What Fiscally Responsible Government Looks Like

Just right now governments at every level are stuck between a rock and hard place. Budgets are unsustainable, taxes are maxed out, sources of lending are maxed out, and cutting spending (austerity) seems guaranteed to produce recession and thus further reduce incomes. What's a mother to do?

I don't know, but I note with interest Robert Samuelson's tale of one success story. Sweden is one of the few European nations in good fiscal shape. Its unemployment rate is relatively low. Its growth rate is better than Germany's and its debt to GDP ratio is lower. Not half bad. How did it turn the trick? Samuelson tells a story that will please and discomfort both conservatives and liberals.

Conservatives can take heart that many post-crisis policies came right from their playbook. Sweden's income tax base was broadened and tax rates were sharply reduced. (In 1996, the average marginal rate — the rate on the last bit of income — was 46 percent; in 2010, it was 33 percent.) Spending was cut on old-age pensions, child allowances, unemployment benefits and housing subsidies. Union power over wages was reduced. Many markets (banking, air travel, telecommunications, electricity production) were deregulated. Low inflation and balanced budgets became broadly embraced popular goals.

On the other hand, liberals will also be reassured. Although Sweden trimmed social benefits, it hardly abandoned the welfare state. Overall government spending is still about 50 percent of the economy (gross domestic product), much higher than in the United States, where the usual ratio is about 35 percent. To reduce income tax rates, the government raised other taxes. Gasoline and cigarette taxes were increased; so were taxes on dividends and capital gains, hitting the rich. Altogether, deficit reduction totaled a huge 12 percent of GDP from 1991 to 1998. Slightly more than a third of that came from higher taxes.

I think that there is a lot more there to please conservatives, but it also shows liberals how a welfare state can be sustained.

What the case of Sweden shows is that a fiscally responsible government is not an oxymoron. It also shows the benefits of timely action. Sweden suffered its economic crisis in 1992. It then did something astounding. Instead of putting off any effective action it acted, effectively. It also benefitted by acting when conditions were most favorable.

In the early 1990s, the rest of the world economy was relatively healthy. Sweden could offset the depressing effects of its domestic policies by exporting more — and that's what happened, aided by a huge devaluation of its currency, the krona. The devaluation made its exports more price-competitive.

"They let it [the krona] go down by about 25 percent, and that produced an export boom," says economist Desmond Lachman, a former top economist at the International Monetary Fund who has studied the Swedish crisis. "It allowed them to do massive [budget] adjustment without putting the economy into a deep recession."

The world's struggling economies don't enjoy such a favorable condition. Almost all of them, including ours, are in trouble. When every economy is in the toilet, there is no one left to pull anyone out.

Still, Sweden is the model. In the U.S. a large part of the political culture is still firmly dedicated to keeping spending levels high and avoiding fiscal realities. We could have acted decades ago, as Sweden did, but we did not. While responsible policy might be much more painful now than it was for Sweden in the 1990's, irresponsible lack of policy is the best way to prolong the pain as long as possible. Samuelson says:

Sweden's good fortune is that it had its crisis two decades ago.

That is the only thing he says in his essay with which I am prepared to disagree. As Machiavelli would put it, it wasn't fortuna but virtù that was responsible for Sweden's success. They prospered because they decline to put off until tomorrow what they desperately needed to do today. Just right now the Democratic Party in these United States is committed to the opposite.

Comments

[LK]

"I think that there is a lot more there to please conservatives, but it also shows liberals how a welfare state can be sustained."

Seriously? I thought that Republicans had replaced "Thou shalt have no other gods before me with "Thou shalt never raise capital gains."

I see myself as a moderate who knows that spending needs to be cut on both social programs and the military. I would take a tax deal that lowered rates and limited dedications while raising the rate on capital gains in minute

[Bill Fleming]

Yeah, that picture is pretty much what it used to look like around my house when I got ready to go to work. These days not so much since the kids all moved out and got their own jobs.

[Bill Fleming]

p.s. still trying to figure out who that shadowy figure is in the upper middle right of your pix, KB. It's either the nosey neighbor to the east who's always trying to figure out what all those naked people are doing over at our house, or an allegory for that rich guy up the hill who just got his taxes raised and is stunned senseless from the shock. Or maybe both?

[LK]

Bill,

If you and your wife were engaging in that rather kinky looking ritual while your kids were at home and watching, I'm surprised social services didn't step in.

[Bill Fleming]

LK, yeah, that armor and the angel wings were a little kinky, I admit. So was standing on the drunk kid, I suppose. But we didn't do that stuff around them until they got older. Plus it was more a "Monday" ritual than an everyday thing. A little performance art theater schtick to get everybody fired up for the work week. (Don't you think the garter on the leg thing is an especially nice touch, LK?)

[LK]

Yes, especially for a work that's titled Champion of Virtue.

[Bill Fleming]

Oh, right! That's Nike, not an angel.

And those are Greeks.

Well, that explains everything (...except who the nosey neighbor is.)

Thanks, LK.

[larry kurtz]

legalize cannabis now!

[A.I.]

"We could have acted decades ago, as Sweden did, but we did not."

Suffer from a selective memory disorder much KB? Remember the Clinton tax increases of 1993--the ones Republicans campaigned against and used to win both houses of Congress in 1994, but that also helped balance the budget by the end of the decade? Remember the Bush tax cuts that reversed Clinton's policies plus Bush & Company's two wars and Medicare part D--neither of which were paid for except by borrowing.

In other words, we did act decades ago just as Sweden did. Problem is, we undid those policies during the 2000's under a Republican president governing with a Republican congress. And now you say it's time for Democrats to stop blocking policies promoted by the oh-so-fiscally-responsible Republicans?

I agree though that Sweden does seem to be quite fiscally responsible. For one thing, they spend about 9% of GDP on health care to cover 100% of their population with a system that caps an individuals health care expenditures at $360 per year while we spend over 17% to cover less than 85% of our population in part with private policies that can still leave individuals liable for thousand in annual, out-of-pocket costs. Put another way, they spend half as much per/capita too achieve better results meaning if we could match their efficiency, we would spend about $1.3 trillion per year less for better health care.

Despite any cuts during the 90's, the Swedes still have robust welfare and employee-support programs that far exceed any in the U.S. For example, a new parent receives benefits for up to 480 days of stay at home child care. They have guaranteed retirement income starting a age 61. And instead of talk of cutting health and retirement programs, they are considering increased dental health coverage.

So yes, let make America as fiscally responsible as Sweden. Let's do that right after we make it as socially responsible.

[Donald Pay]

Thanks, A.I.

I know I have pointed all this out on other threads where KB's ideology blinds him to inconvenient truths. When KB puts on his ideological aires, he conveniently forgets history and selectively twists facts.

Another thing the Republicans conveniently did away with during their time in power was "pay-go" in Congress.

[Ken Blanchard]

A.I.: I have frequently written on this blog that Bill Clinton's presidency was largely a success in terms of domestic policy. While you accuse me of selective memory, I do remember that he had a lot of help from a Republican Congress. My aim above, however, was not to blame one party or the other. Yes, Republicans are just as responsible as Democrats from the fiscal problems we now face. I have also said that I think that tax increases will be necessary, something most Republicans want to deny.

It is nonsense to say that Bill Clinton dealt with our fiscal problems. His fix on Social Security was temporary and, as I had to explain to you, it provided a cash cow to cover other government spending. The fiscal trajectory of our major entitlement programs was toward insolvency in a few decades. This was entirely obvious back in the 1990's. Clinton did nothing to remedy the structural problems. Bush added trillions to the deficit. Obama has done about as much damage in three years as Bush did in eight.

President Obama, his Treasury Secretary, and the Trustees of Social Security and Medicare (so THAT is the vast right wing conspiracy!) have all acknowledged the severity of the problem. The Administration has offered no concrete proposals to address it. His budgets simply let the deficit curve climb toward the rafters. The Democratic Senate hasn't voted on a budget in three years. What is the response of my commentators here? Everything's fine! Budgets don't matter! Whatever fiscal virtues Clinton may have had, he didn't pass them on.

[Bill Fleming]

Not "everything is fine" but rather that budget laws trump budget resolutions. Why do you insist on being opaque about that, KB? Is it because you don't understand it?

[Ken Blanchard]

No, Bill. I have no idea what YOU are talking about. Resolutions ARE laws, if they are passed by both houses and presented to the President. That, however, has nothing to do with the Senate's refusal to pass an actual budget as required by law.

[Bill Fleming]

As I suspected, you appear indeed not to understand it, KB.

http://budget.house.gov/BudgetProcess/

Excerpt:

"Although it also does not have the force of law, the budget resolution is a central part of the budget process in Congress. As a concurrent resolution, it represents an agreement between the House and Senate that establishes budget priorities, and defines the parameters for all subsequent budgetary actions."

By contrast the Budget Control Act has been negociated and signed into law:
http://budget.house.gov/BudgetProcess/

The reason the Senate hasn't passed a budget is because McConnell and Reid wanted to do the Budget Control act instead: http://www.nasbo.org/publications-data/washington-report/senate-forgo-budget-resolution instead.

[Bill Fleming]

My hunch is they're waiting to flush the lunatics out of the House of Representatives this coming election year, so those left with their senses can get on with the nation's business. The inmates have been running the asylum of late.

[A.I.]

My point KB wasn't that Clinton's economic policies were the solution to every fiscal problem the U.S. might ever face or was attempting to deal with at the time. They were, however, starkly different from those introduced by Bush. And, in terms of keeping the budget in or near balance, they were vastly superior.

You, in your initial post, were the one accusing one party of being responsible for blocking efforts to restore some semblance of fiscal responsibility to government. You chose to place that blame with Democrats. I simply pointed out the obvious fact that Republican dismantled the fiscally responsible policies of the 90's when they took full control of the federal government in the 2000's. And they now block efforts to reinstate even a shadow of those policies.

You say in your response to my post that a combination of tax increases and spending cuts are needed. Democrats agree and have offered to reduce Medicare and Social Security benefits if Republican will agree to tax increases. Meanwhile, Republicans refuse to increase taxes. So, why place blame with Democrats when it is in fact Republicans that oppose the policies you advocate?

[Ken Blanchard]

Bill: the reason the Democrats in the Senate refuse to pass a budget is that they can't afford to explicitly acknowledge the realities. The President, to his credit, produced a budget honestly reflecting the current fiscal trajectory. It looks like a doomsday scenario. Not a single Democrat voted for it in the House. The Senate won't vote on anything.

You talk sense when you suggest that the Democrats are "waiting to flush the lunatics out of the House of Representatives this coming election year." The Democrats are not the least bit interested in policy. They only want the Republicans to actually propose something that they can then attack. Maybe, sooner or later, we will have to get back to actually doing the public business.

[Ken Blanchard]

A.I.: If the Democrats indeed have a concrete proposal for a budget, perhaps they should vote on it in the Senate. The President produced a budget. It got no votes in the House from either party. The Senate ignored it.

I agree that the Republican refusal to raise taxes is an obstacle to a rational budget. The Ryan plan reflects that, but it was at least a serious attempt to address the real problem. Contrary to what you say, the Democrats have offered nothing.

[A.I.]

Democrats have offered something, it's called the people budget: http://cpc.grijalva.house.gov/index.cfm?sectionid=70