Transcription
NES, a podcast from the news. >> A warm welcome to Elisabeth Holvik, uh, chief economist at Sparebank 1. And I have gotten hold of your latest lecture. And it begins very dramatically, because there you have two boxing gloves. One with an American flag and one with a Chinese >> Mhm. >> that clash. >> Yes. It is a power shift that has been underway for many years. Uh, where one has seen that China is gradually building itself up strategically. Uh, very good at building alliances, thinking long-term. And then the USA has gradually awakened its economy, its innovative power, its defense, um, and taken over a lot of the responsibility for other countries' economies and defenses. And then this has been, in a way, a plan from when Trump first took power, uh, that they would rebuild the innovative power, uh, production capacity. So it hasn't quite worked out until now, when there's been a very clear strategy in the USA where security policy, uh, long-term strategic power, and economic strength are being put together. So we are in the biggest change in world history since World War II. And everything we in Norway take for granted, like a rules-based world trade and institutions like the UN, nothing is set in stone. On the contrary, it is a political construct that has historically proven not to be stable for more than a period of about 70, 80 years. So if we are to understand what we are in now, we must actually look back at the previous power shifts. And that was when the USA took over from Great Britain, and when Great Britain took over from the Netherlands. And before the Netherlands, it was actually China that was the world's great power. And China is a continuous civilization. You can read books that are 2, 3 thousand years old. And it's very much the same mindset that exists today. >> You are really drawing the long lines here. If you >> perhaps we should start by describing a bit, uh, in numbers, how does this power relationship look, so that it becomes a bit clear to us and >> and how do Europe and Norway fit in >> in this. >> Yes. Because after World War II, the USA was completely dominant, both economically and militarily. They had very strong allies in Europe, and the combined population was very large. So when they established the institutions and the reserve currency, they were completely dominant. And the weakness of the reserve currency system is that it works excellently when you are so dominant. But the more others grow at your expense, the harder it becomes to provide liquidity and currency around the world. And we got a shock in '71 when they had to abandon the gold standard. And then they haven't really done anything about these underlying imbalances in the global trade system until now. So, uh, also when it comes to China's allies, perhaps their strong strategic strength is to think long-term and build alliances. And if you read those old Chinese war books, they say that the best war is won if you don't waste your resources. And you achieve that if you know your enemy and can weaken them so that you don't have to, uh, uh, use, uh, weapons and soldiers and waste resources. >> So, so you mean that there is a thought behind >> with China. They have played, uh, until Trump, they have in many ways played smart. >> Yes. Because they, uh, felt very humiliated, especially after the Opium Wars, and that they were completely taken advantage of, so to speak, economically, by the West. >> Yes. Because the Opium Wars, it was Great Britain that went to war because they wanted to sell opium to China. >> Yes, yes. And that still sits in their bones, that it was unfair. So now we're getting even. So fentanyl is, in a way, an important part of how China and its allies weaken the USA. There is no doubt about that. So, so for China, it has >> Yes. Yes. Because fentanyl is this synthetic opiate that is chemically produced in >> in China and then finished in the cartels' laboratories in Mexico and other Latin American countries. Yes, and it is a death penalty in China for dealing with narcotics, while when you look at the incentive structure, they have strong incentives to produce and export. Together with the alliance of, uh, non-Western economies like Russia, Iran, Venezuela, etc., which have one thing in common. And that's like the old saying, "my enemy's enemy is my friend." So President Xi and Putin are best friends. They have met countless times over the years and given each other both jewelry and diplomas, and they say that you are my best friend. So that's a bit nice. >> And on top of all this, uh, then comes, uh, Yes, now I'm thinking aloud, so you can interrupt me. But I imagine that, uh, that we have the West before Trump, which is actually a West that hopes and believes >> Mhm. >> that China and the other countries will eventually stop, uh, sinning >> and become more like us. >> Yes. >> And start following these international rules. >> Mhm. Uh, because after all, that's the smartest thing for everyone. >> Yes. And that is a very arrogant attitude from our side. Uh, I have studied development geography, and if there's one thing I learned early on, it's that what we think is best, only we think is best. There are many other ways to live life and govern the world. Uh, and we just have to deal with that. Uh, even if we think that human rights and all, and democracy, and all that is top-notch. Uh, and I would of course wish that everyone did as we do, but what the USA has done since they let China into the WTO in 2001, and that was with the goal and desire and promise from China that they would develop into a market economy and follow the rules of the game. So the USA has evaluated that, uh, in a way, letting them in every year since, in a multidisciplinary report that goes to Congress. And in the latest report, they say that this has gone completely the wrong way. And they even use a word like "predatory," that China, with the help of its entire state apparatus and, uh, the security law, where everyone is part of the community, including those who live in other countries, students, researchers, uh, investors, etc. And the USA says that now, uh, we realize that China has not done what it promised, and that it is a predator that we must now defend ourselves against. And if you look at the USA's economy, they were on the verge of a fiscal crisis, uh, until quite recently. >> Describe that. Why was the USA heading for a fiscal crisis? And why? That's perhaps the most interesting thing, you say. >> They were, they are no longer. That's in the past, hopefully. >> Yes. And this is the grand plan or strategy. And I want to distinguish between plan and strategy, because strategy is quantified concrete goals, uh, to correct course. That is, you steer the ship in a more sustainable direction. Because what the USA did in the years before, uh, Trump came to power for the second time, was that the budget deficit was around 7% of GDP, and the debt was on a trajectory towards 130% of GDP. And if you go back to the Maastricht criteria, a country should have a maximum of 3%. That is, >> those are the criteria for joining the euro. >> Yes. Back to when those countries joined and were supposed to join. They first had to show that they had their economy in order, and then it was a maximum of 3% budget deficit in bad years, and then they were supposed to improve it in good years to have something to, uh, use for counter-cyclical policy in bad times. Then they should have a maximum of 60% debt as a percentage of GDP. So when the USA then built up enormous budget deficits that they had to borrow for, and the debt was accelerating, uh, and we saw that in recent years under Biden, a lot of short-term interest rate debt was taken on. So not only did they have to borrow more, they also had to refinance a lot of the government debt they already had. So the economic sustainability of the USA was not sustainable. And it would have led to a crisis if these measures that Scott Bessent is now taking had not been implemented. Uh, because >> he is the Secretary of the Treasury. >> He is the Secretary of the Treasury, and he is an incredibly skilled and experienced financier. Um, built himself up from absolutely nothing. He slept in his office at the beginning of his career and has shown enormous insight and competence in financial markets. And that's what I'm primarily concerned with. And then to see, like, what will be the consequences for the financial side. Uh, which is, in a way, incredibly important for Norway, since it is a small open economy, but also a large international investor, and more and more people are saving in the global financial market. So what Scott Bessent came up with was a 333 plan where he said that if we are to create stability, budget deficits must be reduced to, uh, 3% of GDP. That sounds familiar. And then real growth in the economy must be over 3%. Because there is a simple relationship between nominal GDP growth, that is, GDP growth minus price growth, you get real growth. And that is, in a way, the real value creation and growth we are interested in. But to service a loan, government debt, it is the nominal growth rate relative to the loan interest that creates stability. And the latest figures now show that GDP growth is approaching 6%, while the government loan interest rate is around 4%, and you can borrow cheaper for shorter maturities. So then you are on the way to a more sustainable direction for government finances. And that is important because, uh, the USA is the anchor and the largest economy in the world. Um, and if you think about why the economy has gone so wrong, it's because after World War II, they wanted more and more countries to join their sphere and trade and, in a way, benefit economically from it. And then they spread American values with, uh, yes, free markets and human rights and democracy. And then they let individual countries in on quite favorable terms, just as they did with China in 2001. Then China came in as a member and received very favorable terms. Uh, and then they just continued with these because they saw that you just keep drifting forward. Um, and then I see now that if you just keep drifting, you would have had a big problem with financial, government finances, and not least, you would have lost economic and military power. Then the USA would no longer be a great power. >> But this is, if we rewind, yes. >> a little less than a year ago. >> Mhm. Then this Liberation Day came, as Trump called it, >> with these tariffs. >> And there was an almost unanimous chorus in Norway that the end of the world was near, >> and this was economically disastrous, Mathias. Uh, people were supposed to move their money from the USA to Europe. >> Mhm. >> Uh, that is, this was an incompetent amateur. Uh, and then, yes, 10 months later, you are sitting here saying that, uh, these incompetent amateurs have averted a fiscal crisis in the world's currency. >> Yes. And >> largely. >> Yes. And, uh, I don't know if this will succeed or if new shocks will come. Uh, so this is just an analysis that it's a bit like if you are on a path that is not sustainable, something must happen to correct course. And it's not certain that all the details are correct, but, uh, if you think about what it takes to change a system that has been running since World War II, just like a caretaker government, you just continue. What does it take to change that? Right? There are enormous counter-forces to making changes. And I read the biography of Jens Kristian Hauge, the great hero of World War II in Norway, who became our first Minister of Defense and later Minister of Justice. And he said that he experienced such enormous counter-forces in the bureaucracy to make necessary changes, that he had to be absolutely, uh, brutal and intense to make changes quickly in so many areas that the bureaucracy couldn't reconfigure itself and then resist the change, uh, proposals. And it's a bit like what he described, that you have both political counter-forces, but you also have counter-forces from everyone who benefits from this continuing. And then you also have counter-forces from the hybrid war that is now coming. Because the, uh, war we are in, and which is actually already a quite hot war, it's not about doing something like Trump with full-scale innovation in Ukraine. It's an intense hybrid war. >> Putin in Ukraine. >> Yes. Yes. Yes. Excuse me. Yes. >> When, when Russia invaded Ukraine, that was a more conventional, old-fashioned war. Whereas what we see now with influence operations, with hacking, with cyber, with them cutting cables, with them, uh, buying up infrastructure, property, companies, uh, they are trying to, uh, yes, influence our societies to become more polarized, uh, more unstable. Uh, so, so all that influence is also against a change for the West and the USA to rebuild power. For, for all these countries have, in a way, the same interest in weakening the West and weakening the USA. So perhaps you can say a bit more about the hybrid war, both how it is waged by >> Russia and how it is waged by >> Mhm. >> by China, uh, as >> predators, to use the foreign word. >> Yes. Um, where we, uh, in the West think that buying a company is about economic rationality and you should make money. For China, it's about buying critical technology to rebuild power or build up power, both militarily and economically. So, so China actually builds power using the entire spectrum, from the best education, uh, best research, and then it's a pure meritocracy, meaning that the best are promoted and get opportunities as long as you, in a way, are loyal to the system. >> And, and they have been doing this for hundreds of years because there were, uh, public exams to get a job for the emperor. And >> it could be, like, a poor provincial boy who was >> Mhm. good at reading, writing, and arithmetic, he could become the emperor's right-hand man. >> Yes. And that's how it was actually in Norway too, before it was more important that you were the smartest and had the best competence. Uh, it wasn't as important what political connections you had. So this is, in a way, that they have, uh, built what they know historically builds, uh, power. And that's the best education, best research, best innovation, uh, best, uh, production capacity, best military, and those who have the best technology, they win a war, right? And that's what we see now. Uh, as I said, the war in Ukraine is very conventional. It's almost an old-fashioned trench warfare. And then you have an intense technological race in the civilian sector with drones, artificial intelligence, sensors to increase the pace of innovation into the military. And here, Russia is getting help from Iran and China and India and all sorts of places. They are even recruiting from Africa to get soldiers in there. So, so China thinks very long-term, and they use the entire state's muscle with free capital, with help, for example, to buy up infrastructure, harbors, the Belt and Road Initiative. If you look at the map of Africa, you see that from, uh, 2000 to 2020, almost all countries in Africa have gone from being European and American allies to China being the largest trading partner. So China has strategically built itself up with control over raw materials and resources and energy. And they have done the same in Latin America. So, uh, China is building power and is entering, for example, by, uh, buying up companies, they are buying up mines, harbors, they have even established police stations around the world. So they operate with a parallel system where they exert their, uh, their power. And the most important thing, as I said, was to know your enemy. So in the USA, there are, uh, between 300,000 and 400,000 Chinese students today. And they jokingly call Harvard Business School the party school of the Chinese Communist Party. And apparently, President Xi's daughter also went there, so they know the USA and its institutions, its strengths and weaknesses, inside and out, and then they use, uh, a very long time to build themselves up. E >> And how many Americans study in China or speak Chinese? >> Yes, no, I think many, unfortunately. So, and then there are these new ways of influencing, and we have gotten more information about how Russia, uh, but also China and Iran do it, that they, uh, have algorithms on social platforms where they stir things up so that there will be demonstrations and you will enter these echo chambers. And it is, uh, very difficult for us to understand. Uh, and even those who are very upset about certain issues, probably don't know that they themselves have been radicalized. But if you look at released, uh, information about how that type of operation was before from Russia, then your no to nuclear weapons was controlled by Russia. Uh, and I don't think many of those who were demonstrating in Norway or the USA knew that, right? So this is our weakness, that we are, uh, open, uh, and trusting, and we let ourselves be engaged. And then, uh, >> what fascinates me is how we love to criticize the USA, but, uh, yes, Putin, I would say we criticize, but, uh, there isn't, uh, it's not loved to criticize China in that way. We >> we talk little about China. It was like we had this >> Erna Solberg's, uh, curtsy where she promised never to provoke China again. >> Mhm. Yes. And I have enormous respect for China, right? I have read a lot and am very fascinated by China. So it's not that I am, uh, but I think to understand China, they respond best to strength. If they smell weakness, then you are in trouble, so to speak. So to understand China and understand what kind of, uh, power they wield, and then it's not certain, uh, we should, we can trade with China. The USA does, but they have a clear strategy on what is smart to trade with, what is strategically smart. What is strategically smart not to allow acquisitions from? For example, Greenland is an example of China, uh, for many years buying up strategic things and various companies in Greenland. >> China has bought in Greenland. >> Yes. Previously. And now I'm not an expert on Greenland, but the impression is that it was first, uh, that the USA, with its security, uh, law or security strategy last year, not the one we are discussing now, but the previous one, then they had a much greater focus on, uh, the Arctic, and that Greenland is a natural part of the USA's immediate surroundings and important for its defense by the USA. And it was only when the USA pushed Denmark to deny China the purchase of everything in Greenland, that they put their foot down on that. And in this picture of a calculating China that knows what it wants, and a USA that responds and deals with it, then comes Europe and, uh, little Norway. How >> if we are to think a bit about how we respond or don't respond, and what we think or don't think. I >> I immediately think that if we take industry, then, uh, this green initiative in Europe, uh, has primarily manifested itself as a way to make ourselves dependent. In this perspective, we become dependent on Chinese solar panels, >> Chinese wind turbines, >> uh, Chinese batteries, Chinese critical earth minerals, that is, >> Chinese everything in the name of green. >> Yes. And the EU has already stated that we are too dependent on China to be able to put our foot down against China, as the USA has done. Um, so these are strategic misjudgments that Europe has made for a long time. First by shutting down nuclear power and relying on Russian gas as a stabilizing energy source in Europe. Um, and then with this green transition, which is ideologically driven. And, uh, it is one of the good commentators in the Financial Times who wrote an article where he wrote: "Why is Europe so weak?" And then he answered that, well, it's actually that it has a structure for acting. It is built as a, uh, bureaucracy where, uh, it has the, like, French regulatory model where everything must be decided at the top, and then it trickles down. And the more, uh, demands and regulations, the better. And then everyone must agree. And I work in an alliance myself. And to get everyone to agree on everything, you have to spend some time. So, so Europe is not set up to be decisive. And then it has lived in this. It has not received any reality orientation that there is such a dangerous change in the world system that we must do something. We still take for granted that the USA will defend us, uh, even though they don't really have the economy for it, and certainly not if you read the latest security strategy, where they say that for them, they are only 300 million people, they have limited resources, enormous state debt, they must prioritize harder, and they must pressure, uh, allies to take more responsibility, and then, of course, they will prioritize the allies who, in a way, help to, uh, strengthen the alliance and not just take it for granted that the USA will do as they always have done. It, it is, uh, it is a fascinating picture you paint because it is so very cold for, uh, for us Europeans that we, uh, we are so angry at Europe now in our daily lives. >> Mhm. >> We are a bit disappointed. We are like, uh, I get a feeling that we are a bit like a man or a woman who has had a very generous and benevolent boyfriend. >> Mhm. >> who has actually financed our, uh, our idle life >> and our comfortable apartment with >> much better social benefits and healthcare system than in the boyfriend's apartment. >> Mhm. >> And when he suddenly says, "I'm not doing this anymore," >> Yes. >> then we are left on the street, writing out our indignation about this. Yes. >> Uh, male chauvinist pig who has dumped us and left us to the wolves, >> and hope that he, uh, will change his mind and take us under his wing again. >> Yes. Uh, and of course, we can hope for that, but it's not very realistic. And if you read Mario Draghi, who was commissioned by the EU Commission to look at Europe's, uh, economy, innovative capacity, then one of his recommendations was to learn from the USA regarding innovative capacity and standardization. For example, if you look at defense matters around Europe, there are still many different tanks and dimensions and equipment, so there is no, it's not standardized, and no one can make a decision on behalf of an alliance because everyone must agree, and everyone should actually think about the next election at home, where the population is concerned with immediate things. So the, uh, organization in Europe, it is too fragmented and too weak and has not been reality-oriented, uh, towards the threat we are facing. And, uh, when you travel around the USA, I was there for three weeks in the USA last fall, they have some things to stream themselves. Ordinary Americans don't have it particularly easy, to put it mildly. It takes longer to get the opportunity to buy their own home. Uh, wages have been poor. The good jobs have been outsourced. So that ordinary people, I mean, uh, typical workers in areas other than the big cities we know in Norway. >> Average Joe, isn't that what they call them? >> Yes. And and it was, Trump has previously referred to this "the Forgotten Man," uh, that is, this ordinary worker who just works and pays taxes and goes to church and is not so politically active that they have, uh, become, uh, these that Hillary called "the deplorables," right? Those who are, in a way, not worthy of being included in politics, they are supposed to finance whatever the elite wants at any given time, but which they don't have enough money for themselves, which they have to pressure others to pay for through the state budget. >> In your presentation, you have a slide. I don't usually do this, but I want to read out, like, how you summarize the policy for controlling government debt. Mhm. >> First is the incentive to invest in the USA. Second is tariffs on imports from China and others to achieve equal competitive conditions. 3. Less regulation. 4. Efficiency of the public sector. 5. Securing value chains, especially technology and shipyards. 6. Self-sufficiency in everything from minerals to technology. 7. Allies must take responsibility for their own defense. How is it going so far, if you were to say something about the arrows for this policy? >> Yes, well, what we see is that growth has increased in the USA. Production is being moved to the USA. So it is happening. Uh, and then, of course, it takes a very long time. And there are certainly some who say they will do it and are waiting to see if they have to, but, but there is a clear, uh, trend that production is being moved to the USA, and then they give tax, that is, import tax exemptions for what they need. So there are many things that are exempt from tariffs in the USA today. The effective actual import tariff on what is imported is around 10%. Um, so, yes, the incentives are working. There are strong depreciation rules and stimulation, and you have got, uh, got a lot of rules and regulations clarified that create stability and optimism for investments. So, uh, more is being invested, and you also see that ordinary people are getting lower taxes. Uh, price growth is starting to come down. Um, the oil price, which is very important in the USA for price growth, has come down. Um, the fact that they have got, uh, more equal import tariffs and pressured China has had an effect, uh, by giving them negotiation opportunities with China and other countries. Um, so I would say that they, and then they have also got other countries to pay more for their own defense. Perhaps just as interesting is what is happening in Asia with South Korea and Japan. Uh, uh, where they are, in a way, rebuilding their old, uh, Chain Island strategy, where Taiwan is an important part. It's like the islands that are supposed to block the Pacific to, uh, secure Japan against China. >> Yes, right. Because what is a common challenge for both Russia and China is that they don't have many deep-sea ports for their large naval fleets. >> Mhm. So that's why China has built all these islands in the South China Sea and is pushing for, they have secured a security agreement with the Solomon Islands, which was an old allied island base just off Australia. Uh, and they are intensely focused on the Guam base of China, no, of the USA, which is like another row of these. So they call it like a string of pearls outside China's coast. Uh, and that has been an important military strategy for the USA and its allies, like Japan, South Korea, the Philippines, uh, and several other countries in Asia, who are now choosing to side with the USA. So a lot more is happening geopolitically than we, uh, are aware of. Uh, because it is so complex and the world is so large. Uh, and it has been so long since we had to deal with military strategy and defense and, uh, and that kind of thinking in the way we analyze economics. >> It is also a bit funny to see how, uh, how the USA, uh, yes. Uh, you, you show in the lecture how the yield curve has fallen. That is to say, >> uh, they were paid less for buying American bonds. In other words, the market believes in the USA. AI is growing, and promises that you are now also starting to see artificial intelligence in productivity growth. >> Mhm. Yes. Because when, uh, when they started with this "Liberation Day" and so on, the market's loan rates increased for lending money to the USA, right? They were worried, will this go wrong? Will they really destroy everything? And then they wanted this risk premium for lending money to the USA. Now, the interest rates for lending money to the USA are lower on all maturities than a year ago, and significantly lower up to 10, uh, approximately 10 years. So the market is reassured that the USA is on a good economic path regarding government finances. And then, as you say, the innovative power in artificial intelligence, that's where it's happening in the USA. And now it's going to be used by businesses. So productivity growth in the USA is now up to 4, maybe 5%, it's hard to know, but it is >> 4-5% productivity growth. And that's probably, that's probably completely beyond what we, I think I remember from my head, that like 2% was what we could hope for. >> Yes. We have to go back to, in a way, the internet revolution and that period in the 90s when it started, and we didn't get the productivity growth with the internet at first, right? It took time, and then it started to be implemented with the fact that you could do things in other ways. So I think we are facing a strong period in the USA with increased productivity growth. And from economic theory, we know that that is the only sustainable way to raise welfare in a society. It is by doing things more efficiently. >> So making, yes, fewer resources to make something, right? >> Yes. So if you look at figures for GDP growth and employment growth, the arrow for growth goes straight up, but employment growth flattens out. And and what also the Secretary of the Treasury talks a lot about is giving workers better pay. It's a bit like Henry Ford, who, uh, gave his workers good wages, because then they would be able to afford to buy the car eventually. So, uh, one can believe what one wants, but they have a desire to raise the wages of ordinary people in the USA. Do you see any effect of them also cutting immigration and illegal immigration, and yes, they had kicked out over 2 million, so do you see any effect on wages for the least educated or demand there? No, I haven't, I haven't looked at that that closely, because I think there has been a shutdown, and so I think one should wait a bit and see the effect. But of course, uh, my impression is that it's a bit like a negotiating position. It's a bit like, uh, creating noise, unrest, shock, and then finding sensible arrangements. And if it turns out that there is still a need for a lot of, uh, labor immigration from, for example, Mexico in agriculture, then I am absolutely sure that they will find arrangements for that, but in a legal way. So, uh, and when I was in the USA, of course, I spoke with many people, and there were many who needed to say that, yes, we don't agree with what Trump is doing, but it's nice that it has become a bit safer, and it's nice with that, and it's nice with that, so the way he, uh, operates is completely, it seems completely crazy, but if it turns out that it is part of creating room for maneuver for those who are actually going to implement the policy, the Secretary of the Treasury, the Secretary of Commerce, only time will tell. Uh, I just think that it is important to try to maintain a bit of, uh, that is, try to look at what is happening, and, and understand that this can be an important change for our own security as well. Uh, we should remember that Norway has a very special security agreement with the USA, which was established before NATO. >> Tell us about that, because I don't think many people know that. No, it, it, if you look at the map from and when you >> the North Pole in the middle, so to speak. >> Yes. Because when we unfold the map, it is very Eurocentric. While if you look at a globe, you get the right, uh, proportions. And then you see that
The Russian bases in the north, where Russia has deep-sea ports and submarine stations. And now, they have started using these missiles that travel five times the speed of light. No, the speed of sound. These, what they call "hypersonic" missiles, if they are to be sent to hit targets in the USA, they will go from the nearby area of Norway, Kirkenes, and over the North Pole to hit targets in the USA. So, after World War II, Norway was one of the first countries to have its own security agreement with the USA specifically to monitor the traffic of submarines and activity in Russia's northern areas. And that is a role that we should take care of. And it is clear that if there is intense development of new drones, swarms of drones, many missiles, and they are shot over Greenland, then there is a vacuum in Greenland. So, I see that it is a point for the USA to have control. And it may well be that they now just want to get Denmark to take that responsibility, or that more allied countries come and help. They can get a type of security agreement like ours that goes outside of NATO. So, we have been an important ally for the USA for a very long time. And again, if you go back to Jens Kristian Hauge, it was because he had experience from Milorg during World War II, so he knew how important it was that his soldiers in Norway, in the resistance movement, received training from the very best soldiers in England, special forces, and that they had access to the best weapons. So, after World War II, a whole Norwegian defense strategy was established based on advice from those who had the latest sharp experience with war. And we had great respect for that for many, many years after the war. And then it may be that some of that experience, that we must be prepared, we must be ready, has somehow slipped away, and then one thinks that someone else can fight for us.
But here we have a good bridge to Norwegian economic policy and the outlook there. If you... Yes, we finally got a state budget. Yes. Uh, yes. And it was heard today when Jens Stoltenberg received the municipal proposal, there was some mumbling that yes, perhaps they needed some money, so that there might be even more in the revised budget, I wouldn't rule that out. That the management model they now have with five parties that are to come in and have their pet projects and their election promises delivered. This means that we have a terribly unmanageable and ineffective leadership in Norway at the moment. And one must remember that in Norway, there is also the principle of sectoral management. That is, all ministers are only responsible for their department and their area of responsibility. And when we are now entering a period of major changes where one must think cross-sectorally, as we call it nicely, meaning that it must apply to transport, defense, environment, and tax, for example, you have to get them to talk to each other. And someone has to say that this is the most important, and you others have to put yours aside, otherwise there will be paralysis of action. And when I talk to people around Norway who are trying to get things done, with regard to total preparedness, for example, it's like, yes, but we have to go to the municipality first, and then we have to go to defense, and then we have to go to transport, and it's impossible to coordinate this. And that is a bit special for Norway. If you look at Sweden, it is the government as a collegium that is responsible. And then you get a different decision-making structure.
But this is perhaps the only nice thing I can say about Støre's plan for Norway. Because he says that they will work more interdepartmentally or, yes, cross-sectorally to achieve this. Yes. But who is the person who can get the others to give in? It doesn't say anywhere who it is, right? And that's what I think is a weakness, that as long as there isn't one person who has that responsibility, it becomes a bit like, yes, but it's everyone's responsibility, and then it's no one's responsibility. And I have been talking for a long time about this, that one must consider how owner taxation is a very important piece in that Norway's total defense is now being weakened because very... Explain why, why does owner taxation lead to the weakening of total defense? I don't think everyone understands that immediately. No, because in Norway, in recent years, owning an industrial company, or a contracting company, or a tech startup, the owner taxation, i.e., wealth taxation, the value of the company, has increased sharply. It has, let's say, roughly doubled in recent years. And that has led to many of our companies around the country, contracting companies, plumbers, shipyards, shipping companies, selling out. And then, of course, when you have private equity funds abroad owning many companies in Norway, and something happens, right, can you then in the same way use those resources? Could it be that they have more loyalty to their home countries? And until recently, there has not been good protection that such companies have been sold to actors who could be shell companies from Russia, Iran, or China. And that has meant that if you look at the proportion of companies in Norway with foreign ownership, it has increased sharply. And this is, in a way, an important part of total defense, that you have some companies that have the pressure and the ability to turn production around and are willing to do so in a crisis, not just shut down and say that no, our owner abroad doesn't want to, or it becomes more complex. And it's also about technology companies, where we see how important the development between the USA and China is now, it's a technology race. And in Norway today, if you start a successful technology company that has received a lot of help from incentive systems and universities, the company starts to look like it's doing very well, so the value of the company starts to become very large. And what is typical of that type of company is that they don't make money until a very long time has passed. But in Norway, wealth tax on value starts to hit very early. And then it is difficult for that company to take money out of a company that is supposed to grow, right? Because it doesn't really have much value to take out. And if it has to take money out of the company, there is a dividend tax of almost 40%. So, this also means that if these companies, in order to raise capital to grow, will have a huge problem raising that capital, and certainly from abroad, because they don't want their money to go to a lot of tax in Norway, right? So, this means that many companies that are in the process of starting up and look like they will be successful have moved out of Norway. So, you also lose that innovation capacity, apart from all these great companies like Kongsberg and Telenor, who do a great job. But we know from innovation policy and studies that the strongest innovation power comes from small companies, startups. And then it is important that the conditions are created for them to grow and stay in Norway. So, I think this is something that should have been done more quickly, right? And not just set up a committee to look at it and then perhaps do something in a few years, right? The decision-making process is too slow in the situation we are in today.
So, what happens to productivity in Norway? How is it? I have noticed that Martin Bekkhus has been in a fierce dispute with Dagens Næringsliv, because Bekkhus believes that total productivity has fallen. Mhm. While other economists have believed that no, it has grown slowly, but slower than before, but we are in the middle of the European track, a little under 1% per year, I think they have said. What do you think about Norwegian productivity? Well, first of all, I think that the main picture of what has happened in Norway in the last 20 years with the very rapid phasing in of oil money is that it has led to increased spending through the state budget, so that a larger part of the economy in Norway is financed by the public state budget. If you look at how value creation in the public sector is measured, it is because there is no direct measure of value creation. There, they say that one must use the input factors. And that is work. So, that means that when wages rise, value creation in the public sector rises. So, pay a bad teacher twice as much, he is twice as productive. Yes. And so on. Yes. So, the fact that we have been in this period where the public sector has increased so much, and there is a very simplified way of measuring production, I would say there is a high chance that we have overestimated what the real productivity is in the Norwegian economy. And that also goes back to a choice we made when we introduced inflation targeting and the fiscal rule in 2001. It was that we knew that this would happen to a certain extent. That we would take in a lot of money quickly in state budgets and that it would lead to slightly higher wage and price growth in Norway than other countries. So, we chose a slightly higher inflation target than other countries. And then you lost, in a way, the comparison mechanism that we had in the old days, before 2001. Where in wage negotiations, you actually looked at what is the wage growth in Germany and Sweden? What is the productivity growth in industry in Sweden and Germany? And then you knew that with a stable exchange rate, there was a direct comparison if we had higher wages and weaker productivity than other countries. Right. So, with a stable exchange rate, it was very easy to compare and know that, okay, now we are weakening competitiveness because wages are rising a bit and productivity is a bit weaker. So, from 2001, one has essentially just chased an inflation target. And then one has said that, and then we assume that productivity is the same as in other countries. And then no one has really problematized it, because it has actually been quite convenient. Yes, we meet the inflation target, we are great, but... But now when we no longer meet the inflation target because it seems that, well, it's 2%, and now Norges Bank says 3%, and it doesn't seem like anyone really has a very strong focus on that it is a top priority to get it down to two. No, and I think that's a bit because the reason why it has just let things slide is that it has let the krone slide. And then it has created its own inflation dynamics through wage formation. And the front-line model was designed based on a stable exchange rate, right? As I said, it was easy to assess competitiveness against other countries. But when, after oil prices in 2014, one has allowed the krone to weaken almost year after year, one has been able to maintain competitiveness with other countries even though they have had higher wage growth and perhaps in real terms also weaker productivity growth.
And now, after Trump, perhaps this fall in the krone has also been disguised by the dollar falling so much. Yes. And that comes on top. So, the challenge for Norges Bank is that interest rates are now working in the same way when the underlying driver of price growth is the public sector, right? If you get higher inflation, the idea is that you raise interest rates, you stifle demand in the private sector, and demand higher loan rates, so you dampen consumption. But if the increasing part of the economy is the public sector, and they get compensated, right, if the municipalities have to tighten their belts because interest rates go up, and then they complain, and then they get more money, right, then interest rates don't dampen activity in the Norwegian economy in the same way as before. But what strikes me, and here, Ida Volden Bakke, she is a very, well, you had Svein Gjedrem, who was perhaps the first independent central bank governor who was very clear, and everyone listened when he spoke. Yes. And I worked at Norges Bank at the same time as him. So, I may have been a bit... raised in the idea that one should tell the truth and try to be an advisor to the overall economic policy in Norway. Because it affects what Norges Bank can do, right? There is actually very little it can do. And then you got Øystein Olsen, who had a slightly, yes, a quieter profile, I would say. Mm. But now you have Ida Volden Bakke, and I would say she is characterless, I mean, she comments on the interest rate decision, and that's it. Or am I too harsh now? Yes. Yes. Or I can't say I've picked up many statements from her like Gjedrem did, right? He talked about competitiveness, and he was the one who established the regional network to get impulses and information from the business community into Norges Bank. And was very concerned about what was happening in the financial markets, right? And understood that it was an important source of information and perhaps a sensor of how economic policy was. So, I actually miss a more open and wondering discussion about, are we actually doing the right things, right? Or should we have focused much more on the structural problems in the Norwegian economy, which is that we have weakened competitiveness and used the krone as a comfort blanket, and then I think Norges Bank has now realized that. They have at least been much clearer about the need for a stable krone. They talk a lot about it after October 2023. But I think it is the structure and balance in the Norwegian economy that has become far too dominated by the public sector, and that it has not reflected anything about, yes, what does that do to how monetary policy works when you can just get money if you don't dampen activity, i.e., you should actually dampen activity in the public sector, right? Yes, but no one wants to do that. And again, in a sense, we voters are the problem, because we only vote for parties that want to do something that will spend money. And if you look at the alternative state budgets, it's like, yes, it's a bit of a pretense, Høyre and Frp are trying, but you don't quite get that, it's not an election winner to cut the public sector. Perhaps reducing immigration, but take the sick pay scheme, which I think should be an obvious candidate for cuts. Perhaps, but everyone shies away from it. No, and I don't think enough people reflect that the fact that inflation is so high is a form of taxation of our purchasing power. Explain it. Why is inflation taxation? Because when you get a salary, you can spend it on something, and then you can choose to save some. But if you put it in safe savings, what you can buy will become less as inflation rises. So, the fact that we have such high inflation in Norway today, 3% is one percentage point above what it should have been. So, it eats away at purchasing power going forward. And it also affects how people act in the economy, right? It becomes less profitable to save. And those who save are pushed to save in things that have much higher risk than what we in Sparebankene were originally established for, to provide a safe annual return to secure pensions. So, if you are to save today, you are encouraged to save in something that gives a higher return, but it also has a higher risk. So, the fact that inflation is so high, I think it should be more problematized and discussed so that one understands that it is something that eats away at our purchasing power and encourages taking out loans and investing in things that give higher returns, such as real estate and stocks. I also wonder if it shifts the willingness to work from the private to the public sector. Because if you work for yourself, it is not automatically given that all your customers will accept that you increase your invoices by 3% every year. Then you have to negotiate. And why should you give them that, saying it's inflation, it's not the best justification. So, yes. So, while if you sit in a secure public job, and you get 3% every single year, it seems quite convenient compared to a private individual who perhaps feels they have to become 3% more efficient to be able to increase invoices by 3% to put it that way. Yes, that's at least how I think now, just for myself in relation to the few customers I have, that it's not like, you have to have a reason to be able to send a higher invoice. Yes. And then there is also the issue of saving for pensions, right? Those who work in the public sector are secured in a completely different way than those in the private sector. And we who are in the private sector are only properly secured for 10 years. And then it depends on how good you have been at making sure you move the money into stocks and that the stock market goes well, right? So, the risk is on those who work in the private sector, both on wages and on keeping up, and on how they save for pensions.
But if we just double their salaries, the public sector will be twice as productive. That's great, isn't it? Yes. No, and I mean, many people do a fantastic job in the public sector, but I think that if nothing is done about the balance, we are at a level now where 70% of the economy receives its financing from the state budget. And there is nothing in the mechanisms that pulls in the direction of slowing that down, right? So, this will just continue. In a sense, we are, when we start talking about 70% of the economy over the state budget, we are approaching, there are almost no historical parallels, I think. So, we are moving into some form of mixed economy, which is the wrong description. So, we are becoming more and more of a planned economy with a private element. Yes. And that's why I think one has to consider how monetary policy works in such an economy, which is different from what it was designed for, right? Because the balance was completely different in 2001 than it is now, in terms of how many are employed. Now I'm thinking about who gets paid, including those who deliver to the public sector of all sorts of things. And even though Vedum has tried to cut it, there are a lot of consultants who deliver. And then I think it also affects public debate because, of course, you don't bite the hand that feeds you. So, I find it fascinating to notice how many people have doctors who have strong opinions about the healthcare system, teachers who have opinions about the school system, and consultants who can tell me about wild projects they have been involved in publicly. But the desire to talk about it publicly, unfortunately for a podcast, is low. Simply because I'm afraid that you will get less food. Yes. No, and in that sense, I travel around and represent savings banks that live and die with the local business community all over Norway. And they have had a significantly more difficult job operating with much increased regulation, tax levels, with the green shift that requires them to change investments and regulations, everything that has changed that they just have to deal with, and that no one really speaks for them, right? So, who stands up for the small businesses in Norway? Right? Very few.
But if one is to be optimistic, perhaps it is that if the USA were to achieve 3 years of 5% productivity growth over 5 years, yes, then we are up to almost, then we are approaching about 18% productivity growth in three years. And then Europe will either change course or everyone will move to Texas. Move to Minnesota. I've heard that quite a bit. Start a little Minnesota scam. Yes. Yes. I mean, no, Norway, if you look at how Norway functions when it comes to starting businesses, how much is invented, how smart people are, technologically inclined, very easy to start businesses in Norway. Lots of creativity, so we have all the prerequisites, and we are a bit like how the USA does it in the early phase. And then the problem is really when the companies start to become successful, if something is done about it, and it's a tax change that needs to happen, then you have every opportunity to keep pace with the USA. I would claim that. So, if we just copy Sweden's tax system, we can achieve the same large and healthy growth increase as the USA. We'll leave that as the last word. It looks, yes, it's going in the wrong direction, but it can go very well with quite small changes. Yes. Thank you very much for coming. Yes, thank you. If you like this podcast, you can support iheter, either by a Vipps transfer or to a bank account. You see our numbers on the screen now. Don't forget to subscribe to our YouTube channel and follow us on X, Facebook, and other social media.