By Paolo von Schirach
May 16, 2013
WASHINGTON – What happened to the “Western World”? We were used to the idea that America, Europe and Japan, taken together, were and were destined to stay at the top of the economic performance charts, while their societies would keep enjoying a very high quality of life. They were the reliable engines of innovation-fueled solid growth. And the secret of this enviable successs? Strong and free societies, grounded on solid values guaranteed by well functioning democractic institutions. Add to that mix superior education institutions, working as a never ending fountain of innovation, and state of the art business management techniques. This enviable assembly of human capital, superior ideas, plus well oiled, modern institutions would guarantee the continuation of the unchallenged primacy of the West.
It is all over
But all this is over. Finished. Probably for good. Most of Europe is in the grips of recession or slow growth. Eurozone unemployment is at 12%, (27% if you are unlucky enough to live in Spain). The US with a meagre 2% growth looks wonderful only in comparison. The glory of the West did not go suddenly up in flames, even though for a moment, back in 2008-2009, it appeared that a possible financial meltdown could indeed become a planetary catastrophe that would inflict a mortal blow to the West. Well, that did not happen. What happened instead, as a direct consequence of that most severe financial crisis, was the sudden deterioration of pre-existing chronic conditions: very slow growth and high debt. The West is short of breath. It is debilitated.
A values shift
And why is it that we cannot shake this off? The answer is so simple that its sounds superficially simplistic. The Western World has shifted its values. Over time we stopped emphasizing productive investments, while we started consuming all we had, including the seed corn. For some reasons enterprise is no longer in fashion, while we are concerned with keeping (unaffordable) debt-funded welfare. The state has become the provider, not of last but of first resort. And when ths state run of cash, it did not stop spending. No. It simply increased its borrowing. As its credit was good, nobody noticed. Today, even though the crunch is now self-evident, policy makers still pretend it is not there.
Europe is the primary example off this sad transformation. States, once upon a time well funded by high tax revenue generated by world class economies, now consume more than 50% of GDP. And this gigantic growth of state functions has been politically justified in the name of social equity. The state, we discovered, has a moral (and now legal) obligation to help the needy.
Unfunded entitlements
Indeed. And so new (and expensive) programs were created and funded. As revenue could not possibly finance all these programs, states resorted to more borrowing. The net result is that a combination of more welfare and more entitlement programs produced risk averse, highly indebted societies. Besides, as the focus is on funding entitlements, there is less and less capital to fund new enterprise. Here we are, from a culture that put a premium on enterprise to a culture that extols the merits of more leisure, more free time and early retirement.
The crisis of the West, a crisis that manifested itself with low growth, high unemployment and semi-bankrupt states, is rooted in this dramatic value shift. What is worse is that these values are now entrenched. All evidence notwithstanding, because of the ideological blindfolds now in fashion, to date there is still no true recognition that this extravagant level of unfunded public spending to subsidize unaffordable standards of living cannot be sustained by unproductive societies.
These societies are still mostly in denial. In fact, the Europeans protest daily against austerity and spending cuts. But if public spending is not cut, where will fresh money come from? In the US, even though the picture is somewhat better, there is not even an attempt to begin reforming entitlement programs.
How do we get out of this?
And so, what is the plan to get out of this historic swamp? Sorry to be blunt. There is no plan.
Unless you think that the easy cash provided by the monetary authorities in the US, Europe and now Japan is a plan. This is no plan. And it should jump at everybody that monetary authorities are not economic policy makers. In a best case scenario central banks are helpful. Via their controls on interest rates they can help modulate growth. They can make sure that enough credit will be available. They can keep inflation in check. But monetary growth cannot make economic growth happen if the fundamentals are insufficient.
Central Banks to the rescue?
And yet, this is what Ben Bernanke at the US Fed has been doing and this is what his Japanese counterpart just started doing. By keeping interest rates at or near zero, while buying tons of state bonds, the monetary authorities have forced private investors to seek higher returns in stocks. And so we see the Dow Jones breaking records, while share prices in Japan have never been so high in recent years.
But this is like giving a combination of steroids and cocaine to a chronically ill patient and then rejoice in seeing that all of a sudden he is perky and chatty. The Bank of Japan has induced a devaluation. Of course Japanese exporters, no longer held back by a strong yen, are doing much better. But don’t tell me that the forced debasing of the national currency is a “real” cure. The real test of this “therapy” for Japan is if indeed easy money will boost investments in new, globally competitive enterprises. A central bank induced stock market boom is not a good substitute for genuine growth.
Bad business environment in Europe
In Southern Europe it is even worse. There you have the unhappy combination of high spending, inefficientt public services, bad education systems, low levels of investments, and finally plenty of corruption. In all this, the better educated young tend to emigrate, seeking greener pastures elsewhere; leaving behind the elderly and new, low skills, immigrants. Not exactly an exciting environment for new investors. All this gives you 12% unemployment and zero growth in the Eurozone.
Will this change?
As I said earlier on, it is all about values. And values can be changed, if people believe there is a good reason for doing so. But I see no serious debate on any of this. The debate is about who pays for what and on short terms measures that could generate a few jobs. It is not about how we came up with this astronomic entitlements bill, while disregarding productive investments. Unless the ruling elites in Europe, Japan and America refocus on the real issues, I see little hope for qualitative change. And this is very sad.