Tuesday, May 02, 2006

Structural Reforms Damned If Unemployment Goes Up, If It Goes Down

When the French government proposed a all too modest liberalization of its strict labor laws, we saw the almost unbelievably stupid argument that because unemployment is so high now under the current system, we should oppose reform of the system. Now, Swedish Social Democratic Prime Minister Goran Persson offered the opposite argument in his May Day speech:

"How could it go so wrong that the centre-right put in their attack on the unemployed when unemployment is falling? Why hunt the unemployed when Sweden is doing better than ever? The centre-right didn't believe that we would have an election campaign at a cyclical stage when things are going the right way." [Hur kunde det bli så tokigt att de borgerliga satte in stöten mot de arbetslösa när arbetslösheten faller? . Varför jaga de arbetslösa när det går bättre för Sverige än någonsin? De borgerliga trodde inte att vi skulle driva en valrörelse i ett konjunkturskede när saker och ting gick åt rätt håll.]

Let's set aside for the moment that the centre-right parties have quietly and cowardly withdrawn their proposal to reduce unemployment benefits in any significant way. And let's also set aside that the so-called reduction in unemployment he refers to is pathetically small (Only 789 people less than a year ago). Persson's argument still makes somewhat more sense than that of the French "students". Clearly, if unemployment falls, the case for liberalization of the labor markets become weaker.

But while somewhat less confused than that of the French left-wingers it is still confused, as he himself admitted that the current economic upswing in Sweden is cyclical, not structural. Cyclical means, more or less by definition, that it is first of all unsustainable and more importantly, that it is unrelated to structural factors like labor regulations and unemployment benefits. So the fact that Sweden because of the low interest policy of the Riksbank and the global cyclical upswing is in a cyclical upswing, definetly do not prove that the need for structural reforms have been reduced.

You can always count on socialists to use such illogical arguments, as it is obvious to anyone thinking in rational terms that strict labor laws and high unemployment benefits will raise unemployment. What is disheartening is that so few are pointing out the fallcy of their arguments.

Finally, to really illustrate the cyclical nature of the current Swedish upswing, today it was revealed that M3 money supply rose a full 15.1%, while private sector debt rose 13%. Monetary policy in Sweden are thus even looser (more inflationary) than in the Euro-zone, where money supply growth was "only" 8.6%.


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