In his latest column for the New York Times, best-selling author and award-winning economist Paul Krugman declares that Sweden's economy is going the way of Japan's — and policymakers in the country have only themselves to blame.
"In 2010 Sweden’s economy was doing much better than those of most other advanced countries," Krugman writes. "But unemployment was still high, and inflation was low. Nevertheless, the Riksbank — Sweden’s equivalent of the Federal Reserve — decided to start raising interest rates."
This was a very bad move, Krugman says, and it was clearly so at the time when the move was first taking place. "There was some dissent within the Riksbank over this decision," Krugman writes. "Lars Svensson, a deputy governor at the time — and a former Princeton colleague of mine — vociferously opposed the rate hikes ... But he found himself isolated, and left the Riksbank in 2013."
Once the move to raise interest rates had been made, the negative consequences, Krugman argues, arrived quickly. "Sure enough, Swedish unemployment stopped falling soon after the rate hikes began," Krugman writes. "Deflation took a little longer, but it eventually arrived. The rock star of the recovery has turned itself into Japan."
How to explain Sweden's self-destructive policy shift? Krugman points his finger at a group of elites with influence not only in their home countries but all over the world, people whom he calls "sadomonetarists."
"At least as I define it, sadomonetarism is an attitude, common among monetary officials and commentators, that involves a visceral dislike for low interest rates and easy money, even when unemployment is high and inflation is low," Krugman explains. And while he doesn't doubt the sadomonetarists' sincerity, Krugman argues their ideas come from a mix of class bias as well as a superficial desire to seem "tough-minded" and unsentimental.
Where does this gut dislike for low rates come from? At some level it has to reflect an instinctive identification with the interests of wealthy creditors as opposed to usually poorer debtors. But it’s also driven, I believe, by the desire of many monetary officials to pose as serious, tough-minded people — and to demonstrate how tough they are by inflicting pain.
Whatever their motives, sadomonetarists have already done a lot of damage. 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.
And they could do much more damage in the future. Financial markets have been fairly calm lately — no big banking crises, no imminent threats of euro breakup. But it would be wrong and dangerous to assume that recovery is assured: bad policies could all too easily undermine our still-sluggish economic progress. So when serious-sounding men in dark suits tell you that it’s time to stop all this easy money and raise rates, beware: Look at what such people have done to Sweden.