par Nuder (It's pronounced "Neuter". Not that I want to imply anything about him.....) wrote a article in yesterday's Svenska Dagbladet. For those of my readers that don't understand Swedish, I can summarize what he wrote:

1. The Swedish economy is going great.
2. It's going great because the Social Democrats pursue so great policies.
3. To keep it great, they will increase the level of fiscal stimulus.
4. The tax cut proposals from the centre-right opposition cannot be motivated on economic grounds, and is motivated by the circular argument that taxes must be cut because taxes must be cut.
5. A extensive welfare state is necessary to make people feel secure, and the feeling of security is necessary to secure Swedish competitiveness.

Regarding point 1 and 2 , I refer to my previous post on the subject. Nuder makes a big deal of the by Western European standards strong third quarter growth number, but this reflects not high underlying growth but is a purely cyclical phenonema, reflecting the combination of fiscal stimulus, interest rate cuts and the falling exchange rate of the krona. The effects of these will probably last for a few more quarters, conveniently enough for the Social Democrats for next year's election, but once they wear off, growth will slow sharply, down to its long-term sluggish trend.

As for number 3, that is a rather curious argument given the fact that the Social Democrats traditionally have been Keynesians and since Keynesians usually teach that you should pursue countercyclical policies, that is loosen during downturns and tighten during booms. And since this is a cyclical peak, it seems strange to loosen then. Does this mean that Nuder will propose to tighten fiscal policy during the next downturn? If the fact that the government sector (including the pension system) now have a surplus is a argument for loosening, then surely this would imply tightening during the coming downturn.

As for number 4, I have previously demonstrated the negative economic effects of high tax rates both on a theoretical and empirical level.

Moreover, there is a strong non-economic case for lower taxes, a case which contrary to Nuder is not circular. While this may seem incomprehensible for a Social Democratic Finance Minister, some of us have a desire to keep our income and dispose of it as we see fit, rather than being robbed of it by arrogant Social Democrats. Taxes should be cut, not because taxes should be cut but because we want more freedom from arrogant politicans like you.

As for number 5, I find the argument that the feeling of security supposedly created by "generous" welfare state benefits is necessary for Swedish competiveness to be invalid on at least two grounds.

First of all because these have -together with high taxes and high union-imposed mimimum wages- created Sweden's employment crisis where the level of employment have been falling under the last few decades and where now some 20-25% of the population is unemployed (including those hidden in various hidden unemployment schemes from the government), a number which is more than 50% for non-western immigrants.

Secondly, Nuder claims that "security" is necessary because otherwise people won't agree to necessary structural changes. Presumably, he by that means that in the absense of the welfare state, people would demand protectionism and employment regulations. But this is first of all a political argument, not a economic one. Unless he can come up with some other arguments even he is implicitly admitting that the ideal state of affairs is a free market economy with free trade and little or no taxes and regulations, like in Hong Kong and Latvia and Estonia . It's just that he finds it inevitable that the political process will produce either a extensive welfare state or heavy regulations and protectionism. Yet, there is little evidence for such inevitability, as we see many examples like the aforementioned Hong Kong and the Baltic states which have little or no welfare state yet have even less of regulations and protectionism than Sweden. Meanwhile we see that in the case of France, whose welfare states is as extensive as Sweden, that there is strong support for protectionism and destructive regulations.

The Social Democrats may think they have repealed the laws of economics, but in reality they cannot escape the basic economic truth that if you punish productive behaviorand subsidize people who do not engage in productive behavior, you will get less of productive behavior.


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