Austerity vs. stimulus

The rise of social democratic ideas in Western Europe after World War II made hundreds of millions of people overly dependent on their governments' good will and their econometricians' expertise. Large income inequality was perceived as an evil that must be eradicated through redistributionist policies. The older members of the European Union agreed to subsidize the poorer newcomers intending to help them close the development gap. Instead, the practice of "spreading the wealth" around the Old World stimulated a culture of slothfulness and irresponsibility among the people coupled with corruption and reckless wastefulness in politics.

Flooded with free money, union workers in Greece, Spain, and Portugal developed the idea that they can remain as productive as their Third World counterparts and still be entitled to salaries, benefits, and pensions comparable to the ones earned in the United Kingdom, France, or Germany. The result was a drag on the economic growth in the more frugal European core and an unsustainable expansion of indebtedness on the spendthrift periphery. In this contemporary Greek tragedy the ratio of government debt to national income in that country more than doubled since the turn of the century to reach the unbelievable 160 percent and with no end in sight.

Some EU countries heard the wake-up call and chose different strategies. When the new Tory-led government in Great Britain evaluated the situation, it took the only sensible course of action-abandon the stimulus philosophy and act preemptively with austerity measures to avoid the Hellenization of its economy. Did the British government design and execute a perfect plan? Far from it. Instead of reducing the size of government, the British are content with slowing its growth. Even more unfortunately, the Brits have used one hand in an attempt to cage the beast while with the other they have squeezed more taxes from the people. But at least they have learned a lesson in leadership-the best time to withdraw your people and institutions from their addiction to living beyond their means is during an economic crisis. When times are good and credit is cheap and easy, there is little incentive to stay on the path of fiscal responsibility.

At the beginning of last summer I started a series of commentaries on Friedrich Hayek lamenting that we have missed our chance "to test the Austrian theory of the business cycle against the ideas of Keynes." On both sides of the Atlantic, governments follow policies based on mixed, sometimes mutually exclusive, theoretical structures. Thus neither The New York Times' Paul Krugman nor I can collect empirical data from our current economic environment to prove conclusively the superiority of one view over the other. Are the flawed European austerity programs better than the best stimulus plan that President Obama could shove down the throat of the American people? You tell me: One puts the junkie in a rehab; the other subsidizes the consumption of drugs. It's possible that the latter feels better today but how about tomorrow?