The Silly “Stimulus v. Austerity” Debate Goes On And On – But It Is Useless Encourage innovation and risk taking instead

WASHINGTON – The surprisingly resilient “austerity versus stimulus” political diatribe continues –with no end in sight. What is the best cure for the economic impact of the financial crisis? Spending cuts that will reduce deficits and recreate confidence in the public policy foundations of modern economies? Or should we go easy on austerity, feeding the patient (the economy) with more (borrowed) public money until it will be strong enough to get on without help?

Useless debate

In principle this should be a debate worth having. But in practice this has become a silly, meaningless blah-blah, a new variation on the time old syndrome of escapism. The fact is that the problem is not about austerity v. stimulus. The problem is about old, tired societies that have essentially “lost it” when it comes to drive, innovation and risk taking. Which is to say that either public policy approach will do little to change the fundamentals, simply because it will not reach down into the fundamentals.

Stimulus in Japan

Look at Japan, for instance. Now new policy makers have decided to be really, really aggressive in their efforts to reinvigorate the stagnant economy. Under new management, the Bank of Japan is in the process of flooding the market with cheap cash. It is believed that this major policy shift will force people to move money away from savings and into equities, this way boosting corporations. In the meantime this de facto devaluation will help major Japanese exporters. “Here we go, Ladies and Gentlemen: Stimulus at work!” Yes, very nice. Except that it will not work.

It will not work because Japan’s stagnation’s roots are very deep. They are cultural and psychological. Japan revers profoundly flawed institutions and the time-honored social relationships that support them. Japan is modern but very inefficient. It is still incapable of welcoming women into the work force as genuine peers. It disapproves of students going abroad to pursue specializations. It really dislikes foreigners.

Worst of all, Japan is in the middle of a probably irreversible demographic crisis. With fertility rates well below replacement level, Japan will soon turn into a retirement home, and not much more.

The idea that a sudden avalanche of cheap money, all by itself, will give the providential jolt that will shake this aging society and remake it into a vibrant youth is a gigantic exercise in wishful thinking.

Italy’s new government

And Europe is in the same territory. Greece, Portugal and Spain, are essentially gone –for good. In Italy, Enrico Letta, a new and untested politician is trying now to put together a coalition government of most unlikely partners that is supposed to light the fire of growth, while reforming and downsizing a gigantic public sector. Again, another frankly futile exercise in wishful thinking. This new Italian government, assuming it comes about, has no mandate.

The Italians are at best deeply confused as to the nature and severity of their systemic crisis, while the preferred approach is to blame someone else. The reality is that Italy is a mess. There are, here and there, a few islands of creativity and professionalism. But they are lost in a sea of perpetual mismanagement, waste, inefficiency and Banana Republic levels of corruption. And you would seriously think that a new diet, light on austerity and heavy on stimulus, would take care of Italy’s woes?

A bit better in America

In America it is a little bit better. But not much. It is better in as much as there are still, (mercifully), some sectors of the society that believe in self-sustaining enterprise. Yes, some people still believe in trying to make money without some federal program, via subsidies or a special tax relief. But at least half the country bought into the rather European idea that it is up to the Government to lead economic growth by ladling generous amounts of public money here and there.

Again, even though America’s fundamentals are still a bit healthier than the rest of the West, even here the debate is mostly about the wrong things.

The real debate should be about competitiveness. And competitiveness is about creating the enabling environment for innovation and its commercialization.

It is about good laws, user friendly regulations, access to capital, good communication systems, good infrastructure. It is about a simplified tax system that favors investment.

It is about an education system that creates tomorrow’s super capable economic and policy leadership. It is about smart immigration reform. It is about wise allocation of scarce public money in truly strategic areas: first class public education, basic R&D, modern infrastructure, cost-effective health care.

Stimulus is about subsidies

The trouble is, even on a perfect day, to do all this and do it well is really hard. And our tainted system has made misallocation of resources into an art. And this is why stimulus has such a bad reputation. This is because if you leave it to myopic and parochial politicians stimulus is about creating fake public jobs, it is about subsidies and tax favors to powerful patrons (in my District, or in my State), and so on.

Unfortunately, the magic mix of entrepreneurial drive and genuine innovation that made America great has no known, replicable formula. We simply do not know how to make it happen at will. It is not just about having “X” number of computer science graduates.

Magic mix

It is about how intelligent people mix and interact and come up with incredible new “things” within a system that allows, in fact encourages innovation to come to market without stupid policy impediments.

Look, the Soviet Union had a world-class space program and state of the art weapons systems. This would demonstrate that they had human talent, plenty of it. But the system was a disaster.

The West needs to rediscover its taste for adventure and smart risk taking. Andrew Carnegie did not come to America because he had heard of a program that included tax holidays for steel plants. Steve Jobs and Bill Gates were real pioneers in an uncharted IT world whose exponential growth they could not even remotely foresee back in the early 1980s. They were not driven to start their companies, literally out of nothing, because they were relying on a federal grant.

And this is the point. Unless we get more people with the intelligence and the guts of real entrepreneurs, more stimulus will only get you more fake stuff and more debt.



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One comment to “The Silly “Stimulus v. Austerity” Debate Goes On And On – But It Is Useless Encourage innovation and risk taking instead
  1. Paolo,
    Great piece. Alomst 3 decades ago I had overseas postiongs in Spain and then a Carribbean country. In Spain at that time, unemployment was 25%….just the same as now. When I moved to the Carribbean, I thought that since dropping a seed out of your pocket would soon result in food, that it must be a wealthy place. In learning just the opposite, I came to realize that it is no coincidence that most of the poorest counties in the world are near to the equator. I realized that if you transported any of those populations to the latitude of say, Finland, that all would soon change or die.
    The lesson to me is that people do what they have to do. People along the equator do not need to generate the wealth to buy shelter, food, and clothing that the far latitudes do. By the same token, the more that the government does to “help” people, the less inclined are those people to be fully contributing members of society. Our current urge to “help” with giveaways is counterproductive (except for the physically or mentally impaired in our societies) as it robs our citizens of the dignity of motivation and self-achievement.

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