The Swedish Keynesians figured this out more than four decades ago. You run as hot a macroeconomic policy as you dare without triggering inflation, complementing it with active labor market policies to match well-trained workers with employers. When unemployment gets down to a level that runs the risk of wage inflation, you enlist the unions in voluntary wage restraint, and soak up the remaining joblessness with retraining sabbaticals and public employment. But Swedish Keynesianism doesn't work very well anymore. The culprit is the global economy.
Global growth is held hostage to creditors and financial speculators.
And countries with good wages and expensive social outlays find themselves priced out of the market. But this alternative will require a fundamental shift in how center-left governments view global capital. For the most part, American liberals and European social democrats have not challenged the neoliberal view that all prices are efficiently set by markets. In the May-June issue of Foreign Affairs , Jagdish Bhagwati, former chief economic advisor to the General Agreement on Tariffs and Trade and one of the most eminent and passionate of free trade economists, has a startling article contrasting trade in goods with trade in capital and currencies. The reason is simple.