Anatole Kaletsky

Four years after the start of the Great Recession, the global economy has not recovered, voters are losing patience and governments around the world are falling like ninepins. This is a situation conducive to revolutionary thinking, if not yet in politics, then maybe in economics.

In the past few months the International Monetary Fund, previously a bastion of austerity, has swung in favor of expansionary fiscal policies. The U.S. Federal Reserve has committed itself to printing money without limit until it restores full employment. And the European Central Bank has announced unlimited bond purchases with printed money, a policy denounced, quite literally, as the work of the devil by the president of the German Bundesbank.

This week an even more radical debate burst  into the open in Britain. Sir Mervyn King, governor of the Bank of England, found himself fighting a rearguard action against a groundswell of support for “dropping money from helicopters” – something proposed by Milton Friedman in 1969 as the ultimate cure for intractable economic depressions and recently described in this column as “Quantitative Easing for the People.”

King had to speak out because the sort of calculations presented here last summer started to catch on in Britain. The BoE has spent £50 billion over the past six months to support bond prices. That could instead have financed a cash handout of £830 for every man, woman and child in Britain, or £3,300 for a typical family of four. In the United States, the $40 billion the Fed has promised to transfer monthly, with no time limit, to banks and bond funds, could instead finance a monthly cash payment of $500 per family – to be continued indefinitely until full employment is restored.

Two weeks ago the British debate on QEP reached a crescendo in a daring speech by Lord Adair Turner, chairman of the Financial Services Authority, and one of the two leading contenders to replace King as governor of the BoE. Turner is a former management consultant famous in Britain for finding imaginative solutions to apparently insoluble issues, from climate change policy to reform of the National Health Service. While he stopped short of publicly endorsing “helicopter money,” Turner hinted strongly in that direction with a call for “still more innovative and unconventional” thinking since QE no longer seems to work. His speech was followed by a spate of editorials in the Financial Times, the BBC and other media outlets about helicopter money and the need for serious BoE thinking about such radical ideas.

Where will jobs and growth come from? As we enter the fifth year of the Great Recession, people all over the world are asking this question, but their political leaders are not providing any convincing answers, as has been made obvious in the U.S. presidential debate and the European Union summit this week.

The second presidential debate started with Jeremy Epstein, a 20-year old college student, pointing out that he had “little chance to get employment” and asking the two candidates for some reassurance and an explanation of how this would change. Mitt Romney offered lots of reassurance but not much explanation:

“I want you to be able to get a job. I know what it takes to get this economy going. I know what it takes to create good jobs again. I know what it takes to make sure that you have the kind of opportunity you deserve. When you graduate … in 2014, I presume I’m going to be president. I’m going to make sure you get a job. Thanks, Jeremy. Yeah, you bet.”

John Maynard Keynes said back in 1936 that “practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” Keynes himself is now a seemingly defunct economist, but his influence connects the two most important events of the week and perhaps of the year: the sudden reversal of fortunes in the U.S. election and the powerful critique of overzealous fiscal austerity produced by the International Monetary Fund.

What connects these two events is an economic question that almost nobody dares to raise publicly, but that now seems destined to dominate the U.S. election and that hung over the IMF annual meeting in Tokyo this week: Do deficits really matter? Or, to restate the issue more precisely: Are government efforts to cut budget deficits counterproductive in conditions of zero interest rates when fiscal austerity suppresses economic growth?

This conclusion is strongly suggested by the IMF’s “World Economic Outlook” produced for the annual meeting. The WEO presented six detailed case studies, starting with Britain from 1918 to 1939, of economies that tried to reduce large public debt burdens with various policy mixes in the past 80 years. It concluded that two conditions were essential for success: very low interest rates and adequate rates of economic growth. If fiscal austerity produces high unemployment and economic stagnation, it is doomed to failure, causing the government’s debt burden to go up instead of down. After examining this historical evidence, the IMF report hinted strongly that at least two major economies were now caught in self-defeating debt spirals: Spain, where the debt trap is created by political pressures from the euro zone, and Britain, where the futile austerity is entirely self-imposed.

Rupert Murdoch conceded defeat this week in his battle with Google and the Internet, an adversary even more powerful than the British government. Murdoch, uniquely among the world’s media magnates, decided two years ago to create a “paywall” for the London Times that could not be penetrated by Google and other “parasitic” search engines. In effect, the paper was cut off completely from the public Internet. As one of Murdoch’s newspaper managers later described this strategy: “Rupert didn’t just build a paywall; he circled it with barbed wire, dug a moat around it and put crocodiles in the moat.”

On Monday Murdoch relented. Times articles started reappearing in Google searches, although anyone wanting to read them still has to pay £1 for one day’s paper or £2 per week. Coincidentally, News Corp, Murdoch’s holding company, announced the departure of its chief digital officer, Jonathan Miller. And Murdoch himself stood down as chairman of Times Newspapers, the News Corp subsidiary that controls his upmarket British papers.

Murdoch’s U-turn sends two interesting signals. The first, already much discussed, is about the disappointing results of this paywall experiment – just 131,000 subscribers after two years. The second is about Murdoch’s global empire and the future ownership of the Times. Having spent 20 years at the Times before leaving it six months ago, these signals sound to me like an SOS.

Who’s afraid of the fiscal cliff? Even as protests in Spain and Greece revive jitters in the euro zone, global businesses and investors have discovered a new political horror, this time in the U.S. The fear now in world markets is not so much about November’s election, but about the automatic tax hikes and public spending cuts that Ben Bernanke has dubbed the “fiscal cliff.” These fiscal changes, which come into force on Dec. 31 unless Congress passes new legislation, will tighten fiscal policy by some 4 percent of GDP, comparable to the austerity programs in Spain, Italy and Britain.

Given what fiscal austerity has done to Europe, the worries are understandable, but everyone should calm down. A drastic fiscal tightening is almost inconceivable after the election, because politics, economics and markets interact in Europe and America in opposite ways.

Let’s start with economic policy. The warnings from the Federal Reserve to U.S. politicians as the fiscal deadline approaches are all against allowing the legislated tax increases and spending cuts to take effect. Thus the Fed is giving politicians advice that is opposite that of the European Central Bank and the Bank of England.

When the economic history of the 21st century is written, September 2012 is likely to be recorded as a defining moment, almost as important as September 2008. This month’s historic events – Ben Bernanke’s promise to buy bonds without limit until the U.S. returns to something approaching full employment, Angela Merkel’s support for the European Central Bank bond purchase plans and the Bank of Japan’s decision to accelerate greatly its easing program – may not seem earth-shattering in the same way as the near-collapse of every major bank in the U. S. and Europe. Yet the upheavals now happening in central banking represent a tectonic shift that could transform the economic landscape as dramatically as the financial earthquake four years ago.

To see why, we must go back in history 40 years, to the early 1970s. Maintaining full employment was at that time regarded as the main objective of all economic policy, and this had been the case for roughly 40 years, since the Great Depression. But by the early 1970s, voters had enjoyed decades of more or less full employment and were starting to focus on inflation rather than depression as the main threat to their prosperity. Economists and politicians were responding to this shift. Milton Friedman led a monetarist “counterrevolution” against the Keynesian obsession with unemployment, designing new economic models to challenge the Keynesian view that market economies were naturally prone to long-term stagnation. By restoring the pre-Keynesian assumption that market economies were automatically self-stabilizing, the monetarist models produced two powerful policy prescriptions directly opposed to the Keynesian views.

First, the monetarists insisted that price stability, rather than full employment, was the only legitimate target for monetary policy and government macroeconomic management more generally. Second, they argued that central bankers should not accept any direct responsibility for unemployment, since sustainable job creation depended solely on private enterprise – full employment would be achieved automatically if inflation were conquered and market forces were allowed to operate freely, with the minimum of government interference or union constraints. A few years later, Margaret Thatcher and Ronald Reagan turned Friedman’s intellectual revolution into practical politics. On top of its economic impact, monetarism had huge ideological effects by absolving government macroeconomic management of any direct responsibility for jobs and instead attributing unemployment to regulations, unions, welfare policies and other market distortions.

Does the German Constitutional Court ruling in favor of a European bailout fund, closely followed by the big win for pro-euro and pro-austerity parties in the Dutch general election, mark the beginning of the end of the euro crisis? Or were these events just a brief diversion on the road toward a euro breakup that began with the Greek government accounting scandals in 2009? Most likely, the answer is neither. This week’s political and legal developments have given European leaders just enough leeway to avoid an immediate collapse of the single currency, but not nearly enough to end the euro crisis.

In this respect, the German Constitutional Court has acted exactly in accord with the powerful speech delivered in Berlin this week by George Soros and published in the New York Review of Books. This accuses German policy of condemning Europe, albeit inadvertently and with the best of intentions, to “a prolonged depression and a permanent division into debtor and creditor countries so dismal that it cannot be tolerated.” Germany does this by always offering “the minimum necessary [support] to hold the euro together,” while blocking “every opportunity to resolve the crisis” once and for all.

From what he calls this tragic record of missed chances, Soros draws a conclusion similar to the one presented in my columns three months ago. Germany can continue as the economic leader of Europe only if it accepts the responsibilities of a “benign hegemon,” much as the U.S. did when it forgave Germany’s debts and launched the Marshall Plan after World War Two. If, on the other hand, Germany continues to identify debt with guilt (the German language, significantly, uses the same the word, schuld, for both concepts), it will continue blocking any resolution of the euro crisis that might involve the sharing of government debts across Europe. If, on top of this opposition to mutualizing debts, Germany retains its taboo against any monetary financing of government deficit, as practiced in the U.S. by the Federal Reserve, then Europe will be condemned to long-term depression and quite possibly a revival of national hatreds. In that case, it would be better for all concerned if Germany left the euro.

The North Atlantic hurricane season runs from mid-August to October, with a strong peak in storm activity around the middle of September. A less familiar but even more destructive pattern of disturbances is the financial hurricane season, which coincides with the meteorological one almost to the day.

Most of the great financial crises of modern history have occurred in the two months from mid-August: the Wall Street crashes of Oct. 22, 1907, Oct. 24, 1929, and Oct. 19, 1987; Britain’s abandonment of the gold standard on Sept. 19, 1931; the postwar sterling devaluation on Sept. 19, 1949; the collapse of the Bretton Woods global monetary system on Aug. 15, 1971; the Mexican default that triggered the Third World debt crisis on Aug. 20, 1982; the breakup of the European exchange-rate mechanism on Sept. 16, 1992; the Russian default on Aug. 17, 1998, the bankruptcy of Lehman Brothers on Sept. 15. 2008 – and this list could go on.

The coincidence between financial and meteorological hurricanes may not be entirely fortuitous. The global economy, like the world’s atmosphere, is a finely balanced complex system. In such systems, small perturbations can accumulate to trigger big effects. And just as the meteorological tipping points tend to occur when autumn air circulation starts to disrupt the humid air accumulated in the summer doldrums, something similar seems to happen to financial markets when trading becalmed by the summer holidays returns to normal. The result can be sudden and violent reaction to events accumulated over the summer that markets had seemed to ignore. The world economy does not, of course, experience hurricanes with the same regularity as the Caribbean. But when big events happen over the summer, financial disturbances become quite probable in the fall. This is probably the reason why September has historically been the worst month of the year for stock market performance. In fact, September is the only month in which Wall Street prices have, on average, declined since the 1920s.

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.

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.