Swedish Centre-Right Ignore Sound Monetary Theory at Their Own Peril

On the same day that my mises.org article about Sweden was published, the Swedish statistical bureau released an advance estimate of second quarter GDP (as usual, more details can be found in the Swedish language version of this release) which at 5.5% came in far above all analyst's expectations . Most analysts (including me ) had expected something roughly similar to the first quarter i.e. 4-4.5%.

Many reacted with disbelief and as can be seen by this comment thread at Swedish business news paper Dagens Industri, they believe the number was manipulated in order to help the Social Democrats win the elections next month . But while I admit that the numbers are strangely high given what one could have expected from various indirect indicators such as employment and wage growth, it is nevertheless not impossible to have GDP growth of this magnitude combined with weak employment and wage growth, nor is it impossible that the labor statistics is misleading and underestimate growth. And even if these numbers overestimate growth, we need a lot more conclusive evidence before I am willing to accuse the statistics bureau of intentional manipulation. So, for now, we should accept these numbers for what they are.

Social Democratic commentators reacted unsurprisingly by claiming this is a vindication for "the Swedish model", whereas most centre-right commentators either didn't comment it all or explained it with unsatisfactory explanations. The editorial page at Expressen for example explained it with the modest free market reforms implemented in Sweden in the late 1980s and early 1990s. But while these reforms have indeed raised structural growth since they were implemented, they can hardly explain the recent growth spurt. Blogger Dick Erixon came with an even worse explanation, that it was a temporary consumption boom driven by higher transfer payments from the government, which is misleading since for one thing consumption increased slower than investments (Erixon cites a quarterly decline in investments in some industries, yet this is more than offset by increases in others) and for another these hand-outs can only explain a small part of the consumption increase.

Instead, the real explanation for this temporary growth spurt is the one I have repeatedly explained on this blog and also in my mises.org article: namely that it is a classic Austrian business cycle theory case of a cyclical boom driven by inflationary monetary policy. Unfortunately, since so few commentators in Sweden are familiar with that theory, the Social Democrats can in effect get away with claiming that the current growth spurt is a vindication of their policies, as free market commentators can offer no or only obviously unsatisfactory/false explanations. The Swedish centre-right could pay a heavy price for ignoring sound business cycle theory.