Nobel laureate Paul Krugman has got it wrong when it comes to Sweden's fiscal policy, according to the deputy governor of the country's central bank.
The influential economist last year compared the country's state to that of Japan, claiming “sadomonetarists” had turned the “rock star of the recovery” into a country plagued by rising unemployment and deflation after interest rates were raised by the Riksbank.
In an op ed piece for the New York Times, Krugman claimed the policy makers kept changing the reasons they gave for the move. “That is, as the situation changed, officials invented new rationales for an unchanging policy,” he wrote.
More recently, Krugman has warned that the US could fall into a similar trap, highlighting both Sweden and Japan as scenarios to avoid.
“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 and possibly in the Eurozone.”
Perhaps this latest dig was a step too far: deputy governor Per Jansson has hit out, saying the US professor needs to go back to school.
“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 is reported to have said.
“Has he seen how Swedish GDP recovered over these crisis years? It completely outperformed the euro area, of course, but even the UK. It’s close to the US’s performance.”
"You would wish when he says this, that Sweden looks like Japan and stuff,” he added, suggesting that Krugman “write fewer articles and have more of a look at the data and then come back again."
"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."
Jansson also said criticism failed to take into account growth in the labour force.
“The labour market in Sweden is stronger than the US labour 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 US success has been an outflow from the labor force driving down unemployment.’’
According to Bloomberg, Krugman is not taking the criticism lying down.
He has responded saying in fact Jansson is 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 two per cent. Again, not a reason to raise rates. So I don’t understand Jansson’s point."
Another economist, Robert Bergqvist, has also waded in, claiming neither is right.
Krugman and Svensson "are right about that the Riksbank hasn’t really understood these disinflationary forces and I also think 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.