CHAPTER FORTY

A Return to Hard Choices

ACROSS WESTERN EUROPE, FROM Frankfurt and Bonn to Brussels to Oslo, the economic picture this year remains the same, regardless of changes in scenery and language: drooping productivity, unemployment especially among the young, swelling government deficits, rising inflation, and stagnating investment. “Stagflation” was the “British Sickness” ten years ago, and three years ago it was the “American Sickness.” It has now become the “European Sickness.”

The politicians in Europe, of course, are all blaming outside villains for their affliction. OPEC is a favorite target, even though three of Europe’s sickest economies—Great Britain, the Netherlands, and Norway—are net exporters of crude oil and natural gas and therefore beneficiaries of high petroleum prices.

Only a little less popular as a villain is American economic policy with its “artificially high interest rates” and its “artificially high dollar.” Only two or three years ago, however, Europeans were complaining about “artificially low U.S. interest rates” and the “artificially depressed dollar.” And even the politicians admit that most of the capital outflow to the United States is not “hot money” or the short-term deposits attracted by high interest rates. Rather it consists of long-term investments, which are barely affected by interest rate differentials.

While all Western Europe suffers from the same disease, each country prescribes a sharply different therapy. The British under Mrs. Thatcher’s Conservatives are engaged in the world’s first experiment in monetarism. The French under Giscard d’Estaing practiced a form of supply-side economics that shifted the incidence of taxation from production to consumption.

The Germans have belatedly become Keynesians and practice “demand management”—heavy subsidies to create employment and stimulate consumption, accompanied by runaway government deficits. And now the French under their new president, Mr. Mitterrand, have made a 180-degree turn toward an even more aggressive Keynesianism than that practiced across the Rhine—complete with “pump priming,” sharp wage increases and cuts in the work week, compulsory retirement with higher pensions, and soaring government spending.

Every one of these therapies is totally ineffectual.

The problem is that the Europeans still think that economic policy can be relatively painless. For the last half century, on both sides of the Atlantic, economics has been thought of as “the joyful science.” However much different schools of economic thought have disagreed, they have all thought that their brand of economics could promise painless prosperity without having to face up to unpopular political choices.

Thomas Carlyle called economics the “dismal science” more than 100 years ago, because it reminds us at every turn that everything has a cost and therefore a price, that nothing can be consumed unless it has first been produced, that nothing can be produced without work and sacrifice and, above all, that we have to make choices between competing satisfactions, between today and tomorrow, and between conflicting values and goals.

The economics of the last fifty years, however, at least as understood by non-economists and politicians, have preached relatively simple and painless solutions to the problem of economic choice. The Keynesian panacea is essentially the management of consumer demand, the creation of purchasing power through government spending. The monetarist cure-all involves keeping the money supply on an even keel. For supply-side economists, cutting tax rates will simultaneously increase consumption, increase investment, and increase total tax revenues.

The Europeans still want to believe in these therapies. Whether their present policies are Keynesian, monetarist, or supply-side, they all express the same hope—that a country and its government need not face up to tough political decisions.

The real villains in Europe are neither OPEC nor American interest rates. Instead European policy-makers must come to grips with some difficult structural and political choices. How much national income can be transferred from producers to nonproducers? What limits are needed on the size of an economy’s governmental overhead? How much national income can go into the wage fund rather than the capital fund without stimulating unemployment and depression? What rewards and incentives are needed for adequate capital formation?

These are unpopular questions. Any answer is bound to be both controversial and highly risky.

But to avoid these questions by clinging to the economics of the last fifty years may be riskier still. It is generally agreed that Mrs. Thatcher has come a cropper because she didn’t face up to Britain’s structural weaknesses. Relying on the panacea of monetarism, her policies left untouched the unproductive part of the British economy—an overblown government, an overpaid civil service, and heavily subsidized “losers”—while falling with full force on the productive sector. Giscard d’Estaing’s version of supply-side economics had the same effect, and so does Helmut Schmidt’s Keynesianism.

“Artificially high interest rates” don’t explain why European capital is seeking investment in the United States; indeed they are likely to be somewhat of a deterrent. The real reason is that the Reagan administration is tackling structural problems and making choices. There is not much supply-side economics in the Reagan package; the cuts in tax rates are pretty much what any administration would have asked for at this time. But Mr. Reagan is making a genuine attempt to limit the role of government and cut back a wide range of expenditures and programs.

Whether the choices are correct is a matter of opinion. I would like to see more courage in tackling sacred cows such as Social Security and food stamps, and more discrimination in the treatment of politically weak but economically important areas such as support for science and research. But the greatest furor over the Reagan budget is not the result of the choices made; any other list would have provoked equally anguished protests. It has to do with the acceptance of reality, with the need to make choices. Economics is once again the dismal science, the science of limitations, risks, and choices.

Europe, too, will soon have to follow suit, and let economics again become “political economy.” The change may not be bad for economics as a discipline. Economists, of course, would cease to be popular or friends of politicians; nobody loves a hair shirt. But economics, after all, is the discipline of rational decisions under conditions of scarcity. And such a discipline might, perhaps, be more appropriate as a conscience than a boon companion.

(1981)