Where Obama Errs

Europe discovers the virtue of saving. It should not listen to America’s encouragements to spend more money.

During the panic that broke out after the crash in 2008, they all sang with one voice, from Washington to Berlin to Beijing: “We will flood the economy with money and demand, no matter the cost. Never again will we allow a worldwide economic crisis as happened in the thirties!” After the Greek near-bankruptcy and in the midst of a hesitant recovery, the choir has fallen apart. Europe is the home of savers and debt-killers; in America, Obama vows to not repeat the “mistakes of the past,” yet pressures the Germans to continue flooding Europe with money. His chief ideologist Paul Krugman, the Nobel Prize winner, even reproaches them with reminders of the disaster-Chancellor Heinrich Bruening (1930 to 1932), whose “devotion to financial orthodoxy ended up sealing the doom of the Weimar Republic.”

This time, as opposed to the very beginning of the Greek crisis, our Angela Bruening is not alone with her 80 billion Euro savings plan. The Brits, whose budget deficit is almost as bad as that of the Greeks, are planning on saving as much as 155 billion Euros until 2016. Even Angela’s adversary Sarkozy, whose country has literally invented the belief in the state, wants to save 100 billion Euros in the course of only three years. Are Europeans smarter than Americans? Yes.

Now, of all times, America is trivializing the vice of indebtedness.

If still alive, Obama’s role model John Maynard Keynes, the god of deficit spending, would reassure Europeans. As early as 1937, he argued himself in a series of articles for the Times that the time had come when “further public spending” was of “limited value.” To “take on debt during an economic low” was a smart decision; but now the “contrary” was true.* Since then, we have learned quite a bit. We have learned from the Japanese, for instance, who tarred their streets four times in the nineties and still got stuck in their “lost decade.” Or from America, where the first decade of the 21st Century has been marked by a steep downward sloped curve that could not be more educational: at the beginning, a dollar that is based on new debt (public and private) creates a growth of 0.7 percent; at the end, it was only 0.1 percent.

Another sobering statistic supports the Europeans’ plea: typically, strong growth follows a deep recession in America, such as the seven percent after the crisis of 1982. Today, after an astronomical deficit of Greek proportions, the economy is growing at a rate of only 2.7 percent; the unemployment rate is barely moving.

Why then should the government invest even more money, as Obama impassively proposes to the Europeans? A team from Stanford has compared the promises of the White House — three million new or saved jobs — with the latest data and has come to a bitter conclusion: the ideas of the early Keynes, according to whom every dollar will happily multiply in the national economy, are no longer valid. “Since the multipliers are less than one, the heightened government outlays reduce other parts of GDP such as personal consumer expenditure, private domestic investment and net exports.”** The Harvard economist Edward Glaeser blatantly notes, “There is no longer any significant relationship between spending and change in unemployment.”

How then can Obama advise Europeans to do what does not even work in his own country? The bottom line is debt of nightmarish proportions. And it obviously cannot cure the biggest pains: unemployment and weak growth. Certainly, debt is neither foolish nor immoral if it is the right kind and flows into investments. The economic stimulus packages in the West, however, almost exclusively pour into consumption. How can a country simultaneously manage exploding debt and invest in its future? Only through sprouting growth, but the government is a poor gardener, as the depressing experience in America proves. Over here, 1.5 percent improvement after all of these stimulus packages isn’t very uplifting either.

The old-Keynesian Obama may have it somewhat easier: the population is growing and thus creates constant new demand by biological means; furthermore, the USA can get sheer unlimited amounts of money from abroad as long as the dollar remains world currency — and can repay it in the national currency. Europe, on the other hand, is aging and shrinking, and that is why national debt is accumulating into a gigantic pyramid scheme. Bankruptcy takes the hindmost.

The hindmost are the future generations, where an ever-decreasing labor force has to support an ever-increasing number of elderly, and repay inherited debt. That is not the future we want to give to our children, and that is why Merkel, Cameron, and Sarkozy are right. Moreover, they have another three practical arguments against Obama. First, the budget cuts will be implemented only in 2011, about three years after the recession, while the stubborn Bruening reduced spending at the very height of the crisis. Second, we are only reducing the deficits, not eliminating them. That is not a remake of Weimar, but a well-regulated slowdown; the engine keeps running. And finally, they did not have the “automatic stabilizers” back then, which maintain the purchasing power of the unemployed, the retired, and the needy with hundreds of billions of Euros.

But the irony remains: Now that the Europeans finally get their finances in order, the Americans put lipstick on the pig. But the newly purified should not be swayed. After all, they are singing again lately. During the G20 summit, the Europeans could finally hear the USA promise something sensible: Obama vowed to cut the deficit in half within three years.

*Editor’s Note: Quotes by John Maynard Keynes could not be verified.

**Editor’s Note: This quote is from Robert J. Barro of the Wall Street Journal.