The great debate

No consensus emerging yet on the spending loop

North Americans are timid creatures. Instead of flinging themselves joyfully over that “fiscal cliff” Ben Bernanke said they were rushing toward and that, seeing most agree that piling up colossal debts is probably a very bad idea, may be just what is needed, they stumbled over the brink and then, like those cartoon characters who manage to walk on air for a while before realizing that was something you can’t do, scrambled right back again. Market punters heaved a sigh of relief: like those long-dead Mayans, the doomsters had got it wrong. Equally relieved were the many influential men and women who have been warning us, in suitably admonitory tones, that unless the great North American consumer on which the world economy apparently depends reverted to his (or her) free-spending ways, we would soon be in for another recession or even a full-blown depression.

Is this really the case? Many clever people, including such luminaries as Paul Krugman and Cristina Fernández de Kirchner, clearly think so. In their view, consumption is what keeps the world spinning and should therefore be encouraged even when, from a layman’s point of view, hard cash appears to be in short supply. Just how big the US public debt has become is a matter for dispute: if you factor in all the “entitlements” won by stroppy unions, there are enough zeroes in it to make even an astronomer blink, but that minor detail does not worry the Keynesians. As far as they are concerned, spending cuts will just have to wait until the economy is churning out things, services and jobs at an adequate rate. When will that happen? Nobody even pretends to know.

The archenemy of the big spenders is Germany’s Angela Merkel who, along with her finance minister Wolfgang Schäuble, is keen on austerity and good housekeeping. As far as they are concerned, Krugman and company are as nutty as was their illustrious compatriot, Baron Münchausen, who on once occasion boasted that he had pulled himself out of a swamp by tugging on his own pigtail. Their down-to-earth and grimly Teutonic approach greatly annoys the many who have convinced themselves that austerity is bad not just because poor people who rely on handouts suffer but also because, they insist, it is almost always counterproductive. They point out that for an economy to work, it must be fuelled by plenty of money. In Europe, the old-fashioned virtues preached by Merkel and Schäuble are currently in favour among the ruling elite, though on the street many find them outrageous; in the US, the Keynesians are still on top, as the latest chapter in the long-running “fiscal cliff” melodrama has reminded us, but within a couple of months the Republican skinflints in Congress will have another chance to moan about the rapidly growing debt.

Professional economists love paradoxes. They recognize that for an individual it is better to be prudent, live within one’s means and save for the future, spurning materialistic temptations, but then they tell us that if everybody started behaving that way the consequences would be disastrous. What would happen if millions decided to ride a bicycle in town and use public transport for longer journeys, as many progressives recommend? The automobile industry would go under, and with it the livelihoods of huge numbers of people. Enemies of capitalist crassness and consumer excess like the Pope and a myriad leftwing thinkers want to have it both ways: for excellent reasons, they are against the only economic system that has proved capable of providing hoi polloi with enough goods to keep them happy, but they also complain bitterly whenever it shows signs of flagging.

The great debate between the advocates of spending one’s way out of trouble and cheeseparers who say governments in the rich countries will have to do precisely the opposite before it is too late, has been raging for the best part of five years without anything like a consensus emerging. The former blame what is happening in Greece, Spain and Italy on the folly of the Germans, who, they predict, will soon get their comeuppance because nobody will be left to buy their products. The latter say that seeing the current slowdown came about because governments and people borrowed too much money when it was easy to do so, it would be sheer lunacy for them to try and get out of the hole they dug for themselves by borrowing still more.

Common sense suggests they are right, but, as most economists appreciate, crude ways of thinking that may be appropriate elsewhere have no place in their non-Euclidian world in which nothing is predictable.

In any event, it is not merely a question of financial policy. Though people in government like to make out that were it not for their foes the local economy would soon surge ahead, there is not that much they can do to counter adverse demographic trends or dismantle social programmes that are no longer affordable without running the risk of getting clobbered in the next elections. Europe’s biggest problems right now are demographic in origin. A widespread reluctance to breed has undermined the welfare state: in the Mediterranean countries, pensioners are well on the way to outnumbering the workers who have to cater to their needs. Coming to terms with the distortions thus produced will require rather more than a few budget adjustments, but as yet neither the neo-Keynesians nor their opponents have been willing to talk much about such sensitive issues.