Thursday, May 03, 2012

Why the Election(s) Don't Matter

[Hollande on the left, Sarkozy on the right]

Last night the candidates for the presidency of the French Republic debated the issues.  I was impressed by how they exemplified the choices facing all the Western countries.   For all the noise and chatter in the press about how to deal with government deficits and government debt, there are really only two ways to do it.  One is to spend less.  The other is to tax more.

A reasonable person would say there is a third way - to spend somewhat less and also to tax somewhat more. The problem with that approach is that it has no constituency.  The other two have.

According to M. Hollande, the candidate of the Socialist Party, solving the debt problem by cutting government  services and expenditures won't work because cutting government spending will cut consumer spending even more.  Reduced consumer spending will not only lower everybody's standard of living, it will also shrink the economy.  A shrinking economy will generate less tax revenue for the government.  Reduced government revenues will diminish the amount of the deficit reduction, or even exceed it.  Cutting expenditures results in impoverishing those who benefit from government expenditure but does not accomplish the desired goal of reducing deficits and debt.  M. Sarkozy, a conservative, claims that reduced taxing and spending will support investment and market confidence and lead ultimately to a growing prosperous economy.

M. Hollande's policy is the opposite.  He claims that increased government expenditures will lead to a growing economy.  It will  increase everyone's standard of living, and generate growing government tax revenue, thus reducing the deficit.  To which M. Sarkozy replies, that solving a debt problem by spending more and borrowing more doesn't solve the problem, it makes it worse.

One can summarize the two positions as spend less and spend more.  Neither will work.  

As  Nobel Prize winner in economics Paul Krugman recently pointed out in a stinging column in the NY Times, spending less has been proven repeatedly not to lead to economic growth.  Ronald Reagan claimed it would.  It didn't.  Margaret Thatcher claimed it would.  It didn't. There are dozens of similar examples. The fallback argument, when the first is exposed as a lie, is  that cutting taxes and expenditure will give investors and markets "confidence" and that "confidence" to invest will lead to growth and prosperity. Krugman explains clearly that investor "confidence" is a tooth fairy that only Republicans believe in.  In each case when austerity budgets have been introduced, the crucial bond market responded with a studied and quantifiable indifference.  In short the Sarkozy-and-conservatives-generally argument is garbage and that the people pressing it are either ignorant or dishonest.

Spending more won't work either.  For almost 15 years now, Japan, until recently the second largest economy in the world, has been moiled in a deflationary spiral.  The government and the Bank of Japan have both run enormous deficits in an attempt to reflate the moribund economy.  On the one hand it hasn't worked.  On the other, the Japanese government is now saddled with a huge debt burden and the interest on it.  Think too of the Labour governments of the 1970's, with their free-spending budgets which produced not growth but only inflation - the so-called stagflation.  Something similar happened in the United States in the 1970's under Jimmy Carter. Again, many more examples can be added.   According to Keynesian economics, stagflation, inflation without growth, is impossible..  Yet it was quite real.

My guess is that we are seeing a demonstration that governments, even with all the economic levers at their disposal, really haven't all that much control over national economies.  If they did, we would already long since have achieved permanently stable, prosperous economies with equitable income distributions.  

My Sw- example from the last century illustrates what really makes economies work.  Consider the three Sw- countries, Sweden, Switzerland, and Swaziland.  Sweden (at the time I constructed the image) was the richest country in Europe.  It had a socialist economy which controlled more than half of the gross domestic product.  There was full employment and no poverty.  Switzerland was right behind, the second richest country in Europe.  Compared to Sweden it had almost no government at all.  The Swiss Federal Government is a wisp.  Its seven-member rotating presidency is generally understood to be a joke.  What little government there is is largely conducted by the cantons, not the federal government.  But even the cantons do very little.  Like Sweden, Switzerland had full employment and no poverty.  Swaziland then (before the discovery of diamonds) was one of the poorest countries in the world.  The titular president of the country was merely the king of one of the tribes.  Swaziland had basically no government, neither  employment nor unemployment, and only poverty.

If the issues are what the politicians keep saying it is, picking the best ideology and implementing it, then either socialist Sweden or laissez-faire capitalist Switzerland should have been screwed up and miserable.  But neither were.  Both were terrific places to live and to raise kids.  

Swaziland had neither socialism nor laissez-faire capitalism.  It had a subsistence economy.  It was a terrible place to live and an even worse one to raise kids, not least because life expectancy was low and infant mortality was high.

Both Sweden and Switzerland had accumulated lots of infrastructure - good roads, good medical care systems, safe water supplies, good schools, colleges teaching technical skills, and lots of accumulated capital in factories, businesses, banks, and so on.  Most of all, both countries had lots of highly qualified, highly skilled, well-educated workers capable of adapting to and adopting new technologies as they were being introduced.  Both were able to compete successfully in world markets and to export enough to pay for the imports implicit in a small country with a high standard of living.  

Swaziland had little infrastructure - no roads, no schools, no hospitals, no safe water system, no colleges, no factories, no businesses.  Absent schools, workers had few technical or commercial skills, and little ability to adopt new technologies.  They had nothing to sell on the world market (this was before the diamonds) and therefore could buy little.  Swaziland remained grindingly poor.

Which suggests that the path to prosperity is in spending money on schools and on infrastructure.  Whether this is done by the government or by private enterprise doesn't matter in the least.  What matters is that it be done.  Spending on schools and infrastructure, no matter whether the money is raised by confiscatory taxes on the rich or by grinding the faces of the poor, also doesn't matter.  The fairness of the system doesn't matter either.   Income distribution was more egalitarian in Sweden than in Switzerland, but neither was as egalitarian as Swaziland where poverty was almost universal.  So even social justice doesn't matter.  

Life expectancies in poor countries are low in large part because of high infant mortality.  Imagine arguing to a Swazi mother with a dying child in her arms about the virtues of socialism or capitalism or even social justice - imagine the stare she would give you.  What the woman wants, in economic terms, is infrastructure - a clinic, a doctor, medicine, a road to the clinic - and access to them - national health insurance, no-fee socialized medicine, or a fee she can actually pay.

The Sw- comparisons suggest to me that the endless bickering over socialism versus capitalism, soak the rich versus fostering investment climate, and all the rest of it, are just pointless noise and distraction.  The basis of prosperity is educated productive workers and adequate-unto-excellent infrastructure.

BUT (there is always a 'but') several things are wrong with a program of spending on schools at all levels.  One is that the return on investment is years away, while the election is months away.  The other is that schools are a miserably difficult political subject.  There is no credible way to increase spending on schools without addressing the issue of education reform.  There are intractable racial issues, local control issues, class issues, immigration issues, and on and on.  It is a tar-baby that once engaged with, cannot be withdrawn from and which sullies everyone caught up in it.  Education reform is unavoidably divisive and of no use whatever to any ambitious politician.   

Infrastructure is easier to spend money on.  Everyone likes highways, hospitals, bridges, mass transit, water projects, and so on.  The problem is deciding who will pay for it.

Schools and infrastructure are not sexy subjects, but they are the real issues on which the economic and even cultural future of our country depend.  And, depend on it, neither will get any more than pro forma reference during the coming struggle for power between two factions of the ruling class both here and in France.  

In both countries the candidates will debate the issues that don't matter and ignore the ones that do.  That will be because the national interest has no lobby and it doesn't make huge cash contributions to campaigns.


1 comment:

  1. The really bad thing about Sarkozy losing is we will no long get occasional peeks at Carla Bruni, the Eva Braun of the 21st century.