Nobel laureate Paul Krugman is way off when he accuses the Swedish central bank of being guilty of “sadomonetarism,” according to the target of his criticism.
Deputy Governor Per Jansson says the U.S. economist’s analysis suggests he hasn’t read enough about Sweden.
Krugman has criticized the bank for raising rates at the height of Europe’s debt crisis in 2010 and 2011, and then for not cutting fast enough to fight disinflation. The moves made sense at the time, Jansson said, given a consensus among forecasters that prices were rebounding and as the economy was expanding faster than much of Europe, driving up credit growth and house prices.
“When he described Sweden as sort of a deflationary economy, and makes these parallels to Japan, you wonder, has he ever had a look at the data?” Jansson said in a March 12 interview in Stockholm. “Has he seen how Swedish GDP recovered over these crisis years? It completely outperformed the euro area, of course, but even the U.K. It’s close to the U.S.’s performance.”
Krugman and other critics say the Riksbank’s policies drove Sweden into a deflationary trap that could have been avoided. The Riksbank, which in the mid-1990s became one of the first to target inflation, last reached its 2 percent target in 2011. Annual consumer prices have fallen for 11 of the past 14 months.
Asked about Jansson’s push back, Krugman said that it sounds as if he’s making a “fundamental error, confusing levels with rates of change.”
“Yes, Sweden was growing fast, but unemployment was still above pre-crisis levels and there was good reason to believe that there was still a substantial output gap,” he said in an e-mailed response to questions. “Growth in a depressed economy isn’t a reason to raise rates. On the inflation front, core inflation was well under 2 percent. Again, not a reason to raise rates. So I don’t understand Jansson’s point.”
The Riksbank, which in 2008 awarded Krugman the Nobel economics prize, is now in full reversal. Last month, it cut its benchmark repo rate below zero for the first time and started buying government bonds to drive down longer yields. It said it’s ready to do more if needed to bring up inflation, including currency-market interventions.
Jansson said the bank is responding to available information, just as it did in 2010 and 2011.
The increases “from 0.25 percent in the summer of 2010 up to 2 percent in the middle of 2011 was really mostly about normal things that central banks look at,” given that growth at the time was about 6 percent, inflation was around 2 percent and household credit growth was about 9 percent, he said. “There were really, in real time, no comments suggesting that it would be a stupid idea to increase the interest rate.”
The Riksbank, which is the world’s oldest central bank founded almost 350 years ago, in July 2010 started paying more attention to household debt when setting rates. By early 2013, another Nobel laureate, Robert Shiller, said Sweden was in the grip of a housing bubble as property prices soared to record highs and credit growth continued to accelerate.
Yet inside the bank, there was disagreement over how much attention to pay to the housing market. Lars E. O. Svensson, an old Princeton University colleague of Krugman’s and former Federal Reserve Chairman Ben S. Bernanke, spent years criticizing the bank’s reluctance to cut rates while he was a deputy governor. He quit in protest in 2013.
Household debt “has been a concern, but it has been much more an issue for talking about than really acting upon,” Jansson said. “It could also be that when we started to decrease the interest rate, we could have done that a bit faster if we hadn’t had that concern. It has been about the timing of the increases and decreases, I think, on the margin really.”
Svensson has also accused the bank of being responsible for Sweden’s relatively high unemployment rate — at 8.4 percent in February, it’s Scandinavia’s highest — which the former Riksbanker said can in part be blamed on keeping rates too high.
Jansson says that criticism fails to take into account growth in the labor force.
“The labor market in Sweden is stronger than the U.S. labor market because throughout the crisis we’ve had an employment rate increase,” he said. “That’s good since it paves ‘‘the way for employment in the future, whereas much of the so-called U.S. success has been an outflow from the labor force driving down unemployment.’’
Robert Bergqvist, chief economist at SEB AB in Stockholm, says the truth in the current dispute over monetary policy lies somewhere in between the two arguing camps.
Krugman and Svensson ‘‘are right about that the Riksbank hasn’t really understood these disinflationary forces and I also they’re right about that the Riksbank has focused too much on household debt,” he said in an interview. “They are wrong in that they don’t quite understand” a “small country’s limited ability to actually affect inflation” and wrong on how much it has “cost in terms of jobs and perhaps investments,” he said.
Svensson, in an e-mailed response to questions over the weekend, said it can’t be “excluded” that Sweden has fallen into “low-flation/deflation trap similar to that in Japan.” The “Swedish situation is self-inflicted by the Riksbank’s premature exit in 2010,” he said.
Krugman this month used the Riksbank as an example to warn the U.S. Federal Reserve against pulling “the rate-hike trigger,” in his regular column the New York Times.
“If the Fed moves too soon, we might end up losing millions of jobs we could have had,” he said. “In the worst case, we might end up sliding into a Japanese-style deflationary trap, which has already happened in Sweden.”
The comparison to Japan doesn’t impress Jansson.
“You would wish when he says this, that Sweden looks like Japan and stuff,” that he “write fewer articles and have more of a look at the data and then come back again,” he said. “I don’t know why he does that; it’s a mystery and it doesn’t make him come across as a guy who is very well informed.”
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