The Norway Lesson: The Benefits of Good Financial Behavior

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Unlike other countries facing budget shortfalls, Norway has actually come out ahead in the current economic mess. It’s done so by avoiding some of the behavioral mistakes we’ve made in recent years:

Norway has an 11% budget surplus; the United States is facing a deficit of $11 trillion (UPDATE: In the comments, Tim pointed out the distinction between the national debt and a budget deficit. I should have clarified I was referring to the national debt at $11 trillion versus a budget deficit.)
Norway took the $68 billion it earned in oil revenues last year and added to its sovereign wealth fund; the fund is almost the largest of its kind in the world, even though it suffered a 23% loss last year
Real estate prices didn’t crash because the mortgage system avoided excessive risk

Then, consider what Norway did last fall:

As investors the world over sold in a panic, [Kristin Halvorsen, Norway’s Socialist finance minister] bucked the tide, authorizing Norway’s $300 billion sovereign wealth fund to ramp up its stock buying program by $60 billion — or about 23 percent of Norway ’s economic output.

“The timing was not that bad,” Ms. Halvorsen said, smiling with satisfaction over the broad worldwide market rally that began in early March. (link)

Norway made it a point to budget, to save, and to protect against unnecessary risk. Then, it went on to buy when everyone else was selling.

Norway is not perfect by any stretch. There’s still debate about the impact of it’s social programs on work ethic and how long the good times can last. However, it’s worth noting that when compared to other countries, or individuals, Norway makes an excellent case for the benefits of good financial behavior.

By Carl on 07.01.09 > Link

Tagged as: financial behavior, norway

Jake

ignore everything except bullet #2... OIL... OIL.... OIL

Tim

Eh... there is no evidence that running a budget surplus is a good idea if you are a national government. National fiscal policy is NOT like personal finance. When the government takes cash away from the private sector and saves it, it only serves to decrease the money supply. This causes a number of bad things to happen such as deflation and upward pressure on interest rates. Please recall that as soon as the United States began running a budget surplus circa year 2000 the country entered a recession. That wasn't a coincidence.

There is also no evidence that running a budget deficit at the Federal level is a bad thing. We all just assume that it's bad because we think in simple personal finance terms. But in reality, government debt plays an extremely important role in monetary policy. Without it central banks would have no way of managing interest rates to fight off inflation/deflation and maintain price stability.

Also, the US budget deficit is not $11 trillion. That is the total national debt. The budget deficit is less than $2 trillion. The distinction is important.

braybould

Isn't the point less about the right or wrong of national debt and more about how Norway's current position is a good one to be in given the circumstances? Look at the situation Calfornia faces. The numbers vary, but if Calfornia was an independent country, it's economy would rank from 7th-10th (depending on how you crunch the numbers) largest in the world. Now they're facing a $24.3 billion deficit, and the state is issuing IOUs because they're in a budget stalemate. Plus, with the uncertainity in the credit markets, doesn't a national economy with a healthy balance on the books rate as a safer bet than a country with significant debt?

Tim

Fiscal policy at the state level is much different than at the Federal level. The state of California does not print its own money, just like you and I cannot print our own money. Running a state is much more akin to personal finance.

But the Federal government is obligated to print money for its citizens to use and carry out some sort of monetary policy. Monetary repercussions, therefore, must be taken into consideration when the Federal government sets fiscal policy. For example, if the United States paid off its debts entirely the Federal Reserve would have no way to increase the monetary base and ease upward pressure on interest rates as the economy grew. This would lead to deflation and would likely stunt economic growth.

That said, there are ways to run a Federal budget surplus without disrupting monetary policy. Instead of saving it or paying down debt (like the United States did under Clinton), it can be invested in the private sector, thereby putting the money back into circulation. This would avoid the deflation problem and potentially have a positive economic impact. This may be what Norway has done. Of course, when the economy slows and the government starts to liquidate those investments to supplement shrinking tax receipts it runs the risk of causing asset prices to fall even more, further exacerbating the economic situation .

In short, running a national government is not nearly as simple as many people seem to think.

helicopter B.

What rubbish!

The end effect of printing money is to apply the most insidious tax of all: inflation!

This printing of money does nothing to create wealth, but reduces purchasing power, and it makes its way to the market while being funneled through special interests by those who are in government, hence those on the lower end of the economic scale will experience the greatest effect of dilution of purchasing power.

I suggest you read Economics in One Lesson for a change of perspective.

Tim

helicopter B,

It appears that you misunderstood what I wrote. I never said anything about printing money at a pace faster than the growth of production of real goods and services: the inflation about which you are so concerned. By saying that "the Federal government is obligated to print money for its citizens to use and carry out some sort of monetary policy," I simply mean that the government must issue some official currency and that the amount of currency in circulation must be adjusted to match demand in order to achieve general price stability.

Do you mean to say that there should be no official currency issued by our government? That we should all just barter with what we have available? Or do you mean to say that the amount of currency in circulation should never increase, no matter how many more goods and services are produced/consumed each year (resulting in steady, constant price deflation)?

Brian B.

Correct me if I"m wrong, but isn't the quality of a nation's debt evaluated more from a cash flow perspective than in terms of its balance sheet? Of course, if total debt as a percentage of GDP gets too high, that's important. But isn't overall economic health and expected future revenue flow (ie, tax receipts) more important in this arena?

In that respect, if national debt gets too large relative to the economy and tax revenue, debt gets downgraded (see what recently happened in the UK).

Norway levies a relatively high tax burden on its citizens. That surely explains some of the surplus. But as Tim pointed out, that sovereign wealth fund is a non-productive asset unless it's used to give tax breaks, fund federal programs or otherwise stimulate the economy.

On the flip side, we Americans love to stand on whatever elevated platform we can find and rail against high taxes as the ultimate sin of government. But if we can't restrain spending to keep it at least reasonably in line with tax receipts, won't we eventually find ourselves in the situation where we can't pay our debts or creditors are unwilling to lend at reasonable rates? The alternative would seem to be massive tax hikes at some point in the future.

I guess the numbers are just so huge and the "due date" on that debt so far down the road, the average American can comfortably ignore it.

dnarby

Hmm... So that's 60 billion they need to unload if the markets look like they'll put in new lows.

Might better have bought 60 billion in gold and food.

fossilhuntress

A fantastic article. Tak for sharing the info!

The Norway Lesson: The Benefits of Good Financial Behavior

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