Anatole Kaletsky

As the presidential campaign finally takes off with the party conventions, there seems to be only one point Republicans and Democrats agree on. This election will be about job creation and the role of government. But having defined this battlefield so clearly, neither side seems to have any credible ideas for dealing either of these supposedly decisive issues.

Let’s start with government. The Republicans claim to want smaller and less intrusive government. Yet they vehemently demand tighter government controls over abortion, immigration, marital arrangements and sexual behavior. On other politically less salient issues such as drugs, prison reform, alcohol use by young adults and doctor-patient privacy, Republicans consistently support government intervention, sometimes to a bizarre degree. For example, a law signed in 2011 by Florida’s Republican governor (though struck down promptly by federal courts) made it a crime for pediatricians to tell parents that they could endanger their children by keeping a loaded gun in their home.

The Democrats’ vision of government is equally paradoxical, but in the opposite direction. The Democrats, like left-wing parties in Europe, laud the economic role of government, and especially its importance in supporting public goods and regulating business abuses. But they deny the right of government to regulate, or even try to influence, private behavior, even when it impinges on community life in such areas, for example, as marriage, child-rearing or trade union activity, especially in the public sector.

In short, the left’s faith in government suddenly evaporates when it comes to social and lifestyle issues, while the conservative passion for smaller and less intrusive government only applies when money and economics are at stake.

Which raises the second, even more important, electoral issue — jobs. Mitt Romney has promised “a singular focus on job creation” and has accused Barack Obama of wasting his presidency on healthcare instead of creating jobs. The paradox is that when they are not attacking Obama for failing to create employment, conservative politicians insist that government has no positive role whatsoever in creating jobs — whether by hiring public-sector workers, supporting failing banks or auto businesses, or expanding fiscal and monetary policies to stimulate demand. Such is the conservative aversion to any government involvement in job creation that Senator Bob Corker, a leading Republican economic thinker, has even proposed legislation to remove employment from the legal objectives of the Federal Reserve.

The words “core” and “periphery” have become standard terms to describe the winners and losers in the euro crisis. But how could anyone with the slightest sense of history, or knowledge of art and culture, call Italy or Spain peripheral to Europe, while placing Finland and Slovakia, or even Germany and Holland, at Europe’s core?

As a part-time resident of Italy, with a home 100 km from Rome, the center of two millennia of European civilization, I could not be satisfied with this trite answer. Speaking to friends and neighbors in Italy this summer and observing the behavior of Europe’s leaders, I have been struck by a more interesting, and disturbing, explanation of the core-periphery split. These terms do not refer to the past or the present, but to plans for the future. Core and periphery are not geographic or historical descriptions, but euphemisms designed to legitimize permanent economic and political inequalities among the nations of Europe.

With every step toward a resolution of the crisis, the peripheral countries have lost political autonomy, economic opportunity and national self-esteem, while the core countries, especially Germany, have been enriched and empowered. By creating conditions in which the interest rates paid in Italy, Spain and the other Mediterranean countries are much higher than they are in Germany and its northern allies, Europe has imposed a large and permanent economic handicap not only on the governments of southern Europe but also on their private businesses and households.

Whatever happens in the election and the euro crisis, the autumn of 2012 may go down in history as a pivotal moment of the early 21st century – a political season that may even be more transformational than the financial upheavals that started with the bankruptcy of Lehman Brothers four years ago. Paul Ryan’s nomination to the Republican ticket means American voters will feel forced to make a radical choice between two very different visions of the government and the market, in fact of the whole structure of politics and economics in a modern capitalist state. The choice facing Europe in the next few months – starting on September 12 with the Dutch elections and the German court decision on European bailouts – is in some ways even more dramatic: It is not just about the role of government, but about the very existence of the nation-state.

But do these decisions really need to be so radical? It is fashionable to proclaim that the future is a matter of black and white: bigger government or freer markets, national independence or a European superstate. But these extreme dichotomies do not make sense. The clearest lesson from the 2008 crisis was that markets and governments can both make disastrous mistakes – and therefore that new mechanisms of checks and balances between politics and economics are required. The second obvious lesson of the crisis was that economic problems ignore national borders and therefore that ever more complex mechanisms for international cooperation are needed in a globalized economy.

Given the historic importance of the decisions that have to be made this autumn on both sides of the Atlantic, it will be tragic if complex issues such as the role of government or the future of Europe are reduced to oversimplified choices between polarized alternatives.

Last week I discussed in this column the idea that the vast amounts of money created by central banks and distributed for free to banks and bond funds – equivalent to $6,000 per man, woman and child in America and £6,500 in Britain – should instead be given directly to citizens, who could spend or save it as they pleased. I return to this theme so soon because radical ideas about monetary policy suddenly seem to be gaining traction. Some of the world’s most powerful central bankers – Mario Draghi of the European Central Bank last Thursday, Eric Rosengren of the Boston Fed on Monday and Mervyn King of the Bank of England this Wednesday – are starting to admit that the present approach to creating money, known as quantitative easing, is failing to generate economic growth. Previously taboo ideas can suddenly be mentioned.

Rosengren, for example, suggested that the Fed should expand the money supply without any limit as long it sees unnecessary unemployment. Draghi has similarly promised to spend whatever it takes to prevent a euro breakup, although politically his ability to do this remains in doubt. Most interesting was a speech by Adair Turner, chairman of Britain’s Financial Services Authority and leading contender to be the next governor of the Bank of England. This speech strongly challenged the pervasive complacency of central bankers and called for new ideas that might combine central-bank money creation with government decision making on how to bypass banks and inject this money into the non-financial economy of consumption, investment and jobs.

The radical alternative discussed here last week – QE for the People (or QEP, for short) – would bypass banks completely by distributing newly created money straight to the public. It is not yet on anyone’s agenda, but neither is it any longer dismissed as a joke.

Through an almost astrological coincidence of timing, the European Central Bank, the Bank of England and the U.S. Federal Reserve Board all held their policy meetings this week immediately after Wednesday’s publication of the weakest manufacturing numbers for Europe and America since the summer of 2009. With the euro-zone and Britain clearly back in deep recession and the U.S. apparently on the brink, the central bankers all decided to do nothing, at least for the moment. They all restated their unbreakable resolution to do “whatever it takes” – to prevent a breakup of the euro, in the case of the ECB, or, for the Fed and the BoE, to achieve the more limited goal of economic recovery. But what exactly is there left for the central bankers to do?

They have essentially two options. They could do even more of what the Fed and the BoE have been doing since late 2008 – creating new money and spending it on government bonds, in the policy known as “Quantitative Easing.” Or they could admit the policies of the past three years were not working, at least not well enough. And try something different.

There is, admittedly, a third option – to do nothing, on the grounds that public bodies should stop interfering with the private economy and instead leave financial markets to restore economic prosperity and full employment of their own accord. This third idea is based on the economic theory that if governments and central bankers leave well enough alone, “efficient” and “rational” financial markets will keep a capitalist economy growing and automatically return it to a prosperous equilibrium after occasional hiccups. This theory, though still taught in graduate schools and embedded in economic models, is implausible, to put it mildly, especially after the experience of the past decade. In any case, experience shows that the option of government doing nothing in deep economic slumps simply doesn’t exist in modern democracies.