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Only shock therapy can force countries to break debt habit

Democratic governments keep amassing debt as politicians buy votes with the voters' money. A nasty shock may be the only way to break the cycle.

Anyone looking at the economic and political crises afflicting the wealthy countries of the West is justified in being confused. Even Germany's Chancellor Angela Merkel, whose economy is the most successful in Europe, has complained about the amount of "contradictory advice" she receives.

Experts can be heard every day pondering why major western economies are not emerging as expected from the 2008 financial crash. Instead of healthy growth, America has a "jobless recovery" while Britain has no recovery at all. The weaker economies of southern Europe - Greece and Portugal - are being bailed out at tax-payer expense, while the markets wait anxiously to see if Spain and Italy can survive.

In Washington, politicians are locked in an ill-tempered struggle over the raising of the US debt ceiling that, if not resolved in the next five days, could see world markets thrown into turmoil.

In past years, the raising of the US debt ceiling has been treated as a technical issue to be nodded through by Congress. But this year the ideological battles lines are drawn between those who demand cuts, and those who see borrowing yet more money as the only way.

But there is another point of view which is gaining attention. This view holds that there is nothing exceptional going on here. Rather, the progress of liberal democracies from affluence to the brink of bankruptcy - and beyond - is normal, and indeed inevitable.

The principle of advanced democracies is that governments buy votes with the voters' own money - that is, they make electoral promises which can only be met from the tax take. But in every democracy there is a limit to how much tax people want to pay - higher in countries like Sweden with a strong social-democratic tradition but lower in the US where political culture resists giving money to the government. Once that ceiling is reached, then the government's promises can only be redeemed by borrowing, which becomes a deadly habit.

The free-market economist Milton Friedman pointed this out in 1985. Throughout history, he wrote, aspirants for leadership have always bought votes either with their own money or a patron's money. "But something new has been added. Since the 1930s, the technique of buying votes with the voters' own money has been expanded to an extent undreamed of by earlier politicians."

The idea has been expanded in a new polemical tract Democracy and the Fall of the West published in Britain by Craig Smith, a lecturer in moral philosophy at St Andrews University in Scotland, and Tom Miers, a former management consultant. Their conclusion is that the dynamic of democracy leads inevitably to a high tax, high intervention state. The people will always want more, and governments will want to give it to them.

This political system has provided unprecedented levels of wealth and comfort. It is undeniably the will of the majority to have better pensions, more secure employment, cheaper mortgages and better health care, all at public expense or by government fiat. As it has democratic legitimacy on its side, this system seems unstoppable.

There is no question that government spending as a proportion of national output has risen relentlessly. Even in the US, supposedly the land of small government, public spending has risen from 21 per cent of national output in 1948 to around 40 per cent now. The inevitable result, in the view of the authors, is for the liberal democracies to bleed to death in a warm bath of debt.

These theories cannot fail to strike a chord with observers who see a grim combination of economic crisis and political paralysis eating away at the European Union. Here the problems of the indebted countries of the euro zone are treated with no more than sticking plasters.

While the US is used to the spectacle of noisy squabbles in Congress, the current game of chicken at the heart of the world's leading economy is unsettling to say the least.

The authors offer few ideas on how to halt the march of the once energetic countries of Europe and North America in the footsteps of ancient Rome into decadence. They yearn for the rigour of 19th century finance. But that was a time of poverty, exploitation and ill health for the majority.

We cannot go back to that time. Nor is salvation necessarily going to come from China, where a centrally guided market economy is just as likely to take wrong turns as previous communist systems.

Illuminating as the authors' analysis is, they fail to note that governments do change course if a sufficient shock is applied to the voters.

The 1997 Asian financial crisis pushed several countries, most notably Thailand, into poverty and led to the end of the 30-year rule of Suharto in Indonesia. But the experience of having to go to the International Monetary Fund for help taught the South-east Asia countries a lesson in the importance of building up foreign exchange reserves. They survived the 2008 crisis better than the easy-going countries of the West.

In Europe, Germany learnt the lesson of living beyond its means when it had to bring the former communist East Germany up to western standards, at a cost of $1.9 trillion (Dh7 trillion) over 20 years. The shock of re-unification spurred the political class into getting ready for the globalised world. German industry increased its productivity and the pensionable age was raised to 67. Other European Union countries, spared the pain of re-unification, are laggards.

It is too early to consign the liberal democracies to history. Voters know that politicians' promises of life getting better for everyone are just sweet lies. The truth is that only a new flood of debt will float everybody's boat, and that is not going to happen.

In future, politicians will have to promise the voters not a better life, but a period of blood, sweat, toil and tears. This will not be easy. The man who spoke those words in 1940, the British wartime leader Winston Churchill, did not last long in office. As soon as the war ended, he was voted out, to be replaced by a Labour government promising welfare for all, including free health care.

 

aphilps@thenational.ae

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