The minister of finance follows the goal of a surplus, which means that the public sector will go up by an annual plus of one per cent of GDP over a business cycle. This can, of course, never be really done with precision, because business cycles do not move predictably like celestial bodies, and it is never possible to know in advance how long the cycle will be, but the practical result has nonetheless turned out alright. Central government debt, which once seemed so intimidating, is now low compared with many other EU countries. Yet the minister of finance is now very tempted to opt for a less demanding course that would open the door to too many new billions in government spending. Or, if you were more optimistic overall, it would make it possible to reduce the burden of taxation on the Swedish people.
The governor of the Riksbank follows the goal of an inflation target. The Riksbank has namely chosen to interpret the Riksbank law’s requirement of ”price stability” as being that annual monetary value deterioration should be at a particular level, and the boss is as stubborn at the tiller as Captain Ahab. The goal is fixed and the Riksbank will do whatever it takes to get there, whatever the cost. This, despite the fact that it appears increasingly unclear whether the inflation target’s guiding principle is a warm, life-giving sun, or whether it is simply turning us towards a black hole.
When the target was first introduced, we were coming from an unhealthily high rate of inflation, and two per cent seemed like a paradise of stability, but now the situation has changed; lower oil prices, technological breakthroughs and stronger competition, amongst other factors, are keeping prices low and the Riksbank is suddenly struggling, not to bring down inflation, but to get it up. The battle-scarred crisis-fighters of the1990s would hardly believe their ears if they heard how the Riksbank Executive Board members are now calling passionately for less monetary value and thinking that they can see hopeful signs that inflation will finally take off. Labour market stakeholders are invited to stick to the map, instead of the terrain where they negotiate wages.
And so they fire up the weapon of interest rates. Since February this year, the key interest rate has been negative and, at the time of writing, it is down to minus 0.35 per cent. The consequence of this is, of course, a loan bonanza without equal, where households are borrowing more and more staggering sums to buy houses from each other. As regards business investment, unfortunately it has not been as prevalent. Sure, the low interest rate reduces the value of the Swedish krona, but the seasoned entrepreneur, Rune Andersson, wrote in early autumn (DI 12/8) that today’s depressed krona cannot be used as a basis for long-term investment. The Riksbank is hoping for inflation, but what you really get is a dangerously high level of debt – Sweden has almost the highest in the world – and a strange signal language that tells citizens that it is stupid to save money in the bank and sensible to spend money that you do not have.
It’s all particularly strange, because the information is so vague about why it is so important to push up inflation to two per cent. It is said that a stable inflation rate provides predictability in the economy, but when you have to resort to unpredictable ways to get there – and still cannot – it contributes to confusion rather than stability.
Well. Whatever one may think of these goals, it is undisputed that they are attracting too much of the energy in the economic policy debate. A country may be hit hard by poor fiscal and monetary policy, but even a well-run macro-economy is just a beginning. Prosperity comes when entrepreneurs, innovators, managers and employees take advantage of the opportunities given and offer attractive products, services and business models. It is absolutely central to a positive business climate and, as pointed out in this issue’s theme section, this in turn requires a positive individual climate.
Edmund S. Phelps, who won the Economics Prize in 2006, strikes a blow for the imagination and finds it tragic that so many people do not feel they have an innovative and stimulating work life. The vast majority of people in the welfare states of the West are able in some way to consume, but it is in their productive efforts that individuals truly come into their own and experience the good life. He urges a double battle: against the special interests that put an end to innovation, and for a renewal of schools and universities that allow the humanities to broaden the horizons of young people and get them to desire and dare to take risks.
It’s about the ethos but probably also about the conditions. That the government, in its autumn budget bill, will push up the marginal income tax rate to the highest in the world will certainly make its comrades on the Left happy. What it does for individual climate in Sweden is quite another thing.
VD och chefredaktör i Axess.