I watched the outcome of the French election with considerable interest. It seems that anti-austerity is becoming a major force in Europe. Even more interesting is the collapse of the will for austerity in Greece.
It is a quite fascinating situation, which is also quite alarming. It is fascinating as the 'Krugmanesque' vision of economics may finally be put to the test. That is, it seems that it may now be the case that the borrow and spend spigots will open for already 'in trouble' economies. As regular readers will know, I do not deny that borrow and spend will indeed create employment. After all, it is not difficult to spend somebody else's wealth on make-work activity or paying for activities that would otherwise not be affordable. I do not deny that this will create more tax revenue. If more people are working, and more are spending, then indeed this will indeed create the activity in the economy that will garner greater tax revenue. Likewise, this increased activity will appear to either slow economic shrinkage, stabilise, or even grow an economy.
The problem is that it is very, very easy to spend the wealth of others in generating activity. The problem is that this borrowed wealth will eventually need to be returned to the lender. This in turn generates the problem that, if people doubt the borrower's ability to repay, then they will not lend. The question then arises as to whom, exactly, these want to be borrowers might actually borrow from. It is all very well for people to march on the streets and demand an end to austerity, but they are demanding that governments spend money that they do not have. However much these marching/protesting individuals and their political leaders demand borrow and spend, they have a problem. The problem is simple. They simply do not, within their own country, create the wealth that they desire. That is why they must borrow.
The wealth that is desired by the protesters and their political leaders only exists external to their own economy. It is not theirs, and short of going to war, they can only access this pool of wealth if the holders of the wealth choose to allow access to it. No amount of protest, political rhetoric, demands, tantrums and so forth, will change this.
Of course, there is always the possibility of raising taxation in a country to pay for all of the government spending. It is always possible to squeeze the pips out of the wealthy. Or at least, as long as the wealthy hang around to be squeezed. However, the term capital flight is not abstract; there comes a point at which people feel that the redistribution of their wealth to others is unacceptable, and they will choose to remove their wealth to a place where such a redistribution will not take place.
Even if accepting that the wealthy can be squeezed, the 'in trouble' economies will have to squeeze very hard to make up for the loss of borrowed wealth from external sources. And that is the problem; even if increasing taxation for the wealthy, will governments be able to manage without the borrowing of external wealth to pay for all of their reinstated/increased spending programmes? I mean really; can this do the trick? I very much doubt it.
The plans of the anti-austerity movement are quite remarkable. They are remarkable in that they assume that there is some hidden source of wealth that is the right of their country. They do not have, or produce, this wealth themselves, but are apparently entitled to it. If the anti-austerity movement wins out, we will be able to see whether the Krugman approach actually really works in practice. I read recently that Krugman's view is influencing political leaders in Europe; that his proposed remedies are believed to be the solution.
Of course, there is nothing to say that some of the 'in-trouble' economies might not borrow a bit longer. For a while at least, the Krugman solution may appear to work, and encourage others to speak out/act against austerity.The success of anti-austerity will, if this takes place, be trumpeted as a solution - at least up to the point that the lenders of wealth lose all confidence. As an analogy, think of the Jurassic Park films; there is a sequence in which the lead character says something along the lines of; 'That's how it always starts, with the oohs and aahs, but then the biting and the eating starts'.
So, if the anti-austerity movement wins for a while, those in favour of the movement will sound out their 'oohs and aahs', but when all confidence is lost, the picture will change dramatically. It is quite possible that we are about to witness a real world economic experiment, in which the theories of individuals such as Krugman will finally be tested. They believe that wealth can simply appear by borrow and spend/tax and spend. They believe this will create a virtuous cycle that will fix economies.
I, on the other hand, believe that wealth is, in the end, created by creating a framework in which individual endeavour creates real wealth. This individual endeavour, whether from a bricklayer or a the CEO of a multinational, is the real source of wealth creation. They make products and services that people want, and can pay for the goods and services as a result of their own individual endeavours. The relative success of these individual endeavours, in aggregate, in terms of productivity, and in relation to other countries, determines the real wealth of a country. Not borrowing.
I suspect that we are about to find which vision of economics is correct. I hope I am wrong. If I am not wrong, then the outcome may be very disturbing.