Europeans, you'd better learn to love austerity
Leaders have become vote-driven sheep, not shepherds, but rejecting the need to lower living standards is merely to wait for the next crisis.
Today's world can be divided into two distinct economic camps. The first embraces a policy that can be called "Merkelism," in honor of its foremost supporter, German Chancellor Angela Merkel. Merkelism espouses austerity and thrift as solutions to economic hardship, and its price is a meaner standard of living for much of the public. The second philosophy can be called "Krugmanism," after Nobel Prize-winning economist and New York Times columnist Paul Krugman, who adamantly supports expanding economic policy and widening government expenditures to restore the economy to health.
In democracies, however, the public can vote policy measures in or out, and support for Merkelism appears to be waning. The French elections this month, which former French President and ardent "Merkelist" Nicolas Sarkozy lost to Socialist-leaning Francois Hollande, brought the public discontent over austerity into stark relief.
Sarkozy's economic policies were in line with those of his German colleague, and he was unseated by an opponent who diametrically opposed his views.
The French public has spoken, and its word is clear: Merkelism is out; Krugmanism is in.
We are living in a time in which our leaders are subject to daily public opinion ratings. The leaders have become more their nations' sheep than their shepherds.
All too often, our leaders are driven by the short-term considerations of public opinion polls rather than by the dictates of their consciences or by that crucial element, long-term vision.
There is a structural flaw in the monument of democracy. Nowadays, however, with round-the-clock media growing ever more prevalent, it is more glaring than ever.
Don't misunderstand me: Just because I stress democracy's faults doesn't mean that I oppose it. Democracy is infinitely better than its alternatives. Even with its defects, it is better to have sheep who fear the rod of public opinion, even when it errs, than strongmen who act with impunity.
Bad opinion! Bad!
Still, this structural defect, that politicians must please their voters, creates a painful recurring dynamic. The public are all too often led astray by its own warped views. The people cannot always see the naked truth.
The average person thinks with his gut, forming his opinions by instinct and intuition. It is the rare constituent who has the patience and ability to scrutinize facts and figures, or the analytical tools required to weigh the importance of commonly known facts.
Humanity has a penchant for thinking in the short term, and when the wider public votes, its ability to make rational decisions is undermined by this bias. Generally speaking, we, as a species, have an immediate, egoistic frame of mind. On the whole, we choose less-than-optimum policies because we lack information, we can't analyze numbers and we have a propensity for immediate gratification and self-serving decisions. And note that here, we are merely scratching the surface of this momentous problem.
Because of these common biases, governments, in a bid to appease their demanding peoples, adopt successive populist measures. These pile up until a country is pushed to the brink of crisis. It is only with disaster looming that everyone – including the broader public – realizes that the status quo is unsustainable. Then, and only then, can drastic economic policy changes be implemented, with a steep price exacted for earlier mistakes.
'Lunatics, get down from the roof!'
One Israeli public official learned this lesson only too well.
Yigal Hurvitz (1918-1994) was Israel's finance minister for two years, from 1979 to 1981. He is best remembered for coining two memorable expressions during his short tenure. Both were in response to budgetary demands.
The first was, "I don't have it." The second famous phrase was, "Lunatics, get down from the roof!"
Angela Merkel is taking the same approach today. At the end of every party, someone has to pick up the bill. Hurvitz's simple and colorful phrases precisely captured the state of the Israeli economy. The party was over, and in its wake was a dreadful mess.
But the public didn't appreciate Hurvitz's policy or pithy polemics. The lunatics on the roof refused to budge, and the finance minister had no political capital to carry out his policies. On January 13, 1981, he was forced to resign.
After Hurvitz left office, the state of the Israeli economy continued to deteriorate. Possibly that decline was brought on by a mentality of "Yes, I do have it," or also because of a spike in spending caused by the 1982 outbreak of the First Lebanon War. In all likelihood, it was probably the two factors combined that created the damage.
Either way, the results were awful. Inflation spiraled out of control. The budget deficit stretched hideously and ultimately, the Israeli financial system crashed.
To stem this tide of decline, in 1985 the Israeli government instituted an "economic stabilization program", which featured painful budgetary cuts, steep cutbacks in living standards and an uptick in foreign aid. The goal was to push the economy onto the path of stability.
By 1985, the lunatics had no choice. Finally, they had to climb down from the roof.
People, you can't handle the truth
In economics, one doesn't pose hypothetical questions. We cannot know what would have happened if Hurvitz's planned austerity measures had been implemented with the full support of both the political establishment and the public. Maybe some of the suffering in the years following his proposals could have been avoided. Then again, those measures might not have changed a thing.
Pain-inducing measures can only feasibly be implemented in a democracy once the situation has already reached breaking point. Decision-makers, steered by the whims of public opinion, can never really implement well-timed yet painful preventative measures to steer the economy to safer ground. They can only react to the status quo once it has reached a point of no return.
Usually, by that time, the pain that is inflicted ends up being much greater than it would have been if corrective measures had been pursued earlier.
What is frightening in today's Western economies, be they in Europe, the U.S. or even Israel, is that decision-makers have scant ability to implement measures that are necessary but unpopular.
The simple truth is that leaders must tell their constituents, "We don’t have."
"We don't have" is a phrase that applies to a laundry list of topics, including the budgets for health and social services as well as other public sector services, national defense budgets and pension guarantees. The bottom line is that living standards in the West are too high.
Governments must learn to tell their citizens, "We simply can't live up to your expectations," as painful a truth as that may be. But in the political marketplace, where cold, hard truth carries no currency in the best of the times and is like a burning coal during the worst, such a phrase will never be uttered.
The people of the west have lived well beyond their means for decades, both with respect to individual and public spending. This simple reality cannot be swept under the rug forever.
It hurts to acknowledge it. In most areas in the Western world, the public isn't ready to reduce their living standards. Any politician who speaks the truth in public puts both his own career, and the standing of his entire party, into jeopardy.
Public opinion within the world's democracies has not yet reached the perilous tipping point that will separate the sheep from the goats and transform the mindless herd of politicians into true leaders. It looks as if it will still take more time, more pain, more trouble and more social unrest before real change can be effected.
We can only hope that the social unrest and mass suffering that awaits us will not be too severe.
The writer is the CEO of Psagot Compass Investments.