Opinion

Nicholas Wapshott

The twisted politics of enforced economic pain

By Nicholas Wapshott
November 25, 2013

By the end of the year, American taxpayers will no longer be part owners of General Motors. That is good news all around. Nationalization of a private company rarely makes economic sense. Even for red-blooded socialists, the ownership of the means of production has long been an empty threat, a totemic cul de sac that for years led socialism down the wrong path. Regulation is a far better way to ensure an industry works for the public good.

The federal government is not best-suited to administer a private industry. The emergency that once threatened American motor manufacturing has passed. State intervention has forced much-needed restructuring into a hidebound business riddled with grandfathered practices and anachronistic benefits. Intervention avoided the deleterious knock-on effects of the collapse of a major domestic industry, helped the external balance of payments, and saved thousands of skilled jobs in good time.

The return of GM to wholly private hands will no doubt set off hand-wringing from those who would have preferred GM to go properly bust during the financial panic of 2008, then restructure itself without state help. Those who opposed Steven Rattner’s motor rescue argue that government intervention to prevent a company from going broke interferes in a timeless process of rebirth as natural as the change of the seasons.

Quoting the Austrian Joseph Schumpeter’s notion of “creative destruction,” a term borrowed from Karl Marx, such dogmatic harbingers of woe welcome bankruptcies and business collapses as a means towards purposeful regeneration. Expect them to concentrate on the costs to the federal government of keeping the American motor manufacturing industry alive; do not expect them to estimate the real cost — to the shareholders, to the motor workers, to the nation — of allowing it to die.

Other “Austerians” point to the Austrian thinker Friedrich Hayek’s warnings of governments encouraging investment in the wrong industries, leading to more unemployment in the long run than can be saved in the short run. But Hayekians tend to be backseat drivers, always quick to criticize and slow to offer any alternative except a hopeless shrug.

The common theme among those who would prefer to invite an industrial doomsday rather than put it off is the assumption that there can be no gain without pain. The notion of punishment for the wicked is also prevalent among those advocating austerity: to atone for previous sins — such as the Greeks borrowing too much to maintain a lifestyle they could ill afford — lean years should be imposed in which everyone must trim their standard of living and pay reparations.

Some, such as the Dutch and Germans, have used austerity to punish southern Europeans, such as the Greeks and the Spanish, they felt had not worked hard enough to live as well as they do. Some, such as David Cameron’s government in Britain, set out on a needless program of austerity which suited those who believed Margaret Thatcher’s program of privatization of state assets and dismantling of the welfare state had not gone far enough. The result was two unnecessary recessions in the UK on top of the 2008 recession and an undignified insistence by the well-heeled in government, for whom austerity is a minor irritation, that everyone but them must make sacrifices.  

Here we have highly-paid shills for big business advocating austerity for everyone except the super-rich. The economic royalists have never had it so good, paying for a mantra that has taken hold of the political discourse, that debt is bad and public debt the worst of all.

We are living at a time when borrowing has never been so cheap — the European Central Bank is even talking about levying “negative interest rates” – and the cost of keeping people out of jobs has never been so high. Yet the dominant thrust of an economic argument that has gained universal respectability, even among Democrats, is not that everyone should be put back to work without delay, but that high unemployment should become permanent to ensure that public debts are paid off fast.

Businesses like the cheapness and weakness of labor that policies of mandatory unemployment for millions produce. Politicians congratulate themselves for taking “hard” decisions that inflict untold misery on the blithe assumption that the more harsh and bitter the medicine, the more it will do good. Many voters, too, appear to believe they deserve to be chastised for living high on the hog for too long.

Where did they get this idea? There is nothing in economic theory to suggest that being poor is a virtue. On the contrary, most theory is directed toward finding ingenious ways to maximize prosperity despite the vagaries of the business cycle. Yet deep in the psyche of many of the Austerians and Austrians who are summoned to provide some intellectual justification for the beggar-thy-neighbor policies is a sense that only by feeling bad can you feel good, only by inflicting misery can pleasure result, only by paying off past debts can prosperity be restored.

There is both a religious as well as a psychological basis to passing off punishment as a virtue. John Maynard Keynes recognized it and asked, is it the sado-masochistic make-up of some economists that causes them to enjoy pain and welcome inflicting pain on others? Hayek acknowledged a righteous dimension to his cheese-paring economics. His eternal pessimism led him to believe Keynes’s revolutionary notions about borrowing at the height of a depression to be “immoral.” This has led some to believe Hayek was implicitly condemning Keynes’s sexuality, though, perhaps because of the circumstances of his own failed marriage, Hayek did not press the notion as far as he might.

Religion and morality may have little to do with economics but a great deal to do with politics, particularly in America. The thrust of many western religions is that the good life is one that minimizes material possessions and that a simple life in this world will lead to untold rewards in the next. Calvinism, the creed the sociologist Max Weber believed was the key to understanding the emergence of capitalism in northern Europe, both insists upon hard work without reward and a modest outward display of wealth to signify being part of an elect heading for heaven.

It is the Protestant/Roman Catholic divide that underlies the economic debate about debt in the European Union today. The northern European Protestant nations, including Britain, admonish the southern Catholic nations — and Catholic Ireland — for not treating wealth creation seriously enough. When Martin Luther launched Protestantism and set off the Reformation, he could not have imagined he would be encouraging the debt wars that dominate today’s European politics.

In America, political battles over personal morality — such as homosexuality and women’s health rights, which used to preoccupy conservatives — have given way to arguments over the role of debt in society. The old plea for “family values” has been replaced by the charge that those who do not prioritize the paying off of debt are poor parents and grandparents as their descendants will be left to pay the check. It was when pandering to a question based on such sentiment that Harvard history professor Niall Ferguson suggested Keynes did not care what happened to children and grandchildren because he was gay and had no offspring.

A more persuasive family values argument would suggest that families are kept together and work at their best when everyone is working, well-housed, and comfortably well-off. The best way to destroy family life is to impose the stresses and strains of living without a wage-earner in the family. Just as it is virtuous to work, it is virtuous to provide work. To punish the victim of structural joblessness for being poor and a poor parent to boot is doubly harsh. And to disguise such an assault on the poor as an act of morality is the height of hypocrisy.

Nicholas Wapshott is the author of Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.

PHOTO: A bronze statue of a worker called “The Builder” stands in front of the Unites Auto Workers Union Solidarity House in Detroit, Michigan, September 8, 2011. REUTERS/Rebecca Cook 

Comments
7 comments so far | RSS Comments RSS

The ideal is to have a solvent government that can meet its obligations and provide services to its public. This is easier when a nation lives within its means. Countries like Germany, which in the last 20 years has had a sustained austerity drive to aright its stretched public finances, are currently doing very well for having taken this approach. The argument that you should “borrow hard” and spend much more just because current interest rates are low, is extremely reckless. Eventually, like Spain, Italy, Ireland, and countless other countries have shown, austerity measures become unavoidable, because spending is great fun and fiscal rectitude is hard. Being prudent all the time is a much more tenable approach. There will always be a big lobby of people who advocate fiscal profligacy.

Posted by ExDemocrat | Report as abusive
 

Or did Germany do so well because the Deutsch Mark would have been sky high compared to the Euro, so they were able to export their products everywhere?

I contend the fiscal prudence of Germany was only possible because of their inclusion in the economy of the euro zone. Accordingly, they owe the money to the other countries of the Euro south whose currencies would have moved to accommodate this. The result being that they dragged the Euro down for German benefit.

Posted by Benny27 | Report as abusive
 

And the fiscal “imprudence” of the PIGS is a result of being able to import and export into the same EU. Economics is international, while fiscal integrity is local.

As stated previously, you cannot use debt to deliver benefits today and expect to sustain the model indefinitely. At some point, you have to make a choice or the choices will be made for you.

Our political elite are incapable of understanding that simple reality. Ignoring reality will only serve to increase the severity when it rears its ugly head.

Posted by COindependent | Report as abusive
 

“Just as it is virtuous to work, it is virtuous to provide work. ”

The best provider of work is per capita demand for products both necessary for survival and desired as elements of a high standard of living. As per capita consumption of those products goes, so too goes per capita employment. Unemployment has slowly, steadily risen around the world because of the failure of the field of economics to even consider the ramifications of population growth.

As societies become more densely populated, their citizens occupy ever-smaller dwellings because there is no room for anything larger. For the same reason, the consumption of home furnishings declines. Fewer own equipment for maintaining lawns and gardens because there is no space for everyone to have lawns and gardens. They eschew automobiles in favor of public transportation because the roads are too crowded and there is nowhere to park. Fewer own pleasure craft because marinas are already full and, again, because they can’t own vehicles capable of towing them. Fewer own all manner of recreational products because there is no room for golf courses, tennis courts, etc. They are forced into small apartments where they must be content with a few meager possessions.

Unemployment grows steadily worse because the field of economics remains mired in absolute gibberish, refusing to awaken from its Malthusian stupor and open its eyes to the consequences of the inverse relationship between population denisty and per capita consumption.

There are no political solutions to rising unemployment until the economists who advise our politicians evolve into a real science willing to ponder all of the parameters that affect our economy.

Pete Murphy
Author, “Five Short Blasts”

Posted by Pete_Murphy | Report as abusive
 

Neither austerity nor money printing (as you seem to suggest) are the answer to the problems. They are like deciding to starve or take a loan into bankruptcy after you allowed your banker to burn your farm. What is needed is to permanently fix the systems that created the problems in the first place. No more banker speculation. No more fractional lending. No more long and theoretical diatribes on Keynes/Hayek thanks.

Posted by BidnisMan | Report as abusive
 

How much scotch was consumed writing that screed, Nick?

Posted by HamsterHerder | Report as abusive
 

The point is well taken on the wealthy “Austerians” who prescribe financial pain for the rest of us. It is reminiscent of the headlines from an American satirical publication (The Onion)awhile back, which read “Ninety Five Percent of Americans favor mass transit – for other Americans”

Posted by Cassiopian | Report as abusive
 

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