The 1945-1975 Period Was an Abnormality in the History of the West

~ Frederic Sautet ~

Strikes are currently crippling France. Public and private employees are on strike. Picketing outside oil refineries block access and gas shortages are looming. Today was another big day of protest in the streets of the main cities of France. For the French, this is the way social dialogue takes place. Even though everyone is tired of the mess, protesting against the government pension reform is necessary since social rights are in danger.

Fundamentally, the same problems exist in the US and in many other OECD countries. They all result from the violation of this principle: individuals, families, businesses, or governments cannot forever spend more than they earn — especially if spending accelerates over time. This principle is generally self-enforcing at the individual, family, and business level, but it is not at the government level — or rather it is not anymore. Up to about WWI, the old-time fiscal religion, as James Buchanan puts it, was an accepted norm of government behavior. Governments would generally balance their budget (without Tax and Expenditure Limits in place). In some cases, current spending would outpace current revenues and governments would borrow (e.g. during the civil war), but by and large, government budgets were balanced or in surplus.

All this is gone. The destruction of the fiscal norms of the early part of the twentieth century is one of the greatest evils of the last century. Indeed, it is now an accepted norm for governments to spend more than what they can levy in taxes. This is not a moral (or economic) problem anymore. In France, as in many other Western countries, the government not only borrows to pay back the interest on its debt, it also borrows to keep the retirement system afloat. Public debt is starting to become such an issue that even leftists, Keynesians, and other government pundits are worried. They are realizing that it’s a one-way street. Now that European states cannot inflate their currencies at will, the only way out of their spending profligacy is more taxes or more debt — and neither options are sustainable.

One of the great tragedies in the aftermath of WWII has been to make people believe that the period that followed the war (roughly 1945-1975) was normality — i.e. the expansion of public spending would be the new norm forever. The problem is that many social rights were given during that period. The French are protesting because their governments in the last 50 years have promised them new “social rights” that turn out to be built on sand. Now that the current government is about to take some of them back, it hurts. And I understand them (the strikers, I mean). Promises have been made and promises are now broken.

These so-called social rights are morally despicable (they changed social norms regarding public spending and destroyed private initiative); they are legally dubious (they imply the tacit agreement of people who are not part of the decision, they are not universal, and they often have no corresponding duties); and they will eventually bankrupt the state. All this is slowly unraveling in front of our eyes. The Glorious Thirty (the thirty years between 1945-1975) was a mistake. The US and the UK started adjusting back in the 1980s, but much more needs to be done. Others, like France, Greece, Italy, and Spain, to name just a few, are learning that they’ll have to do the same — i.e. offer more realistic expectations as to what can be done in public policy. This is all good news in the end, but it may take a lot of pain and time to de-learn the norms that were learnt after the war, and for people to set new expectations.

 

Comments

[Daniel Kuehn]

Do you distinguish at all between deficit spending and these social rights/entitlements?

You seem to be talking about two extremely different things here. First, that governments can't deficit spend from now until eternity (I think you're wrong on this), and second that exploding entitlements pose a threat to public solvency (I think you're right on this). Aren't these two very different points?

[liberty]

One could also take the opposite position: "social rights" can theoretically be extended every year; yet one cannot keep borrowing more and more, never raising taxes or curbing spending of any sort in order to pay off some of the debt.

[Daniel Kuehn]

liberty -
Well again, I think we really oughta distinguish between the idea that we can run deficits every year (which is a relatively new idea - even more so in this country) and the idea that we can "keep borrowing more and more, never raising taxes or curbing spending of any sort in order to pay off some of the debt". Those are two very different things and I'm afraid your comment, like the original post, bundles it all together. Spending more than you take in in revenue for perpetuity is quite possible, and that was an important innovation of the 20th century (not one of its "greatest evils"). But there's a difference between borrowing for perpetuity and borrowing unsustainably. We oughta be careful not to make a good solid argument against the latter and then turn around and pretend that that counts as an argument against the former as well.

[Frederic Sautet]

Deficit spending and social rights are linked.

If one assumes perfectly benevolent and omniscient bureaucrats and politicians, then yes deficit spending forever is theoretically possible (as long as spending doesn't accelerate more than revenues). The problem is that politicians are not benevolent and omniscient and thus deficit spending is in the long run not sustainable (if only because of exploding entitlements).

Since WWII, deficit spending has become the norm and is getting worse over time. One country in the OECD have reversed the trend in the last twenty years: NZ (and perhaps others such as Australia, but I am not sure). But even in NZ, it is difficult to keep spending below revenues. It is unclear what the long term effect of the Fiscal Responsibility Act will be since it was only tested during a period when NZ had good growth rates (1995-2008) and the memory of the pre-reform period was still alive.

[Daniel Kuehn]

Well Frederic, the concern here isn't whether bureaucrats are benevolent or omniscient. You won't get disagreement with my on that point, and you haven't gotten disagreement with me on that point.

Why is deficit spending in the long run not sustainable? You haven't argued this point yet. You've noted that countries can and do overextend themselves with respect to entitlements. Again, I would be the last person to dispute you on this point. But that's not an argument against deficit spending in perpetuity. I imagine if economic growth were to stagnate for the forseeable future - a no growth steadys state - that would provide a context under which deficit spending would have to stop. But I see no prospect of that happening. Do you?

[Frederic Sautet]

You should have mentioned this right away if that was your point. You are right, my implicit assumption in this blogpost (not an academic paper) is that spending and revenues are seen as a proportion of GDP growth.

But the real issue is that the theoretical construct of deficit spending forever abstracts from the realities of political decision making and for this reason alone it is unsustainable.

[liberty]

Daniel Kuehn - you are correct that an argument against the latter is not necessarily one against the former. However, what we are doing right now is much closer to the latter.

[Jerry O'Driscoll]

This issue was extensively debated back in the 1980s under "some unpleasant monetarist arithmetic." There is an economic tipping point at which debt service becomes unsustainable.

Growth does stagnate in part due to the extension of "social rights." That has been summed up in the term euroscelorsis. The economy no longer generates the income needed to pay for the benefits promised. Social rights then lead to social discord. That is what is happening in France, Spain, Iceland, etc. (It's interesting hwo comparatively placid the Irish have been.)

As detailed in This Time is Different, the political tipping point comes sooner than the economic one. Most sovereign debt defaults are choices, not necessities. The regime in power decides not to honor the country's debts.

As Adam Smith observed, based on the already sorry history of 18th century Europe, sovereigns eventually default. That is the history of public debt.

[hsearles]

"Euroscelorsis"

Good one!

[Jerry O'Driscoll]

BBC reported on the issue tonight with Jim Hoagland, foreign correspondent for the Washington Post. He described the situation as the unraveling of a 50-year social consensus in Europe.

You read it here first from Frederic Sautet.

[Daniel Klein]

Great post. I especially like the remark about "morally despicable."

[David Emanuel Andersson]

I think it's worth noting that according to the World Values Survey, France has the lowest proportion (in the world) of people who agree with the statement that "the market economy is the best economic system there is". Maybe this has something to do with what seems to me to be the weird behavior of the people there. There are similar problems elsewhere in Europe, but France seems to be the worst case, followed by culturally related places like Belgium and Italy.
Then there is the separate effect of downright corruption, which is perhaps moderate in France but much more serious in Italy and Greece (another 2X2 matrix anyone?).

Interestingly, supposedly Communist China has the highest proportion of pro-market sentiment according to the survey referred to above.

[Lyle]

Consider that the second largest party in France was the communists and in the period 1946-1953 there was a large part of the population that felt that the soviet system was desirable for France. The state had to make a deal to keep these people from pushing for soviet style govenment. This deal was social democracy in exchange for not going communist.

[Matthew Walther]

"Great post. I especially like the remark about 'morally despicable.'"

Daniel --

Why be curt? If there is something wrong with Frederic's phrase, say it -- it seems to me that his parenthetical remark explains his (apt) characterization of "social rights."

[Pietro M.]

Andersson: Italian corruption is a perfect example of ecological rationality. :-)

Italian laws, rules and taxes are so bad that if there were no dishonest people everything would stop working. The Italian society can survive only because we don't take our political institutions seriously.

Unfortunately, this has the side effects of causing predatory corruption, amoral familism, lack of social capital, cooperation difficulties, the success of organized criminal groups, the formation of informal/black/illegal markets, and last but not least islands of feudal systems that resist the pressure of a competivive open society, mainly because such a society hardly exists, especially in southern Italy.

There are people who believe that a culture of legality would improve the Italian society. They probably confuse the formal notion of legality (law abidance) with the substantial notion of it (abidance to good norms). Law abidance in a formal sense are the result of the widespread belief in the philosophy of legal positivism, in the a "fascist" view of authority (which must be respected per se, irrespectively of its merits), and the total lack of what we call "juridical civility".

[Daniel Kuehn]

Matthew -
I think Klein was agreeing with him.

[Mario Rizzo]

Frederic,

On a personal note, it is odd to see this going on in France when all the French people I know are (more or less) classical liberals.

[Roger McKinney]

It becomes a little more understandable if we realize that the left does not believe in scarcity. Libertarians take it for granted. Socialists never have. Rev Jim Wallis begs people to abandon the "gospel of scarcity" (by which he means economic science) and embrace the "gospel of abundance" (by which he means socialism).

Socialists believe there is plenty of wealth for everyone if the state would take from the rich and give to the poor. For them, the state is failing to do its job by not taking more from the rich in order to maintain the "social contract" of the last 50 years.

[Frederic Sautet]

Mario,

It's the same for me. Many of my friends and acquaintances in France are also classical liberals, though not all of them. Those who aren't, either have no opinion or are in the center-right. So when I hear that 70% of the French population is in favor of the strikes, I wonder where it's coming from. I think in our cases, it's only sample bias...

[The Cuttlefish of Cthulu]

If you believe in MMT, then indeed, deficit spending can continue without end.

[Rick]

I wonder what Matt Mueller would say about this.

[David Andersson]

Pietro:

I totally agree with you. As an illustration, I happen to know that Taiwanese land-use regulations are (even) more detailed and bureaucratic than Swedish land-use regulations, but because most such regulations are ignored de facto in Taiwan (example: almost 90% of all buildings in Taipei have illegal rooftop structures), it seems as if there is much less regulation than in Sweden. The messy land-use patterns here in Taiwan are therefore an improvement over a situation where all laws are enforced, and may even be preferable to the situation in Sweden where formal regulations are almost always enforced. So there is obviously some reglatory limit after which corruption and illegal business behavior render net social benefits at the margin. Seems like an interesting (but difficult) research topic!

[Troy Camplin]

I can either live within my means, or I can "deficit spend" and accumulate debt. Like most people, I will not typically deficit spend for necessities, but for wants. Of course, I cannot deficit spend into perpetuity, because eventually I will accumulate so much debt, that most of my income goes out to interest, meaning I'm not paying down the principle. And what happens when income falls below interest payments? I can borrow more, but that only digs the hole deeper. Eventually, my entire financial edifice collapses, and I lose everything. And all because I wanted some things I couldn't afford (during the good times, I fool myself into believing that it can go on forever -- in bad times, reality only hits earlier than it otherwise would have).

This is true of individuals, companies, institutions, and, yes, governments. Governments aren't these magical entities where reality doesn't affect it and its decisions. Accumulation of debt matters; and continuous accumulation of debt will bankrupt you eventually. Governments deficit spend for the same reasons individuals do: for luxuries. Social spending is a luxury. Governments do it to buy off certain voters. So the two are intimately related. (A favorite quote from Mark Twain from "The Gilded Age": "I used to be dead broke, but now I owe millions.") The problem is that too many think neither morals nor physical reality have anything to do with government. The individual cannot steal, but somehow, magically, if enough people get together and call themselves a government, they can steal. The individual cannot murder, but somehow, magically, if enough people get together and call themselves a government, they can murder. The individual cannot run up massive amounts of debt through deficit spending without financial consequences, but somehow, magically, if enough people get together and call themselves a government, they can run up massive amounts of debt through deficit spending without financial consequences. In the real world, bills come due -- even for governments.

[The Cuttlefish of Cthulu]

"Governments deficit spend for the same reasons individuals do: for luxuries."

Perhaps, but this has no bearing on the fact that the means by which (central) govts deficit spend are completely different from those of individuals, and you've given no reason here to believe that "bills come due -- even for governments."

[Current]

Daniel Kuehn,

Do you believe that governments can keep borrowing even if the real value of debt repayments increases every year beyond economic growth? I think that is the essential limitation.

[The Cuttlefish of Cthulu]

Current,

You need to first ask Daniel Kuehn what he thinks of MMT. Then the answer to your question here will be made more intelligible.

[liberty]

Cuttlefish: Troy made it pretty clear; but if you need it spelled out just a little more explicitly: people will stop lending. If borrowing from outside its own borders, foreign lenders will simply stop lending because they can see it can't be repaid, or its too dangerous because it may not be repaid. If borrowing from within its borders (after raising taxes has stopped increasing revenues because the economy has begun grinding to a halt) then the citizens will eventually revolt.

For a recent example of a developed nation in which this process begun and nearly completed but for some last minute bailouts, please see Greece. Do not think that a bailout is 100% guaranteed, especially for a larger nation which would be much harder to bail out.

[Current]

The Cuttlefish makes a good point.

On the subject of Ireland.... I think the reasons there isn't discontent are twofold. Firstly, it would go against the Irish "national character". Secondly, and maybe more importantly, welfare benefit levels here are still high. Unemployment benefit is still ~196 euros per week. Most of the austerity has been directed at taxpayers and public services.

[Current]

liberty,

Whenever I'm arguing with Chartalists the following sort of thing happens.... A Chartalist says "Classical economists said" or "Neoclassical economists said X". I then write something like "No they didn't, haven't you read Mises/Hayek/misc famous economist".

The problem here is that many people seem to think that the only argument against Nominalism, Chartalism, MMT or whatever are arguments that are like those the Chartalists call "Metallism". That isn't true.

What I think Cuttlefish is getting at is that in many circumstances governments can create new fiat money and it will be accepted. Nobody really disagrees with that. The argument is about "what follows?" Is a government "monetarily sovereign" in any circumstance? Those who oppose Chartalism argue that it isn't and there are circumstances where no police force or tax law can make people accept bad money. And, does the power to create fiat money mean that the government can perform various miraculous economic feats to extract an economy from recession?

The accounts of a national government really are different to those of an individual. The interesting questions are about what that means.

[The Cuttlefish of Cthulu]

liberty, you and Troy may want to recall that central govts have central banks. They are NOT like households. To be clear, I don't subscribe to chartalist nonsense, but this point does render the Keynesian system a bit more coherent than most of its opponents acknowlege.

[Kyle8]

Keynesianism is coherent in much the same way as "Star Wars". It is coherent, but it is a total fantasy.

[The Cuttlefish of Cthulu]

" It is coherent, but it is a total fantasy."

Agreed, but sound arguments should still be employed against it. Common conservative/libertarian arguments likening govt finances to that of a household are simply incorrect.

[Current]

Although this may be a bit of a nitpick I'm not really sure that Keynesian theory is consistent. Keynesians discuss relative prices when it suites them and ignore them otherwise. The employment multiplier argument, for example, is a relative price argument.

[liberty]

OK. When government prints money, it is essentially stealing (and also redistributing) the money of the people within its borders (because it acts to reduce its debt at the expense of the people having higher prices, and therefore lower living standard). Hence, it can steal instead of only borrow so long as it does not create rebellion or economic disaster.

Of course, governments do this all the time on a small scale. But they must continue to borrow as well or else (a) there will be such high inflation that rebellion or disaster may strike and (b) inflation works best the more debt you have.

What this means is that using both debt and inflation governments can spend outside their means for a long period - but both too much borrowing and too much inflation WILL eventually put a brake on their actions. (Again: see Greece).

[The Cuttlefish of Cthulu]

"When government prints money"

You're talking about the Treasury, I assume? Because central banks don't literally print money.

[Troy Camplin]

The central bank can "print money" by simply declaring that there is more money, then buying up treasury bonds to loan the money to the government. Let's not be so archaic (and misleading) by acting like we are talking about literal physical dollars and coins. Much money is magnetic dots anymore. Which makes it easier to create. Either way, we get inflation. If the government needs to borrow more and more and more, and the only one left to loan the money is the central bank, then the central bank has to literally create the money out of thin air (this is the problem with fiat money, is it not?) to loan it to the government. The result will be, again, inflation. If the central bank is the only one lending, then it will end up being hyperinflation. Have you seen what happens when there's hyperinflation? If you want your government to collapse, your population to become nihilistic (the money has no value, so perhaps nothing does), and a dictatorship to take over, then by all means, engage in massive deficit spending to the point that foreign governments won't lend you the money, your own population won't lend you the money, and the central bank has to create more money to lend. So, no, it is not possible to borrow forever. In the real world, you get (if history is any guide) typically fascist dictatorships. But then, the fascists did love Keynes' work. Now we know why.

[Rafe Champion]

The lesson that should have been learned was that when the nations of the world stop killing off the cream of each others male workforce and destroying each others infrastructure, then good things happen.

The wrong lesson was also learned from the Marshall Plan. It has been billed as a helpful, even a significant factor in the recovery of Western Europe. This misperceived success may have prompted the disaster of aid to the Third World. Tyler Cowan demonstrated that the program was a dud.

http://www.the-rathouse.com/2009/Marshall-Plan.html

Belguim and Germany turned around before the aid arrived and the major beneficiaries were the US firms that supplied food and other goods. They asked for lard and they got peanuts because there was a glut. A lot of this was straight out of Catch 22 (remember Milo Minderbinder?).

[candelarion]

Consider that the 2nd largest party in France was the communists and in the period 1946-1953 right? The lesson that should have been learned was stop destroying each others infrastructure.

[Peter Whiteford]

Frederic Sautet said:"Since WWII, deficit spending has become the norm and is getting worse over time. One country in the OECD have reversed the trend in the last twenty years: NZ (and perhaps others such as Australia, but I am not sure)."

Actually many countries reversed the trend up until 2008 including Australia (as mentioned), all of the Nordic countries, the Czech Republic, the Netherlands, Ireland and Canada. Even Belgium, Spain and Italy had falling public debt between the mid 1990s and 2007/2008, as a look at OECD statistics will show.

[Cheap Supra Shoes]

HELLO MR DJ,WOULD YOU PALY MY SONG,ON THE RADIO....

[true religion outlet]

At 9 or 10 on the scale, the anger has led to major problems/crime. Maybe they are in prison for some crime committed during an outburst of anger. They may need major deliverance from an obvious demonic problem.