According to Jonas Hinnfors, the Social Democrats have shifted from their traditional ideology to become social liberals. He highlights the party’s decision in the 1980s to limit the size of the welfare state and tax rate as a breaking point. However, other decisions were more decisive. In the 1990s, the party adopted the idea that monetary policy, not fiscal policy, should govern the economy, leading to a return to an order similar to that under the gold standard. This change meant that fiscal policy was no longer an effective tool for societal transformation or expanding the welfare state to protect full employment. Instead, the Social Democrats adopted austerity measures, which led to persistent unemployment and exclusion. If the party wants to re-evaluate their social analysis, they need to examine the changes in the 1990s.
The Social Democrats have abandoned their traditional ideology and become social liberals, writes Jonas Hinnfors. He identifies the breaking point as the party’s decision in the 1980s to set a limit on how large the welfare state and the tax rate could become. That’s an important observation, but there are other decisions that stand out as more decisive.
In the 1980s were connected the welfare state to high taxes because they wanted to avoid budget deficits that could put pressure on the fixed exchange rate. Today’s floating exchange rate makes the exact level of the tax rate less interesting because the current account can be allowed to vary.
When the Social Democrats came to power in 1994, they did not want to challenge the Riksbank’s high interest rate policy, but instead blamed the high interest rates on the market.
More important than specific tax levels is how the Social Democrats changed their view of fiscal policy as a whole. In the 1990s, the party adopted the idea that monetary policy and not fiscal policy should govern the economy, and that fiscal policy should therefore be tight and passive.
As national economist Lars Jonung put it, it meant a return to an order similar to that under the gold standard, a hundred years earlier. That is to say, precisely the system that Social Democracy settled with in the 1930s, and which opened up opportunities to use fiscal policy to reduce unemployment and build up the welfare state.
When the social democracy let go the idea of fiscal policy as a tool for societal transformation in the 1990s, it was no longer possible to expand the welfare state or to protect the goal of full employment.
Full employment had previously been considered crucial for strengthening the power of unions and wage earners in the labor market. And the expansion of the welfare state was seen as crucial to ‘decommodifying’ services to which every citizen was thought to be entitled. In addition, it was a way to absorb labor, which during the 1990s instead ended up in unemployment.
Instead of responding to the economic depression of the 1990s with lowered interest rates and expansive fiscal policy, as the textbook states, Sweden did the opposite. When the Social Democrats came to power in 1994, they did not want to challenge the Riksbank’s high interest rate policy, but instead blamed the high interest rates on the market. In this context, it can be mentioned that an independent central bank was a condition for EMU accession, a process that they probably did not want to jeopardize.
During the 1990s election campaigns promised the Social Democrats to invest away unemployment, among other things with SEK 50 billion per year in green investments. But instead they chose austerity. Unemployment persisted and turned into permanent exclusion, which the Alliance made a winning election issue in 2006, and which later took on an immigration-critical dimension in the hands of the Sweden Democrats.
If the Social Democrats want to re-evaluate their social analysis, what Hinnfors writes may be reason to go back to the 1980s, but it was in the 1990s that the major change took place. As the political scientist Johannes Lindvall put it, it was when Sweden went from full employment to mass unemployment. Since then, fiscal policy has been passive while monetary policy has become increasingly experimental in its attempts to perform tasks for which it is not suited.