Once again, tight money is the Achilles heel of the right
This is beginning to sound like a broken record. A reformist right-wing government does lots of good things, trimming the size of the public sector. It promises monetary stability but delivers instability—a contractionary monetary shock.
This time it was in Sweden, where the coalition government narrowly lost an election to the left-of-center parties, mostly due to the decision of the Riksbank to ignore the advice of the only qualified person serving on their board—Lars Svensson. Instead of targeting inflation and employment, as they were legally required to do, they went off on a quixotic mission to pop imaginary “bubbles.” As a result inflation fell far below target and unemployment stayed unacceptably high. One of Obama’s Fed appointees wanted to do the same in the US.
Now Sweden will probably edge back toward bigger government, although thankfully not too rapidly. Because Swedes are relatively moderate and sensible, they won’t swing as sharply to the left as Argentina did in 2002, or America did in 1929-33.
Perhaps someday right-wingers will learn how counterproductive it is to discredit their market reforms with tight money policies that result in high unemployment, opening the door to the left.
But we’re not there yet.