Photo via Wikimedia Commons. Edited by Inroads Journal.
In 1963, at the University of Stockholm, Assar Lindbeck tested my mastery of macroeconomics in a one-hour oral examination. Four years later, I served as his assistant, carrying out research into unemployment, inflation, balance of payments and other issues for what became a major paper in the American Economic Review.1 The paper covered the whole field of stabilization, monetary, growth and allocation policies. I warmly remember him patiently listening to my efforts to draw conclusions from the statistics that I had dug up. It was an educational experience that has served me well to this day.
In this short personal reflection about Assar – as most people called him – I focus on issues of common interest to both of us. There are other issues that I don’t cover, such as his analysis of the functioning of the labour market with workers being either insiders or outsiders. I do not address his famous critique of the political economy of the new left. I was, in effect, one of the targets of that critique as I advocated worker self-management. Assar opposed wage-earner funds, rent control and many agricultural regulations.2
Assar was renowned for choosing his research topics from policy issues relevant to real life. He was a genuine market economist but at the same time he was an advocate for a – reasonably – generous welfare state devoted to public health and education services, paid for via progressive taxation.
Assar’s main preoccupation as an economist was macroeconomics. A long tradition in the Swedish Economic Association has been the minister of finance’s annual presentation of the central government’s budget proposal for discussion by professional economists, academics and others. For many years, the highlight of the year was Assar’s exchanges with legendary Social Democratic Minister of Finance Gunnar Sträng. As economics students, we gathered every year to listen to these two articulate combatants, and Assar’s analysis was always a bit ahead of the reasoning of the ministry of finance.
Macroeconomics and stabilization policies were on his mind even when he was studying other issues like housing and agricultural policies and the welfare state. Richard Musgrave, a prominent mid-20th century economist, gave government three overarching goals: to stabilize the economy at a high level of employment, to allocate resources in the economy efficiently and to assure an acceptable distribution of income and wealth.3 Though supportive of the modern welfare state as “a major achievement of modern civilization,” Assar frequently warned, “If we do not watch out for hazardous dynamics, there is a risk that the welfare state will destroy its own economic foundations.”4 What was original in his approach was his linking Musgrave’s goals with a political economy sensibility to the problem posed by inefficient rent-seeking behaviour – the “hazardous dynamics.”
Assar feared that, with time, a generous system of social programs would erode the “Lutheran ethic” – an image he used to summarize the complex issue of preserving social trust between those who pay high taxes and those who use social services as intended. He feared that a generous welfare state would result in abuse of social programs and an unwarranted increase in welfare budgets, which in turn would require higher taxes. In a paper entitled “Sustainable Social Spending” he put it this way: “In today’s advanced welfare states, the choice between labor force participation and benefit dependency is largely an issue of (containing) moral hazard.”5
If moral hazard was left unchecked, he feared it would destroy the ability of fiscal policy to stabilize the economy. Instead of acting as an automatic cushion in times of recession, welfare programs would increase budget deficits to such high levels that expectations of high interest rates would increase as would uncertainty about future policies. In the worst case, higher public spending would have an effect opposite to that intended. Experience in Sweden and elsewhere during the 1990s confirmed his apprehensions. This reckoning may be seen as a concession to the arguments of his opponent Gunnar Sträng who, fearing large budget deficits, had always preferred more restrictive fiscal policies.
‘Baumol cost disease’
Assar said he appreciated my efforts at signalling the dangers for the welfare state if public sector productivity declined. I sought to measure the effects on productivity of welfare programs and services. I had not chosen an academic career; instead, I worked in the central government administration where I had the opportunity to delve into such issues. This work came to Assar’s attention. After I finished my thesis in the 1970s, we had only occasional professional communication until, in 2005, he sent me a working paper for comments.6 It dealt with the same issues of welfare state hazards, but more broadly than in his earlier work. Now he was concerned with external factors such as difficulties of tax financing due to internationalization of trade and capital migration, an aging population increasing the “dependency ratio,” and increased unemployment. These factors compounded the moral hazard effects of Sweden’s longstanding ambitious social policies.
Another unavoidable feature of a society with generous social policies – often referred to as the “Baumol cost disease” – is the slower productivity growth in services (private and public) than in goods production. I addressed American economist William Baumol’s assertion that taxes must be raised because of the difference in productivity development between services and goods.
Assar, as one would expect, handled the Baumol cost disease appropriately, contrary to many others including some economists. An erroneous conclusion is that taxes must be raised just because there is a difference in productivity development between sectors. Assar rightly pointed out that this is the case only if public services are to expand at the same rate as private goods production. Of course, if there is a productivity decline in the production of public services – which my measures based on Swedish data showed to be the case – maintaining a constant volume of public services necessitates tax increases.
From very low percentages, by 2020 the foreign-born share of the Swedish population was 20 per cent, coincidentally similar to Canada’s. In recent years, Assar was concerned with the evident difficulties of integrating large numbers of immigrants, mostly from the Middle East, into the Swedish economy. In my view, the roots of his critique, during his last years, of Swedish immigration policy were linked to the analysis he had made of dynamic welfare state hazards in the 1990s. He argued that the number of immigrants was too large for the Swedish economy to integrate. He feared that increased demand for social services and an intensified erosion of the “Lutheran ethic” would ensue, undermining support for the welfare state.7 Already in his 1995 paper, long before immigration became the hottest political issue in Sweden (and elsewhere), he had speculated, “Immigrants who have come to a country largely because of generous benefits are also likely to be relatively quick to utilize the existing benefit system; a liberal immigration policy toward such individuals may therefore in a long-term perspective be a threat to a generous welfare state.”8
Chatting on the subway
During the 1970s, I lectured and wrote my thesis one floor down from Assar, who was head of the Institute for International Economics. We often met on the subway going home after work and chatted about social and political issues with an economic twist. Since I was environmentally engaged in banning cars from the streets of Stockholm, he strongly urged me to concern myself with road pricing. At that time politics leaned left, so solving environmental problems with economic incentives was not popular. I don’t know whether Assar’s motives for advocating road pricing were environmental or efficiency-oriented. I was sceptical: afraid that the road tolls would be used for building more roads, thus increasing environmental problems. In the end the Stockholm Party under whose banner I ran for office in 1979 adopted car tolls in the inner city of Stockholm as a tool to alleviate the burden of pollution, noise and accidents on the city and its residents. After many years of bickering, a system of congestion charges was established in 2007. It immediately reduced car traffic to and from the inner city by 20 per cent. Toll revenues are now being used for building a bypass west of Stockholm.
The Lindbeck Commission
Assar’s best-known engagement in public policy came in the early 1990s when he chaired a commission charged with redesign of many core Swedish social and economic programs in the wake of a financial crash and deep recession. At the time, Sweden – and Canada as well! – experienced a financial crisis, brought on by the bursting of speculative housing bubbles and a general recession in Europe and North America. Interest rates on public debt were high, at one point reaching 500 per cent; public expenditures reached two thirds of GDP; there were massive bankruptcies and a high rate of unemployment; government revenues fell; and a very large budget deficit ensued.
Assar collected a group of economists and political scientists and, after three months, produced a report containing 113 proposals. Several of the proposals had been in the making for some time, but some were novel. Instead of confining itself to economic issues, the commission also took on reforms of administrative and even political institutions. Among the proposals were strict budget process rules, an independent central bank and longer terms of office for a chosen government. The book Turning Sweden Around gives the English reader an account of the commission’s analysis and proposals.9
Assar engaged in city planning and architecture to an extent that surprised me. He wanted cities to age with beauty. In 2014, we collaborated to prevent destruction of an iconic 1934 traffic junction in the form of a cloverleaf in the middle of Stockholm – a modernist innovation hailed by Le Corbusier. Economic reasoning, popular opinion and aesthetics combined to make Assar a strong proponent of a reconstructed and modernized version of the cloverleaf and an opponent of the proposed new and – in his, my and many other people’s eyes – brutal construction. Assar assured us that the Stockholm daily Dagens Nyheter had never rejected any of his opinion pieces. So we had high hopes for a powerful article that would change the minds of local politicians. But alas! To his and our dismay, this was the only one of his articles that was ever rejected. And we lost the battle.
A few years later we met again in another campaign to preserve a part of Stockholm’s harbour history and early-20th-century inner-city architecture. In a park in Stockholm adjacent to the headquarters of the Nobel Foundation, Assar gave a memorable speech condemning the foundation for its intention to build new headquarters on the waterfront in the form of a gigantic “gilded nuclear plant” dwarfing the National Museum of Art. His involvement in the creation of the prize in economics in honor of Alfred Nobel was well known and gave him considerale credibility. His willingness to speak out, in his blunt and witty way, proved effective. This time we won the battle.
Assar was an amateur painter with a sharp eye for aesthetics. The year before he died, he exhibited his paintings for the last time, at a well-known gallery in central Stockholm. We were all there.