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CORRECTION

Original: "...unless the recovery was a capricious short deviation due to an accidental synchronicity of animal spirits but an autonomous one...."

Corrected: "...if the recovery was not a capricious short deviation due to an accidental synchronicity of animal spirits but an autonomous phenomenon...."

(Sorry for the inconvenience.)

@fundy

The recent data point was no more than what offered an opportunity to discuss this time.

The logic of Mr Karlsson is that it is not the monetary policy but that supply-side policy that is the decisive factor for recovering the output of Sweden. On the contrary, my argument is that if the figure of the output is not a capricious short deviation, which is often observable, from the longer trends of business cycle there must be factors, other than the monetary or supply-side policies, that are helping the economic recovery.

The implication in my argument is that the supply-side policy has two sides as a catch-up drive of the labour supply when the economy is increasingly close to the state of full-employment and as an excessive drive when otherwise. As what we have actually been observing is either disinflation or semi-inflation, which implies the latter case, anywhere in the world, Mr Karlsson’s view sounds unconvincing to me.

I, therefore, suppose both that the fiscal policy must be a notable one of the decisive factors of the recent recovery of the output unless the recovery was a capricious short deviation due to an accidental synchronicity of animal spirits but an autonomous one and that the monetary policy and supply-side policy have supplemental and ambivalent effects on the recovery.

So, try and draw in mind the triangle among the three of us.

Regards,
Jasiek

Jasiek, yes I'm familiar with Stephan Karlsson's blog. He's a good economist. However, I don't understand the desire to build theory out of a single data point. The variation in even quarterly data is mostly random. A good economist needs at least 30 data points to be able to determine if a trend exists. Whatever anyone says about one or two data points doesn't mean a thing.

I find the linked blog-entry posted by a Swedish economist against Prof Scott Sumner’s entry extremely interesting:

Swedish boom isn't due to monetary policy
http://stefanmikarlsson.blogspot.com/2011/02/swedish-boom-isnt-due-to-mo...
http://www.csmonitor.com/Business/Stefan-Karlsson-s-Blog/2011/0226/Swedi...

(But, I didn’t know how to post my comment to the entry. I am instead posting mine here, because I find the topic relevant to RA’s recent entries).

If what Mr Karlsson presents is the real reason why the Swedish growth was the highest in the EU recently I would assume that the supply-side policies with the market-liberal vector must have added expantionary pressures to the supply of employment and that at the same time the same policies must have promoted the domestic production against the foreign outsourcing of production, especially in the service sector, adding an expantionary pressures to the demand for employment and thus to the aggregate demand via wages. But, he doesn’t elaborate the background kinetics as to how the two policies promoted the domestic production (i.e. the service industry this time).

With the above assumption, the whole policy package including the two policies must have promoted the competitiveness of the domestic service sector from the approach of creativity, which encouraged the demand and supply of employment to balance at a higher level in number of employment, rather than from the approach of (drastically reducing) the real wages.

So, along with the two supply-side policies that he cites in the entry there must have been unmentioned factors – probably structural (i.e. institutional) ones – that promoted the creativity (i.e. entrepreneurship or animal spirits) of the domestic service sector (to create new sub-markets in there) and thus the positive attitudes for demanding credits within the sector to expand employment.

Although Mr Karlsson doesn’t elaborate them the factors must be essential for the success. Otherwise, the rate of unemployment must have simply soared with the supply-side policies with the saved credits due to the reduction in marginal tax rates going into speculation via the domestic savings unless there had already been a sufficient level of demand for employment in the field of domestic production (i.e. businesses, which are identical with aggregates of various fixed factors of production) alluring money via the domestic savings.

I assume that one of the most important among the unmentioned factors is public investment as the cost to promote the domestic production (in the service sector this time) while that is not visible from the net sum of the public expenditure due to the still high effective level of taxation and the reduction of unemployment- and sick-leave- benefits. It is because the average rate of saving is always low in Sweden; there must be a substitute domestic channel, which is taking the role of the Savings, of the flow of domestic capital (i.e. investment) into the fixed factors (incl. employment) of domestic production (even in the service sector).

To summarise my assumption, the secret of the recent economic growth of Sweden may have highly probably come from implementing the two ‘moderate-rightist’ policies at the same time:

1. SLIGHT REDUCTION in marginal tax rate, not to reduce the total sum of public spending in a radical manner

2. PARTIAL SHIFT of public expenditure from social security to public investment to promote the domestic production

As a possible result, the encouraged animal spirits of the service sector may overshoot, causing a return of high rates of unemployment. Here arises a question here as to how the Swedish financial institutions are raising funds to lend money to the domestic production. If the share of the aggregate of the funds that has its source in foreign economies – as another unmentioned factor of promoting domestic production – keeps growing the Swedish model of growth might become precarious: The combination of the slow recovery in the manufacturing sector and the high animal spirits in the service sector might turn the model of capital inflow unsustainable.

But, that worry may rather be another issue for the Swedes to tackle, anyway.

So, in case of the US economy (along with other non-Nordic advanced economies), which has already been looking ‘far-right’ from the perspective of the Swedes, the following may be the solution to consider:

1) (determinedly gradual) INCREASE in marginal tax rate, to safely increase the total sum of public spending

2) (determinedly gradual) INCREASE in both social security and public investment to promote the safety net and the accumulation of fix factors of domestic production at the same time

PS: @fundy, Mr Karlsson says “… (I) generally lean toward the Austrian school of economics.” I now suspect that this might be the reason why he doesn’t mention some of the essential – and non-Austrian – factors that promoted the creativity of the service sector.

We have become our own worst enemy:

http://www.nytimes.com/2011/02/25/opinion/25lynch.html?hp

http://www.nytimes.com/2011/02/25/business/economy/25econ.html?_r=1&hpw

Blinder: "Debt ceilings' and 'job killing' spending are two dumb ideas. Obsessing on the deficit while unemployment is at 9% is another."

In other words, anyone who thinks about the future is dumb or silly or both. Truly intelligent people think only of the present.