Photo by Kielinstitute, licensed under CC BY-NC-SA 2.0

In introducing my article on the death of Assar Lindbeck in Inroads 49, John Richards unfairly describes Lindbeck’s position on crisis management in Sweden in the early 1990s in comparing it to Canada. He writes,

Those of us over 50 can recall Canadian initiatives in the 1990s equivalent to those Lindbeck championed in Sweden. Ottawa limited access to unemployment insurance, reduced conditional transfers to provinces, and doubled Canada Pension Plan premiums. The provinces closed underused hospitals, rendered welfare assistance more difficult and severely constrained civil servants’ wages.

The Lindbeck Commission launched a very broad program – 113 proposals – for restoring economic stability, efficiency in the private and public sectors and economic growth. One of the many proposals was a reduction of central government expenditures amounting to 10 per cent of the total. Half of these reductions had already found their way into the government’s own proposed budget.

Therefore it is unfair to compare that program with how Canada handled its economic crises as described by John. Lindbeck was much more focused on structural reforms, such as the independence of the central bank in setting monetary and exchange policies and a budget process based on macroeconomic goals and priorities rather than wish lists.

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.

Macroeconomics

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.

Immigration policy

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

City planning

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.

Continue reading “Assar Lindbeck 1930–2020: A Personal Reflection” →

The tricky question is whether or not to negotiate with the Swedish Democrats

On one level, Sweden’s general election in September 2018 turned out as expected. It is no surprise that the Swedish Democrats (SD), a nationalist, anti-immigration party with racist roots that identifies with Le Pen in France and Orbán in Hungary, holds the swing vote between the Redgreen bloc and the Conservative-Liberal Alliance.

It is something of a surprise that the Redgreen bloc emerged slightly larger than the Alliance in the 349-seat parliament: the governing coalition of the Social Democrats (SAP) and the Green Party supported by the Left (former Communist) Party won 144 seats, while the Alliance, consisting of Conservatives, Christian Democrats, Liberals and the Centre Party (formerly the Farmers Party) took 143. The rest went to SD, which became the third largest party.

The result was a stalemate. Yet the previous elections in 2010 and 2014 had also left SD with the swing vote. Why, then, is it so much harder to form a government now?

First and foremost, SD has grown. In 2010 it broke through, winning 20 seats; in 2014, it won 49 seats; now, in 2018, 62 seats, with 17.5 per cent of the vote. In 2010 the Conservative-Liberal Alliance lost its majority but still had substantially more seats than the SAP, the Green Party and the Left Party combined. The Green Party negotiated a liberal immigration policy with the Conservative Prime Minister in return for which the Alliance was allowed to remain in power for another four years.

In 2014 the Alliance won fewer seats than the Redgreen bloc, and the leader of the Social Democrats, Stefan Löfven, was able to form a new SAP-Green government with the parliamentary support of the Left Party. The process was very complicated. To keep SD from holding the balance of power, between 2010 and 2014 an informal agreement between the two blocs was established to the effect that the largest bloc should form the government and get its budget adopted. However, in 2013, the opposition SAP, Green Party and the Left Party, supported by SD, had voted an amendment on the budget bill increasing taxes, which the governing coalition saw as violating the agreement. With Redgreen in power in 2014, the Alliance opposition returned the favour, with the support of SD, imposing on the newly formed government a budget which was not its own.

This frustrating situation caused the two blocs to meet, and a new agreement was struck, again based on the principle that the ruling coalition would have the final say on the budget. Though this agreement formally lasted only one year, it remained in effect in practice until the election of 2018, during which time there were cross-bloc agreements in defence, immigration, climate and several other areas. These were ad-hoc efforts to avoid depending on SD that also reflected the perceived need to reach stable agreements on long-term issues.

When parliament was recalled following the September election, the SAP-led coalition was ousted by a majority vote. Löfven then rejected the offer by Conservative leader Ulf Kristersson – tasked by the Speaker with exploring the possibilities of forming a government – to work together. Forming the government now boils down to one tricky question: with or without the support of SD? There are many different views on how to deal with the problem. Our guess, in late October, is that a new government will not be formed in the very near future. At present three main alternative solutions are being debated publicly:

• An Alliance minority government (four nonsocialist parties), with the more or less tacit support of SD, has been the main proposal of the Conservatives, the leading party in the Alliance. Forming an Alliance minority government that would depend on SD has been proposed by several influential journalists (and two big Conservative-leaning newspapers, Svenska Dagbladet and Göteborgs-Posten) as well as some political scientists. The idea has strong support among Conservatives and Christian Democrats. But the Centre Party and the Liberals have rejected any form of agreement with SD, both during and after the election campaign. Their position is supported by many newspapers (including the biggest morning paper, Dagens Nyheter) and many opinion leaders. So this option has gone nowhere.
• The second possibility is a minority Conservative government (possibly including the Christian Democrats). This idea is supported by quite a few leading Conservatives, unconcerned that such a government would have to lean heavily on SD. This possibility has been excluded by the Centre Party and the Liberals, without whose support the Conservatives cannot form a majority.
• A cross-bloc agreement is the third option. The Social Democrats have offered to form a coalition with the Centre Party and the Liberals (perhaps including the Greens). However, the Centre Party and the Liberals have not been willing to turn their backs on the Alliance, proposing instead a majority coalition of the four Alliance parties and the SAP, possibly including the Greens. No one takes this very seriously given the existing divisions. Moreover, such a grand coalition would leave SD and the Left as the only opposition parties. A smaller cross-bloc coalition would also encounter major obstacles. The SAP interprets this option as a mandate to lead the government as the biggest party in parliament. The Centre Party and the Liberals would seek a more balanced government, including the Greens, one not necessarily led by a Social Democrat prime minister. The parties do however face pressure from opinion leaders to come to an agreement on a multiparty government, crossing the blocs to keep out SD. But the SAP on the one hand and the Centre Party and Liberals on the other have very different positions on the economy and labour market that have to be reconciled. On national security the SAP supports neutrality while the others support NATO membership. And such a centrist coalition would have to rely on the support of the Left.

There is, in fact, another option: a Social Democrat–Conservative government, a “grand coalition.” It is a dream solution for many leading figures in business – but politically very unrealistic. These two parties have been rivals for more than a hundred years, though over the past four years they proved to have many policies in common. But there would be important disagreements, including on who would be prime minister, and by themselves they would not even command a majority in the parliament.

In essence, the formation of a government hinges on the question of whether or not to negotiate with SD. This is not just a matter of partisan strategy, but a profound public debate. On one side we hear mainly pragmatic arguments based on short-run considerations: since the nonsocialist parties and SD have so much in common in relation to the economy, labour market, social care, defence etc., they can work together. The centre-right parties would simply ignore the the SD’s xenophobia and evocation of Viktor Orbán’s “illiberal” democracy. But it is dubious that SD will be content with such cherry-picking. Its representatives have promised to make it hell for any government that does not deliver on SD priorities.

The other group bases its position on parts of the SD program and pronouncements by its leaders on its attitude toward immigrants and also on the party’s long-term goals, which emphasize the national culture and play down public service, media freedom and respect for minorities. They point out the danger of a gradual accommodation to such policies, drawing on the example of Denmark since 2001.

In favour of the first position, some people argue that the election result, for a conservative government based on the Alliance and SD, should be respected. Yet, if we scrutinize how SD has voted, we find in fact that it has more frequently been with Redgreen, though less so in recent years. On the other hand, when asked in surveys whether they identify with the left or right, there has been a consistent preponderance among SD voters for the right, a position reflected in statements by SD leaders that they prefer a government led by the Conservatives.

This raises the fundamental democratic question of what respect should be paid to SD voters. On one side, it is argued that you cannot ignore the wishes of 1.1 million voters and thus have to be prepared to include their chosen representatives in the government. A contrary view is that SD voters are sufficiently represented since the proportion of their support is precisely reflected not only in parliament but also on all committees, standing and temporary – even on matters concerning national security. Moreover, given that SD takes such a different stand on long-term, fundamental issues from all other parties, we can also say that 82,5 per cent of voters reject SD’s policies, and their views should be respected too.

A related question is: to what extent do SD voters align with SD’s illiberal ideas? Or are they just casting protest votes against having to compete with cheap labour abroad or from abroad, and against not having been listened to by politicians for many years? Voter surveys testify that the SD voters are indeed dissatisfied. Only 23 per cent of SD voters have trust in Swedish politicians, compared to between 56 and79 per cent of the other parties´ voters. But two thirds of SD voters also prefer to have native-born Swedes as neighbours; 50 per cent don’t want an immigrant in the family; and one third claim that people of certain ethnic groups are more intelligent than others.

In this context, some claim, we need not worry about SD pushing the other parties toward a more nationalistic and xenophobic agenda. Indeed, some point to Norwegian and Finnish experience, arguing that if SD is given a role in the government, the party line will soften as it makes and defends compromises. However, experience elsewhere casts doubt on that assumption.¹ And what we have seen recently in Sweden should make us worry. Before the general election, the Social Democrats, Conservatives and Christian Democrats adopted immigration policies closer to those of SD, with a group of Conservatives and Christian Democrats wanting to go even further.

The outcome of this debate will determine what government will be formed in Sweden before the end of the year and, perhaps, the longer-term direction of Sweden as a nation.

Continue reading “Sweden is Still Waiting for a New Government” →