By Jonathan Power
My family is in a bit of a crisis. My earnings are cut by 25%. Writers never did earn a lot and now we have this economic catastrophe. We’ve cut our expenditures severely.
This is what happens to families in financial trouble. Cut. Common sense, eh? But when it comes to our country being in trouble we have to be counter-intuitive. Then a country must spend more. It has to grow faster to produce the wealth that when taxed can pay down the deficit. As the world’s greatest economist, John Maynard Keynes, wrote: “The boom not the slump is the right time for austerity”.
The Germans and the European Union Commission continue to push countries to cut and squeeze. Yet despite the evidence that the patient is not recovering, Chancellor Angela Merkel of Germany seems determined not to allow the Euro-zone members to let up. (The British government is following the same counter-productive policy.)
President Barack Obama has taken a different tack. Keynesian to his finger tips, he has saved the American economy and now growth has returned. Unemployment is falling, housing starts are up and people are spending. He saved the banks from going bust. Also the big auto companies. He won passage of a new health act, “Obamacare”, that will ensure that most of the poor are taken care of.
If Obama had had his way he would have done more and the economy could be growing at double its recent speed. But the Republicans in Congress fought him very inch of the way. De facto Merkel allies, they set out to depress the American economy by a thousand cuts, convinced that only then would the deficit be reduced and the economy become more competitive.
Hitler would not have approved. Yes, Hitler, Mrs Merkel. Remember your German history. When he won power (democratically) the economy was in a deep mess with massive unemployment. By the time of the beginning of the Second World War Germany was the most successful big economy in the Western world. Hitler knew little economics but intuitively he was a Keynesian. He pumped up the economy, ordering the construction of the autobahns, investing in infrastructure, in universities, schools, scientific research and raising pensions and child allowances. He didn’t spend much on armaments because at that time he didn’t expect to go to war. The electorate ate out of his hand.
In the US President Franklin Roosevelt tried to do much the same, albeit on a smaller scale. The Great Depression had sunk the American economy. Tragically when President Herbert Hoover took over he reversed Roosevelt’s growth policies. Only the rich had something to spend.
The US was saved by the war and the re-armament that went with it, creating hundreds of thousands jobs. War, to Keynes’s disgust, proved his thesis.
Recently at a conference in Iceland attended by all the Nordic prime ministers I asked if another war was needed now to end Europe’s recession. The room laughed, but I think I made my point.
Everybody can’t cut their growth at the same time just as they can’t all devalue at the same time. Although it can make sense for one country to try and reduce its debt, if all the states in a currency union do the same simultaneously the result can only be contraction. If they all devalue at the same time no one gains extra competitiveness.
The Germans don’t see that they have got the relationship between spending and saving backwards. They think public frugality will promote private spending. But someone has to spend for others to save, or else the saver will have no income to hold on to.
As Martin Wolf, the Financial Times’ chief economic writer, has put it: “Is everybody supposed to run current account surpluses? If so with whom-Martians?”
The austerity believers point to the fiscal consolidations of the 1990s in a number of countries with small populations, Canada, Australia, Ireland and Denmark. All these countries cut their budgets and devalued, and growth went up. But overlooked is that they did it when Keynes said they should- when they were on an upswing. Their pruning also worked because they exported to larger states which were also growing.
The European Commission and the Germans point to Latvia which after some harsh cuts has emerged as Europe’s fastest growing economy- at 3.5% a year. However, one cannot construct economic theories out of the experience of a country that has a population of 2 million- less than Europe’s main cities. All along it has been an atypical economy, growing at 12% before the crash. Its unemployment remains high.
If nothing else Mrs Merkel must read the history of Hitler’s Germany.
Copyright: Jonathan Power