Swedes may be wishing they never gave the Nobel Prize to Paul Krugman.
Policy makers are uniting against Krugman after the Nobel Laureate likened price developments in Scandinavia’s biggest economy to Japan’s battle with deflation.
“I’m surprised that he’s drawing parallels to Japan,” Riksbank Deputy Governor Cecilia Skingsley said yesterday in Halmstad in southern Sweden. “The differences between Sweden and Japan are significantly bigger than the similarities.”
At least three policy makers have spoken out publicly against Krugman’s analysis of Sweden, which one central banker even dubbed “crude.” The rebuttal follows an opinion piece by the Nobel Laureate, published April 21 in the New York Times, which characterizes the Riksbank’s steps during the financial crisis as an example of “sadomonetarism.” Krugman contends that interest rate increases in 2010 and 2011 fueled a deflationary spiral like the one that paralyzed Japan’s economy.
Sweden’s consumer prices fell 0.6 percent in March from a year earlier, twice as much as the central bank had predicted. Headline prices haven’t reached the Riksbank’s 2 percent target since December 2011. Adjusting for the effect of mortgage rates, prices have lagged behind the target since December 2010. The Riksbank estimates prices will stay below its 2 percent goal until mid-2015.
Governor Stefan Ingves, who is also chairman of the Basel Committee on Banking Supervision that Krugman describes as a “sadomonetarist stronghold,” said in an April 9 interview he expects inflation to return. He kept the repo rate at 0.75 percent this month, after agreeing to a cut in December.
As one of the main architects of Sweden’s recovery from its 1990s banking crisis, Ingves has repeatedly warned against excessively lax monetary policy he says risks bloating consumer debt burdens that are already at record high levels. Swedes owe their creditors more than 170 percent of disposable incomes, more than at any other time in the nation’s history.
Debt is “a key issue for us and will remain so for the foreseeable future,” Ingves said this month.
His concerns are echoed by Finance Minister Anders Borg, who also dismissed Krugman’s criticism of Sweden.
“I don’t find the comparison with a stagnating Japan accurate,” Borg told reporters yesterday in Stockholm.
Instead of a deflationary trap, Borg sees risks linked to the housing market and says Sweden needs to create “safety barriers” before the next period of economic decline, he said.
Yet some economists argue Ingves’s focus on indebtedness may backfire if deflation sets in. Persistent price declines could become “fatal” because inflation is the “only thing that can hollow out the debt and help households pay off their loans,” according to Par Magnusson, head of Scandinavian rates strategy at Royal Bank of Scotland Group Plc in Stockholm.
“Whatever their motives, sadomonetarists have already done a lot of damage,” Krugman said. “In Sweden they have extracted defeat from the jaws of victory, turning an economic success story into a tale of stagnation and deflation as far as the eye can see.”
Though consumer prices have fallen, Sweden isn’t in a deflationary spiral, according to Riksbank Deputy Governor Per Jansson. He called Krugman’s analysis “rather crude,” arguing it failed to take into account Sweden’s labor market growth or economic expansion rate.
“When he formulates himself in this way and sometimes doesn’t have his facts in order, then it is important for us to address that,” Jansson said in an interview with local newspaper Dagens Industri. “It’s of course unfortunate when such a person writes in this over-simplified and partly incorrect way.”
Krugman was awarded the Nobel Prize in economic sciences in 2008 for his analysis of trade patterns. The economics prize was first awarded in 1969 and was established by the Swedish central bank as an add-on to the original prizes in peace, literature, physics, chemistry and medicine.
Gross domestic product expanded 1.7 percent in the fourth quarter from the previous three months and grew 3.1 percent from a year earlier, Statistics Sweden estimates. GDP will grow 2.5 percent this year and 3.3 percent in 2015, versus 1.2 percent and 1.8 percent in the euro area, the European Commission said Feb. 25.
“The recovery track is still intact,” Skingsley said. “The historical pattern” suggests “that with an improved economy inflation normally picks up, but we need to be vigilant about the existing circumstances.”