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Read the Full PDF Job Name:2222118 Date:15-04-17 PDF Page:2222118pbc.p1.pdf Color: Cyan Magenta Yellow Black THE SWEDISH INVESTMENT RESERVE A Device for Economic Stabilization? By MARTIN SCHNITZER The "new economics" as pursued by the Kennedy and Johnson Administrations reflects the belief that economic stability-full em­ ployment without inflation-can be achieved through the use of fine-tuning adjustments on the country's fiscal and monetary ma­ chinery. These adjustments include the 1964 tax cut, the suspension of the investment credit in 1966, and its recent restoration in 1967. The rationale for the use of fine-tuning adjustments, or "push button" fiscal policy, is that the level of aggregate demand can pre­ sumably be nudged in the direction that is consonant with the desired level of economic activity. Detractors of the "new economics," however, cite several reasons to doubt its effectiveness: 1. Forecasting is still not sufficiently precise and accurate to indicate the most propitious time to use "push button" fiscal policy. 2. Time lags can defeat the purposes of rapid implementation of fiscal and monetary policy. 3. Politics can affect even the most precise and well-planned economic policy. The recent delay in restoring the investment credit is an example. 4. Erratic fiscal policy measures can introduce instability rather than stability into the economy through adverse effects on business and consumer-spending decisions. Sweden has used two interesting devices which are relevant to any analysis of the "new economics." 'One measure, the investment reserve, is well known as a public policy instrument, and is designed to regulate or '~smooth out" investment over the business cycle; the other measure, a direct tax on investment, was used on several occasions during the 1950s. The Swedish investnlent reserve has received sonle favorable attention in the United States. Through the use of tax inducements, the Swedish government encourages business firms to set aside, in a reserve, funds which could be used for investnlent during a reces­ sion. The tax inducement occurs when the funds are set aside in the reserve and also when they are used during a recession. The gov­ ernment attempts no coercion. Swedish firms are free to participate or not to participate. No fiscal or monetary policy nleasure is free from defects. The Swedish investment reserve is no exception. I-Iowever, it is an ingeni­ ous device reflecting a rather high degree of economic sophistication and is worthy of examination, particularly against the current back­ ground of controversy over the "new economics." • Martin Schnitzer is Professor of Business at Virginia Polytechnic Institute and is editor of the Virginia Social Science Journa!. THE SWEDISH ][NVESTMENT RESERVE A DEVICE FOR ECONOMIC STABILIZATION? By Martin Schnitzer July, 1967 PUBLISHED AND DISTRIBUTED BY THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RESEARCH WASHINGTON, D. C. 20036 Distributed to the Trade by National Book Network, 15200 NBN Way, Blue Ridge Summit, PA 17214. To order call toll free 1-800-462-6420 or 1-717-794-3800. For all other inquiries please contact the AEI Press, 1150 Seventeenth Street, N.W., Washington, D.C. 20036 or call 1-800-862-5801. • Martin Schnitzer is Professor of Business at Virginia Polytechnic Institute and is editor of the Virginia Social Science Journa!. He has published two studies on public policy in Europe for the Joint Economic Committee of the U.S. Congress, and has also published a study on Soviet economists for the U.S. Office of Education. He is the author of several journal articles and business cases, and is currently working on a comparative economic systems text. He has been the recipient of a number of grants, including three to do research in Europe. • © 1967 American Enterprise Institute for Public Policy Research, 1200 17th Street, N.W., Washington, D. C. 20036. All rights reserved under Interna­ tiOnal and Pan-American Copyright Conventions. Library of Congress Catalog N-6. 67-27946. Price: $2.00 AMERICAN ENTERPRIS,E, INSTITUTE For Public Policy Research THE AMERICAN ENTERPRISE INSTITUTE FOR PUBLIC POLICY RE­ SEARCH, established in 1943, is a nonpartisan research and educa­ tional organization which studies national policy problems. Institute publications take two major forms: 1. LEGISLATIVE AND SPECIAL ANAL YSEs-factual analyses of cur­ rent legislative proposals and other public policy issues before the Congress prepared with the help of recognized experts in the academic world and in the fields of law and government. A typical analysis features: (1) pertinent background, (2) a digest of significant elements, and (3) a discussion, pro and con, of the issues. The reports reflect no policy position in favor of or against specific proposals. 2. LONG-RANGE STUDIEs-basic studies 'of major national prob­ lems of significance for public policy. The Institute, with the counsel of its Advisory Board, utilizes the services of competent scholars, but the opinions expressed are those of the authors and represent no policy position on the part of the Institute. ADVISORY BOARD PAUL W. MCCRACKEN, Chairman Edmund Ezra Day University Professor of Business Administration, University of Michigan KARL BRANDT FELIX MORLEY Professor of Economic Policy (Emeritus) Editor and Author Stanford University MILTON FRIEDMAN Paul S. Russell Distinguished STANLEY PARRY Service Professor of Economics Professor, Department of University of Chicago Political Science GOTTFRIED HABERLER University of Southern Mississippi Galen L. Stone Professor of International Trade Harvard University E. BLYTHE STASON Dean Emeritus, Law School C. LOWELL HARRISS University of Michigan Professor of Economics Columbia University Loy W. HENDERSON GEORGE E. TAYLOR Director, Center for Diplomacy Director, Far Eastern & and Foreign Policy Russian Institute AmericanUniversity University of Washington OFFICERS Chairman CARL N. JACOBS Vice Chairmen HENRY T. BODMAN CLYDE T. FOSTER H.C.LuMB President WILLIAM J. BAROODY Treasurer HENRY T. BODMAN TRUSTEES HENRY W. BALGOOYEN FRED F. LOOCK HENRY T. BODMAN H.C.LuMB JOHN M. BRILEY WILLIAM L. MCGRATH ROBERT P. BURROUGHS GEORGE P. MACNICHOL, JR. FULLER E. CALLAWAY, JR. ALLEN D. MARSHALL WALLACE E. CAMPBELL DON G. MITCHELL RICHARD J. FARRELL CHARLES "t\10ELLER, JR. CLYDE T. FOSTER DILLARD MUNFORD HARRY C. HAGERTY HARVEY PETERS WALTER HARNISCHFEGER H. LADD PLUMLEY JOHN B. HOLLISTER EDMUND W. PUGH ROBERT A. HORNBY PHILIP A. RAY CARL N. JACOBS HERMAN J. SCHMIDT JAMES S. KEMPER, JR. WILLIAM T. TAYLOR RAYMOND S. LIVINGSTONE R. C. TYSON THOMAS F. JOHNSON JOSEPH G. BUTTS Director of Research Director of Legislative Analysis EARL H. VOSS HOWARD FRIEND Director of International Studies Director of Public Finance Analysis PREFACE I t is the purpose of this study to examine the effectiveness of the Swedish investment reserve fund as an instrument for economic stabilization. The subject is timely for the reason that there has been increasing public acceptance in the United States of the theory that government fiscal measures-changes in spending and taxes-are useful tools to help regulate fluctuations in the level of economic activity. This theory, which can be called "push button" fiscal policy, is the cornerstone of the "new economics" as followed and practiced by the Council of Economic Advisers in the Kennedy-Johnson Ad­ ministrations. The idea in back of "push button" fiscal policy is that the level of aggregate demand can be changed via changes in spending or taxes. If the economy needs stimulating, taxes can be cut or suspended, assuring an increase in total demand and hence an increase in the level of economic activity; if the economy needs depressing, the same taxes can be raised or restored, causing a decre'ase in total demand and the level of economic activity. A prime example of "push button" fiscal policy is the suspension and restoration of the investment tax credit. The effectiveness of "push button" fiscal policy is contingent upon the prompt response of the economy to changes in spending or taxes, and also upon promptness in the timing of the fiscal action. There is little to indicate that prompt response and timing are present in the American economy. The recent restoration of the investment credit is a case in point. Restored by the House, the investment tax credit languished in the Senate for several weeks. I would like to express appreciation to the American Philosophical Society for supporting research in Sweden which served as background for this study. v A recent symposium held by the American Enterprise Institute debated the merits of "push button" fiscal policy. Critics of the "new economics" contended that erratic and inappropriate fiscal and monetary policies have been responsible in part for economic insta­ bility in the United States. Evidence was also submitted that fiscal policy actions have been poorly timed in recent years. The Swedish investment reserve is a fiscal device which is designed to stimulate investment during a recession and discourage it during a boom period. However, its use is normally associated with the former, and it will be examined primarily within that context. The use of the investment reserves brings to mind the quotation in the Book of Genesis: "Behold there come seven years of plenty throughout all the land of Egypt. And there shall arise after them seven years of famine." In the familiar biblical story, Joseph's solu­ tion to the feast and famine problem was to construct huge store­ houses into which grain and foodstuffs collected during the seven good years were deposited. During the seven years of famine, the stores of grain and foodstuffs provided the reservoir that was necessary to sustain the populace. In essence, the investment reserve attempts to do the same thing. In periods of prosperity, business firms are encouraged through the medium of tax incentives to set aside a certain amount of their liquid funds in a reserve which will not be used until needed.
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