Latest News

Commentary: Taking a cue from Sweden on taxes and spending cuts

There's little argument that the $800 billion-plus stimulus bill that was President Barack Obama's first "accomplishment" soon became one of his biggest political liabilities. The recovery that began in mid-2009 has been the weakest since World War II in terms of GDP growth and nearly the weakest in terms of job growth.

An explosion of government spending didn’t do much to stimulate the economy, yet liberal economists keep popping up, demanding more stimulus.

Last week, Peter Orszag — Obama’s first budget chief — was out with a piece saying, in effect, ignore all that debt piling up, just shovel more money out the door. Orszag says, “Those who are most worried about our long-term fiscal health shouldn’t fret too much about additional stimulus today, if it is combined with future budget cuts.” In other words, trust Congress to cough up the cuts later.

Yet the Obama stimulus has become a potent rebuttal to Keynesian economics — the notion that you prime the economic pump by boosting government spending.

I wonder if Orszag ever read that paper that came out last year by a couple of academic economists, Timothy Conley of the University of Western Ontario and Bill Dupor of Ohio State. They looked at the progress of the stimulus up to that point and found that it created or “saved” a measly 450,000 jobs — while killing or forestalling more than a million.

Much of the stimulus money was trundled off to state governments, where in many cases it didn’t result in increased spending. Instead, states used federal dollars to replace spending they had planned anyway.

Which makes you wonder: What if the entire amount of the stimulus had been plowed into permanent tax cuts instead?

There’s no way of knowing with precision, but you’d be safe in assuming that the economy would be significantly larger, that more people would be working and paying taxes, that the deficit would be smaller and we wouldn’t have piled up quite so much debt.

Crazy? Not really. Tax cuts — combined with spending cuts — helped revive Sweden’s economy and stabilize its government finances, beginning a half-dozen years ago.

Sweden was once the exemplar of the overspending welfare state, but last year its economy grew at a 4.4 percent clip, and its deficit vanished. As the London-based Spectator magazine noted in a recent article, when the panic hit in ’08 and everyone was screaming that stimulus spending was essential, Sweden stuck with its policy of supply-side tax cuts.

The program was developed by Anders Borg, a libertarian economist known for his ponytail and earring.

“Look at Spain, Portugal or the UK, whose governments were arguing for large temporary stimulus,” he told Spectator magazine. “Well, we can see that very little of the stimulus went to the economy. But they are stuck with the debt.”

Sound familiar? Borg’s perspective is bracing stuff, given the staleness of the political debate in this country, where one of our major parties has poisoned itself with wealth hatred and our president has become obsessed with “fat cats” and millionaire jet owners.

Borg doesn’t loathe entrepreneurs. He wants more of them. So he scrapped a wealth tax and most property taxes, moves that were controversial and caused his party to lose support. But Borg says economic recovery begins with entrepreneurs and “ownership is a factor of production.” If you want the production and jobs, you have to draw the owners.

At the same time, Sweden cut taxes for lower-income brackets as well and unlike the Bush administration, it insisted on deep spending cuts along with the tax cuts.

While some people would tag any policy mix involving spending cuts as “austerity,” it seems to have worked effectively in Sweden, and there’s little reason to assume the same prescription wouldn’t help our own ailing economy.

If you want jobs and prosperity, a big part of the solution is to curb the growth of government and encourage entrepreneurs — rather than threaten them with higher taxes if they succeed.