1

Some reflections on the Scandinavian countries during the crisis

a Post-Keynesian case study

Jesper Jespersen

Roskilde University

jesperj@ruc.dk

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Structure of the paper:

1. Why post-Keynesian economics?

Because ‘uncertainty’ and ‘social and institutional changes’ prevent us from having any determinate knowledge of the future

General Equilibrium models seem not to apply to the uncertain understanding of the changing real world economics.

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2. Post-Keynesian analytical features:

• Like it or not – GDP in money terms and (un)employment are focus points within PKE

The Principle of effective demand rules the roost – but, watch out, effective demand is not what (some of) you might think it is! It is a multi-facetted analytical concept

Context dependent

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My preferred quote from Keynes’s on Methodology:

• Economics is a science of thinking in terms of models joined to the art of choosing models which are relevant to the contemporary world.

• It is compelled to be this, because, unlike the typical natural science, the material to which it is applied is, in too many respects, not homogeneous through time (CWK, XIV: 296)

• It seems to me … that you [Roy Harrod, jj] do not repel sufficiently firmly attempts ... to turn [economics] into a pseudo-Natural-science.....’

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clock-work

Market System Power, structures, institutions

agents actors

data

Jesper’s methodological ’iceberg’

reflexive organism

Prediction of marketsystem

Understand reality

Inspiration: Martin Hollis

World 1:

World 2:

World 3:

Two cultures

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The business sector as a whole is at the focal point of Effective Demand:

• As I now think, the volume of employment is fixed by the entrepreneur under the motive of seeking to maximise his present and prospective profits; (Keynes, 1936: 77)

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Principle of effective demand (I)

• What factors make the entrepreneurs decide on production (and employment)?

Here, one cannot meaningfully separate between short run and long run, because:

if the entrepreneur does not balance his books in the short run (liquidity) and in the medium run (profitability), he/she will be out of business in the longer run

but, if he/she disregard the longer run implications of investment, competition and technology, he/she will be out of business in any case

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Principle of Effective Demand(II)

Short run: Expectations, profit and finance

• Expected aggregate demand (domestic policies and global demand)

• Profitability & international competitiveness

• Availability of money and finance/credit

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Longer run: Institutions and politics

• Welfare institutions: supply & quality of labour

• Technology and new products: productivity & falling rate of profit

• Environmental issues: work place, products, externalities & sustainability

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Figure 1: Outlines for the macroeconomic principle of effective demand

Effective Demand

Expected proceeds from aggregate demand

Expected Aggregate profitability:competition

Aggregate credit facilitates: the working of the banking and financial system

Expected availability of supply factors: labour, capital, technology environmental conditions

The business sector ‘acts’ within a frame of agreed institutions: labour market, welfare system, tax structures, financial and political concerns

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Overall picture in rich countries– what is it all about?

• Happiness and sustainability

• Of course, I know that Ministers of Finance always talk about growth to fill their coffers

• But growth alone cannot make them re-elected

• Hence, we will talk about social ontology before economic growth

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Because:

Life satisfaction - only up to a certain point corresponds with

GDP/capita

2003/04

13

14

Income distribution, 2008

0

5

10

15

20

25

30

35

40

Slove

nia

Slova

kia

Sweden

Czech

Rep

ublic

Denm

ark

Hunga

ry

Austri

a

Finlan

d

Mal

ta

Belgiu

m

Nethe

rland

s

Luxe

mbo

urg

(Gra

nd,,,

Cypru

s

Franc

e

Euro

area

(16

cou,

,,

Irelan

d

Ger

man

y (in

cludin

,,,

Eston

ia

Italy

Spain

Polan

d

Gre

ece

Lith

uani

a

Unite

d Kin

gdom

Portu

gal

Bulga

ria

Roman

ia

Latv

ia

Source: Eurostat

Gin

i co

effi

cien

t

15

Total government income, percent of GDP

30

35

40

45

50

55

60

65

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

Source: OECD, EConomic OUtlook, 2010

Per

cen

t o

f G

DP

Sweden

Denmark

OECD-area

The welfare state, does it impede employment and growth?

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Government total receipts

40

45

50

55

60

65

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: OECD, Economic Outlook, 2010

per

cen

t o

f G

DP

Sweden

Denmark

Euro15

17

Employment rate, Denmark, Sweden & Euro15

50

55

60

65

70

75

80

1992 1993 1994 1995 1996 1997 1998 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Eurostat, 2010

Per

cen

t o

f p

op

ula

tio

n (

18-6

4)

Euro area (15 countries) Denmark Sw eden

Euro15

Denmark

Sweden

Employment rates

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Employment rate

• Euro15 grew the fastest – 5965 percent of population, age 18-64

• Denmark grew from 74 to 76 percent of population, age 18-64

• Sweden hardly increased employment (74

percent

Why? ‘We don’t know’

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Real Growth in GDP

-6

-4

-2

0

2

4

6

8

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Source: OECD, Economic Outlook, Juni 2010

pen

cen

t, y

earl

y

Serie1 Serie2 Serie3

Denmark

Sweden

Euro-zone

1992-2009  Denmark Germany Sweden

Germany 0,865748 1

Sweden 0,821969 0,785827 1

Euro13 0,886006 0,944485 0,916189

1995-2009 Denmark Germany Sweden

Germ. 0,878061 1

Swed. 0,92538 0,849294 1

EU15 0,93808 0,954362 0,943638

Growth are very alike

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GDP in fixed prices

90

100

110

120

130

140

150

160

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: OECD, Economic Outlook, 2010

!992

= 1

00

Sweden

Denmark

Euro15

One percent point a year adds up to 20 points

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GDP/capita, PPP-measurement

100

105

110

115

120

125

130

135

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Eurostat

Eu

27=1

00Denmark

Sweden

Euro15

- 7

-5

-15

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Unemployment

0

2

4

6

8

10

12

14

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: OECD, Economic Outlook, 2010

per

cen

t

Sweden

Denmark

Euro13Starting point

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Why did they have different (un)employment paths?

• Sweden higest growth – moderate fall in unemployment – unchanged employment

• Denmark (relative) low growth, lowest unemployment – middle increase employment

• Euro15 (relative) low growth, high (nearly unchanged) unemployment, but the highest growth in employment!

• That is puzzling!

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Labour market & Welfare

Scandinavian countries deviate on:

• Higher labour market/women participation rates (welfare state institutions)

• Flexicurity – meaning flexible, but structured hiring and firing and welfare security system (unemployment benefit, and free/subsidized welfare institutions – you don’t loose your social rights, when you get fired)

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Public Sector Budget

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

8

1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: OECD, Economic Outlook, June 2010

Per

cen

t o

f G

DP

Sweden

Denmark

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Unemployment & Budget, Denmark

-15

-10

-5

0

5

10

15

Source: OECD, Economic Outlook, 2010

perc

en

t

1973-2010 actual budget unempl publ. Empl. part. Rate

actual budget 1

Unemploynt -0,71008 1

public empl. -0,12252 0,424201 1

part.rate 0,109415 0,26439 0,525417 1

private empl. 0,770684 -0,7939 0,036539 0,266508

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Unemployment & Public Budget, Sweden

-15

-10

-5

0

5

10

15

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

OECD, Economic Outlook, 2010

Per

cen

tag

e

Correlation:

1971-2010: -0,46

1990-2010: -0,58

EU13:

1991-2010: -0,49

Denmark:

1990-2010: -0,83

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Public Sector Budget

-14

-12

-10

-8

-6

-4

-2

0

2

4

6

1990 1995 2000 2005 2010

Source: OECD, Economic Outlook, June 2010

per

cen

t o

f G

DP

Euro-Zone

Sweden

Denmark

Sweden

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Inflation?

• You have to separate between

• Consumer price inflation

• Wage cost inflation

• Scandinavia is more like Southern Europe, than like Germany

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Consumer price inflation

-2

0

2

4

6

8

10

12

14

16

18

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: OECD, Economic Outlook

per

cen

t p

.a. Sweden

Germany

Denmark

Consumer price harmonization might give a misleading signal due to the single market effect

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Unit labour cost, total economy

0,9

1

1,1

1,2

1,3

1,4

1,5

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: OECD, economic outlook, 2010

1998

=100

Denmark

Sweden

Germany

Because, no one can beat the Germans in unit labour cost!

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Unit Labour Cost, effective exchange rate

0,9

1

1,1

1,2

1,3

1,4

1,5

1,6

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: OECD, Economic Outlook, 2010

1998

= 1

Denmark

Sweden

Germany

Unless, you have a flexible exchange rate!

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Balance-of-payments, current account

-8

-6

-4

-2

0

2

4

6

8

10

12

1970 1975 1980 1985 1990 1995 2000 2005 2010

Source: OECD, Economic Outlook, 2010

Per

cen

t o

f G

DP

Denmark

Sweden

No wonder Sweden is doing well: export led growthDenmark is doing less well; oil & gaz does the trick

Balance-of-payments, current account

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Rate of Interest

• Depends on the Balance-of-payments

• Especially, if you have your own currency

• If the competitive position is weak, profits are squeezed and effective demand is weakened Unemployment

Spain is the arch example, but Scandinavian back in the 1970s & 1980s

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Long term rate of interest

0

5

10

15

20

25

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

Source: OECD, economic outlook, 2010

per

cen

t p

.a.

Denmark

Sweden

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Long Term rate of Interest

0

2

4

6

8

10

12

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: OECD, Economic Outlook, 2010

Per

cen

t p

.a.

Sweden

Denmark

Germany

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What have we learned?

• Economics is not a blind machinery• Different institutions (Banks) and politics

(exchange rate) matters a lot – e.g. the actual situation

• Compared to the 1930s, the western world has become much richer, closer integrated and, I think, more supportive

• Hence, priorities may change from growth to sustainability

Really, this is a Post-Keynesian story!