Monday, September 15, 2014

The winner doesn't take it all

At Vox, Matthew Yglesias hails the Swedish election result as an example of how bad monetary policy can be costly to incumbents --

Both Sweden's early success and its later failure can probably be laid at the feet of monetary policy, rather than anything [PM] Reinfeldt did per se ... But from late 2011 onward, the Riksbank [Swedish central bank] insisted on moving toward tighter money despite high unemployment and low inflation. The stated reason for this, which has also had some influence inside the Fed, was that the bank had to act to prevent "instability" in the financial system. As Lars EO Svensson, a Princeton economist who worked at the Riksbank during the crisis years but lost the argument about post-crisis tightening, explains in this great presentation this has proven to be an extraordinarily costly way of obtaining uncertain benefits. And now it's likely going to cost the governing coalition their jobs.

Here's a Reuters account of the election aftermath in terms of its dynamics --

Under Reinfeldt Sweden lost much of its image as a socialist welfare state. The country's tax burden fell 4 percentage points, to 45 percent of GDP, under France's. Taxes on inheritance and wealth were lowered or abolished. More Michelin star restaurants than ever opened in Stockholm. "These have been fantastic years where the Alliance have taken responsibility for Sweden," Reinfeldt told party supporters on announcing his resignation. "My hope is that the journey will continue, but it will be without my participation." Many Swedes are worried that reforms under Reinfeldt have gone too far, weakening healthcare, allowing business to profit from schools at the expense of results and dividing a nation that has prided itself on equality into haves and have-nots. Voters have been shocked by scandals over privately run state welfare - including one case where carers at a home for the elderly were reportedly weighing diapers to save money - and bankruptcies of privately run schools ... Widely admired for its triple A-rated economy, stable government and liberal attitude to immigration, Sweden nevertheless faces significant challenges, which a weak government will struggle to deal with. Unemployment is high at 8 percent, hitting immigrants and young people especially, and a potential housing bubble threatens economic stability. Widespread riots last year in Stockholm's poor immigrant suburbs highlighted a growing underclass in Sweden, which has had the fastest-growing inequality of any OECD nation. The rise of the far right points to a society starting to question its role as what Reinfeldt calls "a humanitarian superpower". The number of asylum seekers from countries like Syria is expected to reach 80,000 this year. Even Reinfeldt has said government finances would be strained due to the cost of new arrivals. They were figures that played into the hands of the far right.

That list is much more about quality of public services, the perception of tax-cutting zeal, lack of public harmony with migration policy, and the ability of the far right to capitalize on the Syrian refugee influx. Monetary policy surfaces only obliquely (high unemployment among selected groups, but also very high housing prices).  The loss for the centre right is therefore an awkward narrative in which they suffered both from supply side obsession but also humanitarian policies that journalists like Matthew Yglesias would presumably favour (we're all for taking more Syrian refugees than bombing it, right?). In any event, monetary policy looks like an externally imposed narrative looking for one decisive factor that be blended into a broader EU story, even for a country not in the Euro.