Anatole Kaletsky

Reject the politics of oversimplification

By Anatole Kaletsky
August 16, 2012

Whatever happens in the election and the euro crisis, the autumn of 2012 may go down in history as a pivotal moment of the early 21st century – a political season that may even be more transformational than the financial upheavals that started with the bankruptcy of Lehman Brothers four years ago. Paul Ryan’s nomination to the Republican ticket means American voters will feel forced to make a radical choice between two very different visions of the government and the market, in fact of the whole structure of politics and economics in a modern capitalist state. The choice facing Europe in the next few months – starting on September 12 with the Dutch elections and the German court decision on European bailouts – is in some ways even more dramatic: It is not just about the role of government, but about the very existence of the nation-state.

But do these decisions really need to be so radical? It is fashionable to proclaim that the future is a matter of black and white: bigger government or freer markets, national independence or a European superstate. But these extreme dichotomies do not make sense. The clearest lesson from the 2008 crisis was that markets and governments can both make disastrous mistakes – and therefore that new mechanisms of checks and balances between politics and economics are required. The second obvious lesson of the crisis was that economic problems ignore national borders and therefore that ever more complex mechanisms for international cooperation are needed in a globalized economy.

Given the historic importance of the decisions that have to be made this autumn on both sides of the Atlantic, it will be tragic if complex issues such as the role of government or the future of Europe are reduced to oversimplified choices between polarized alternatives.

In the U.S., the Ryan nomination has already filled the airwaves with claims about the courage of acknowledging that government spending and deficits are unsustainable and demand drastic cuts. But these claims are at best half-truths. It is true that U.S. government spending is rising inexorably and that only one part of the budget really matters in driving this trend – the exponential growth of Medicare costs. It does not follow from this, however, that the U.S. is threatened with national bankruptcy. And even if bankruptcy were on the horizon, radical reductions in Medicare or other government entitlements would not be inevitably needed to bring government deficits and debts under control.

The truth is that the U.S. government can continue to finance deficits for the next few years at no cost to future generations because the economy remains so weak that the Federal Reserve Board can print money without fueling inflation – and once the economy starts growing strongly enough to create inflation, a large part of the deficits will automatically disappear. But what about the long term, when excessive government deficits will surely become a problem? At that point, the unsustainable growth of Medicare spending can be tackled in four different ways: by reducing eligibility for government healthcare and replacing it with private insurance; by raising taxes to pay for rising medical costs; by tightening price controls on hospitals, doctors and pharmaceutical companies; or by lowering the regulatory costs of drug development and of training doctors. Many different combinations of these four approaches are not just possible in theory, but are being applied in practice in all OECD countries.

Yet politicians are habitually praised for “honesty” and “courage” when they falsely claim that only one of these options – whether privatizing Medicare or sharply raising taxes ­- is the inevitable answer.

The same fad for oversimplification can be seen in Europe’s response to the euro crisis. European leaders now almost unanimously claim that to avoid a breakup of the euro, “there is no alternative” to abiding by much tighter fiscal rules modeled on recent reforms in the German constitution. European voters have therefore been offered a radical Hobson’s choice: either abandon European aspirations or accept long-term economic depression and a humiliating loss of national sovereignty.

Recently, however, European politics appear to be shifting. As they prepare for next month’s elections, politicians in Italy, France, Spain and Greece, and even some in the Netherlands, are recognizing that there are less radical – and more sensible – options than simply accepting or rejecting Germany’s austerity demands. Most EU leaders now insist that fiscal tightening will only work if counterbalanced by much more radical monetary easing by the European Central Bank. Even more important, leaders in France and Italy are starting to accept the principle of fiscal and political union, but adding a crucial condition that has so far been missing from the debate. Collective European control over national fiscal policies, as demanded by Germany, will be acceptable if – and only if – it is balanced by collective responsibility for national debt burdens, which Angela Merkel has thus far refused to discuss. This more complex and balanced approach to fiscal integration could allow the euro to survive without condemning Europe to a decade of depression.

Whether such a nuanced approach will be acceptable to German political and public opinion remains unclear, which is why a confrontation between Germany and the Mediterranean countries probably lies ahead in the autumn. In Berlin as in Washington, the fashion for oversimplified radicalism has taken hold in both economic and political thinking – a tragic irony when global problems are clearly more complex than ever before.

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