Countercycling

The aspect of the Swedish Model that interested visiting economists in the 1970s was the investment funds invented by the Swedish Minister of Finance Gunnar Sträng in the 1960s. In America, as a one-off crisis measure, something very similar was already being done by Franklin Roosevelt in his New Deal response to the Great Depression although it never became enshrined in policy.

In Sweden the groundwork for the policy had been done by Gustav Cassell at the turn of the century and with the notable exception of David Davidson the idea was endorsed by the economists of Sweden's other golden age...that of economics. Both Wiksell and Hecksher viewed favourably the idea that government should intervene in the economic cycle by fine-tuning effective demand.

The Swedish Social Democrats were in a position to implement these ideas as early as the 1930s which would have made them the first government in Europe to embrace the new orthodoxy which has subsequently come to be known as Keynsianism.

But the question of whether or not the social democrats attempted any form of countercyclical intervention in the economy is a matter of acrimonious debate between the centre-left and hard-left (see 'Social Democratic Government in the 1930s' in Appendix C).

Gunnar Myrdal and Bertil Ohlin were both busy proponents of the interventionist approach but in the cold light of day in the real world the Social Democrats discovered that this new policy tool dreamt up by the academics was a two-edged sword. Its usefulness depended on knowing when to apply it...and you only ever knew that after the bottom of the recession.

Gunnar Sträng reckoned he had figured out a way round the problem. It was really indicative planning all over again. Government would not intervene directly but would instead give incentives to the large companies.

This is how it worked. A company could put money away tax-free in an investment fund and take it out again later. Government would operate the 'economic traffic lights'. Red at the top of the economic cycle...stop spending and put your money into your tax-free piggy bank. Green at the bottom of the cycle...raid the piggy bank if you want to. Amber at other times.

The catch from a company's point of view was that Gunnar Sträng circumscribed any creative accounting they might otherwise have done by insisting that they deposit an amount equivalent to the temporary tax savings with the Swedish Central Bank...interest-free. The companies of course would have preferred to have the money sloshing around in their corporate treasuries.

With hindsight most Swedish economists now believe that Sträng's investment funds never really worked. Not only did the investment funds distort the 'free workings of the credit and money markets'...that after all was the idea...but the mechanisms for triggering movement in and out of the investment funds tended to have a rather perverse ratchet effect that led to a steady one-way increase in public sector spending

Meanwhile other investment opportunities were squeezed out. The boost to the public sector at the low point in the economic cycle was never balanced out by drawing in expenditure at the high point...which was how it was supposed to work.