When an economic crisis hits, there are two schools of thought on what to do. They might roughly be called “spend more” and “spend less,” or, to use their more formal names, stimulus and austerity. The theory of stimulus is that government spending more can make up for the reduction in private spending and thereby boost the economy. The theory of austerity is that there is an inevitable bottom that must be reached, and that any attempt to delay the inevitable simply prolongs the pain. The trouble is that it can be extremely difficult to prove or disprove either theory because neither turns out to be politically viable most of the time.
The trouble with stimulus is that it is counterintuitive. When everyone else is having to cut back, people’s basic instinct is that government should make sacrifices, too. Besides, as the saying goes, people fight more over a shrinking pie than an expanding one. Everyone’s natural reaction to a shrinking pie is to insist that no one else get any more, and to try to shrink everyone else’s share to grab more for oneself. This in particular means insisting that government cut back to spare more resources for private citizens. The trouble with austerity is that, although intuitively pleasing, it has most factually unpleasant results. People are willing to make sacrifices to some extent, but usually only in return for a fairly near-term improvement. When austerity turns out to be deeper and more painful than anticipated, and not to produce short-run improvement, it runs into resistance.
There is one exception. One thing is strong enough to overcome people’s aversion to big spending in a depression or (it would appear) ever greater calls for austerity. Patriotism. (Or, some would say, nationalism). If one’s country is seen as being in danger, normal inhibitions can be set aside, and extraordinary sacrifices can be accepted.
This has been known for some time on the subject of stimulus. Hitler, it has often been commented, was the ultimate Keynesian. This is embarrassing, both to Keynesians, who don’t want to be seen in such disreputable company, and to anti-Keynesians, who don’t want to admit that it can work at all. But, of course, Hitler was able to revive Germany by military buildup. Ultimately, other countries’ economies revived as well, as they made military buildups to match Hitler. And it is not just that ordinary people and politicians are more likely to agree to the necessary levels of spending if it is seen as necessary to avert a country’s peril. National peril is also often necessary to allow central bankers to overcome their fear of inflation and match the fiscal expansion with monetary expansion – in plain English, to finance operations by printing money.
It now appears that austerity, too, can be tolerated if it and only if it is seen as a patriotic exercise. This was less than clear before, because up till now making deep cutbacks in a depressed economy was not seen as patriotic. Our classic example have been Latin American countries forced to accept harsh IMF austerity programs in exchange for loans to service foreign debt. The Latin American public has shown little patience with such measures because they have not been seen as patriotic. Leaders may talk about their country’s honor being on the line if it does not pay its debts, but to most people, this looks like a Yankee imperialist IMF squeezing innocent people for the sake of Yankee imperialist banks. Refusal, not austerity, has been seen as patriotic. Likewise, in parts of Europe today, resistance to more austerity has been strongest on the Right because demands for cutbacks have been imposed by the internationalist European Union. But we are also seeing an extraordinary counter-example in the Baltic states. Latvia, Estonia and Lithuania have been much praised for their seemingly endless appetite for pain. And why should this be so? The answer appears to be that they see austerity as a necessary patriotic sacrifice in order to win the protection of the European Union against Russia. That calls for an end to austerity came from the ethnically Russian party only went further to convince Latvians not to heed the siren song of comfort because it was only a trap set by the Russians. The Irish, too, have shown remarkable patience in the face of suffering. If Ireland were not an independent country, if the austerity had been demanded by the English, Ireland would be in mass revolt.
This leads to three conclusions, both rather depressing. Austerity is wearing out its welcome in Europe, and calls for stimulus are beginning once again. But, in the absence of a military threat, stimulus is unlikely to get very far. Meanwhile, stimulus has worn out its welcome in the U.S., and Republicans are calling for deep austerity. They sometimes pitch it in patriotic terms, as selling our children’s future to the Chinese. But once austerity starts to bite, Americans are unlikely to have much patience for it, either. Finally, judging by the saber rattle of Mitt Romney and some of his advisors, they may know all this. They may have decided that, just as FDR brought us out of the Great Depression by WWII, they will end this one by starting WWIII.