Copies are £10, including p&p. To order Skidelsky on the Economic Crisis, write to 207 Fielden House, 13 Little College Street, London SW1P 3SH. Cheques should be made out to the Centre for Global Studies.

 

 

 

It doesn’t seem to be helping. Their economies are still tumbling, and the debt continues to grow. The credit ratings agency Standard & Poor’s has just downgraded the sovereign-debt ratings of nine eurozone countries, including France. The United Kingdom is likely to follow.

 

To anyone not blinded by folly, the explanation for this mass downgrade is obvious. If you deliberately aim to shrink your GDP, your debt-to-GDP ratio is bound to grow. The only way to cut your debt (other than by default) is to get your economy to grow.

 

Fear of debt is rooted in human nature; so the extinction of it as a policy aim seems right to the average citizen. Everyone knows what financial debt means: money owed, often borrowed. To be in debt can produce anxiety if one is uncertain whether, when the time comes, one will be able to repay what one owes.

 

This anxiety is readily transferred to national debt – the debt owed by a government to its creditors. How, people ask, will governments repay all of the hundreds of billions of dollars that they owe? As British Prime Minister David Cameron put it: “Government debt is the same as credit-card debt; it’s got to be paid back.”

 

The next step readily follows: in order to repay, or at least reduce, the national debt, the government must eliminate its budget deficit, because the excess of spending over revenue continually adds to the national debt. Indeed, if the government fails to act, the national debt will become, in today’s jargon, “unsustainable.”

 

Again, an analogy with household debt readily suggests itself. My death does not extinguish my debt, reasons the sensible citizen. My creditors will have the first claim on my estate – everything that I wanted to leave to my children. Similarly, a debt left unpaid too long by a government is a burden on future generations: I may enjoy the benefits of government extravagance, but my children will have to foot the bill.

 

That is why deficit reduction is at the center of most governments’ fiscal policy today. A government with a “credible” plan for “fiscal consolidation” supposedly is less likely to default on its debt, or leave it for the future to pay. This will, it is thought, enable the government to borrow money more cheaply than it would otherwise be able to do, in turn lowering interest rates for private borrowers, which should boost economic activity. So fiscal consolidation is the royal road to economic recovery.

 

This, the official doctrine of most developed countries today, contains at least five major fallacies, which pass largely unnoticed, because the narrative is so plausible.

 

First, governments, unlike private individuals, do not have to “repay” their debts. A government of a country with its own central bank and its own currency can simply continue to borrow by printing the money which is lent to it. This is not true of countries in the eurozone. But their governments do not have to repay their debts, either. If their (foreign) creditors put too much pressure on them, they simply default. Default is bad. But life after default goes on much as before.

 

Second, deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010.

 

Third, the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had.

 

Fourth, there is no connection between the size of national debt and the price that a government must pay to finance it. The interest rates that Japan, the United States, the UK, and Germany pay on their national debt are equally low, despite vast differences in their debt levels and fiscal policies.

 

Finally, low borrowing costs for governments do not automatically reduce the cost of capital for the private sector. After all, corporate borrowers do not borrow at the “risk-free” yield of, say, US Treasury bonds, and evidence shows that monetary expansion can push down the interest rate on government debt, but have hardly any effect on new bank lending to firms or households. In fact, the causality is the reverse: the reason why government interest rates in the UK and elsewhere are so low is that interest rates for private-sector loans are so high.

 

As with “the specter of Communism” that haunted Europe in Karl Marx’s famous manifesto, so today “[a]ll the powers of old Europe have entered into a holy alliance to exorcise” the specter of national debt. But statesmen who aim to liquidate the debt should recall another famous specter – the specter of revolution.

 

 

 

 

 

nef's event About Time takes forward the ideas from its highly acclaimed report 21 Hours to examine how this could help to address a range of urgent social, economic and environmental problems we face.

 

On 11 January, the event brings together a panel of leading experts in partnership with the Centre for Analysis of Social Exclusion (CASE) at the London School of Economics:

 

Lord Robert Skidelsky, Emeritus Professor of Political Economy at the University of Warwick and biographer of J. M. Keynes, and Dr Edward Skidelsky, University of Exeter, and co-authors of the forthcoming book, How Much is Enough? Economics and the Good Life.

 

Juliet Schor, Professor of Sociology at Boston College, and author of Plenitude: The New Economics of True Wealth, and The Overworked American.

 

Tim Jackson, Professor of Sustainable Development at Surrey University, and author of Prosperity without Growth.

 

The evening will comprise of a public lecture followed by a drinks reception with the speakers.

 

If you are interested in attending please RSVP to Cam Ly (cam.ly@:neweconomics.org).

 

Save the date! This is an open conference, with places available to all on a first-come-first-served basis. Please arrive early to guarantee your place in the main theatre. Join us afterwards for a drinks reception at 7.30 pm.

 

Read more about the event at nef's website or at the LSE's public events page.

 

 

Had Cameron brought an economic-growth agenda to the summit, he would have been fighting for something real, and would not have lacked allies. As it was, he fully accepted Merkel’s austerity agenda – which his own government is implementing independently – and chose to veto proposals for a new European treaty to protect the City of London. This cheered up the Euroskeptics in Cameron’s Conservative Party, but it offered nothing to counter the lethal medicine prescribed by Germany’s Iron Lady.

 

The agreement reached in Brussels forecloses any possibility of Keynesian demand management to fight recession. “Structural” budget deficits would be limited to 0.5% of GDP, with (as yet undisclosed) penalties for violators.

 

This is the wrong cure for the eurozone crisis. The Merkel doctrine holds that the crisis is the result of government profligacy, so only a “hard” balanced-budget rule can prevent such crises from recurring.

 

But Merkel’s analysis is utterly wrong. It was not deficit spending by governments that fueled the economic collapse of 2007-2008, but excessive lending by banks. Government’s mounting debts have been a response to the economic downturn, not its cause. What ought to have been hard-wired into the EU’s institutional structure was not permanent fiscal austerity, but provisions for economic stability.

 

More immediately important is the failure of the proposed “fiscal union” to do anything for European recovery. The figures are grim: before the summit, the European Central Bank slashed its eurozone GDP growth forecast for 2012 from 1.3% to 0.3%. That is almost certainly optimistic. In fact, the eurozone will contract in the first half of next year – and probably in the second half, because of the deficit-cutting policies now being pursued – placing further pressure on banks and sovereigns.

 

The reason why recovery from the crash of 2007-2008 has been so anemic is straightforward. When an economy shrinks, government debt grows automatically, because its revenues decline and its expenses rise. When it cuts spending, its debt grows even more, because its cuts cause the economy to shrink further. This makes the government more, not less, likely to default.

 

In the eurozone, most government debt is held by private banks. As this debt increases, the value of banks’ assets falls. So the crisis of the sovereigns engulfs the banks. To put weakened governments on iron rations, as Merkel did, was to make a financial crisis inevitable. To continue to preach salvation through austerity as the economy declines and banks collapse is to repeat the classic mistake of German Chancellor Heinrich Brüning in 1930-1932.

 

To be sure, the eurozone needs more than a bailout. The periphery needs to recover competitiveness, and some have taken heart from the Mediterranean countries’ shrinking trade deficits – the structural trade imbalances within the eurozone are correcting themselves, they say. Unfortunately, these corrections are not based on increased exports, but on declining imports, owing to depressed levels of economic activity.

The idea that a country can achieve a trade surplus by importing nothing is as fanciful as the idea that a government can repay its debt by starving itself of revenue. One person’s spending is another person’s income. In insisting that its main trade partners cut their spending, Merkel is cutting Germany off from the main sources of its own growth.

 

So, will the single currency survive? Two policies that might, in combination, save it are off the agenda. The first is quantitative easing (printing money) on a heroic scale. The ECB should be empowered to buy any amount of Greek, Italian, Spanish, and Portuguese government bonds needed to drive down their yield to near the German rate. This might stimulate real growth through several channels: by reducing lending rates, by raising the nominal value of public and private assets, and by weakening the euro against the dollar and other currencies. But the effects of quantitative easing on economic activity are uncertain, and such an inflationary policy might well invite retaliation from Europe’s trading partners.

 

That is why quantitative easing should be run in conjunction with a eurozone-wide investment program designed to modernize the creaking infrastructure of eastern and southern Europe. Capital spending by governments, unlike current spending, can be self-financing through user charges. But, even if it is not, well-chosen public investment produces high returns: new roads reduce transportation costs, and new hospitals produce a healthier workforce.

 

An institution, the European Investment Bank (EIB), already exists to carry out such a program. It should be recapitalized on a sufficient scale to offset the contractionary effects of Europe’s national deficit-reduction programs.

 

Quantitative easing, combined with public investment, would impart the growth impetus that the eurozone sorely needs to bring about a gradual reduction in its aggregate debt burden. But it is almost certain that neither policy, much less both, will be implemented.

 

The ECB is stealthily buying government bonds on the secondary market, but its new governor, Mario Draghi, insists that such intervention is temporary, limited, and intended solely to “restore the functioning of monetary transmission channels.” No one at the recent EU summit suggested making the EIB an engine of growth. So the bleeding will go on.

 

This means that the eurozone is beyond saving; the euro will survive, but the zone will shrink. The only question is the scale, timing, and manner of its breakup. Greece, and probably other Mediterranean countries, will default and regain the freedom to print money and devalue their exchange rates.

 

This will send shock waves throughout the world. But sometimes shock waves are needed to break the ice and start the water flowing again.

 

 

 

You can listen to the programme or download it as a podcast at www.bbc.co.uk/programmes/p00lzhr8, or join the discussion at the Forum's Facebook page.

 

Let's start with the theory of the matter. "Look after unemployment," JM Keynes said, "and the budget will look after itself." This was a neat way of saying that a credible deficit reduction plan depends on growth. All governments have large deficits at present because their economies have shrunk. The deficits will decline automatically as their economies start growing.

 

But policies of deficit reduction will not in themselves produce growth. Nor will they eliminate the deficit. Trying to reduce the deficit by cutting spending and raising taxes means taking spending power out of the economy, when what a depressed economy needs is more spending. A government can always cut its own spending. But it cannot control its income. If cutting its spending leads to a fall in its revenue, it is little nearer "balancing the books" than before. One person's spending is another's income. If the government reduces the economy's spending, its own income will fall.

 

This grisly truth is at last starting to pierce the fog of rhetoric. The latest report of the Office for Budget Responsibility predicts that the government will miss its borrowing target this year because of reduced revenues. Even though it has cut spending by more than its goal, the fall in tax revenues – £15bn less than expected this year – has knocked it off target.

 

The economy has not grown for a year and, says the OECD, is now likely to contract. Lower growth over the next five years means the government will have to borrow £111bn more than planned. The brief recovery is over. The shrinkage in demand is becoming a collapse. Unemployment will still be rising in 2013, real wages will continue to decline and as households stop spending, company profits will suffer. The deficit will not be gone by 2015. Even to get rid of it by 2017 – the latest estimate – will require a further £23bn of cuts. But as these will reduce growth even further, the elimination of the deficit can safely be postponed to never-never land.

 

We come to the question of confidence. The chancellor has repeatedly claimed the deficit reduction programme was, and is, necessary to maintain investor confidence in government finances. Confidence is very important, but also mysterious: the bond markets can believe a dozen contradictory things before breakfast. The main point is that confidence cannot be separated from the economy's performance. As it stalls, the creditworthiness of governments declines as their debt increases, raising the likelihood of default.

 

A year ago bond traders, having forgotten what little economic theory they knew, were inclined to believe that deficit reduction would in itself generate recovery. For several months the Osbornites fed them the fantasy of "expansionary fiscal contraction", the idea that as the deficit falls the economy would expand. This story is now exploded. It's the economy that determines the size of the deficit, not the deficit that determines the size of the economy.

 

The chancellor is right to say that Britain is not at the "centre of the sovereign debt storm". But for how much longer? The eurozone financial crisis – on both its sovereign and commercial bank sides – is the direct result of policies which have brought about the slowdown of the European economies. From August to September industrial production turned sharply downwards in the EU, and especially the eurozone. But our government has been pursuing the same policies, with the same results. This suggests that, without a change of policy, the price of our own government debt will start to go up.

 

I agree, therefore, with Ed Balls. The government's debt-reduction strategy is not credible, either as theory, or in term's of maintaining the markets' confidence. The chancellor's plan would have looked good had it worked. It has fallen so far short of it that Osborne sees the need to introduce a subplot into the main narrative. This goes under the name of "credit easing".

 

He has authorised the Bank of England to buy an extra £75bn worth of government bonds – known as "quantitative easing" – to increase the reserves of the banking system. Then there is "credit easing": banks will be given government guarantees to raise money more cheaply provided they lend to small and medium-sized businesses. The government will offer to secure part of the loans taken out by first-time buyers of new-build homes, enabling them to get larger mortgages with a smaller deposit at lower interest rates. The government also intends to "mobilise the finance" for an infrastructure programme, though how it can get the pension funds on board without subsidised interest rates and/or guaranteed income streams is not clear. These are steps in the right direction. But, according to the OBR: "It is far from clear how much additional lending [credit easing] will create."

 

What the chancellor is trying to do is to increase the supply of credit. But the austerity side of his policy is choking off the demand for credit by reducing the market. The new policy is therefore incoherent. What we need is not a subplot but a new narrative, which recognises that the most important requirement for recovery is to increase total spending in the economy. In this story, increasing capital spending is the main plot, cutting current spending the subplot. The chancellor is edging towards this, but he has not arrived. Events may force the pace.

 

 

So we have embarked on Plan B – printing money, though only to a modest extent, a £75bn programme of “quantitative easing” announced by the Bank of England on 6th October. For those who never believed in Plan A – chancellor George Osborne’s original view that cutting public spending would automatically produce economic recovery – resort to monetary policy is the start of a more interesting debate, about whether monetary policy alone can engineer a recovery from recession.

 

Milton Friedman said yes, arguing that it was the Fed’s failure in 1930 to pursue “open market operations” on the scale needed that deepened the slump. Against this view is Keynes’s famous retort: “If, however, we are tempted to assert that money is the drink which stimulates the system to activity, we must remind ourselves that there may be several slips between cup and lip.” Keynes postulated two possible slips.

 

Firstly, monetary policy may not succeed in reducing the interest rates faced by borrowers. The relevant interest rate is of course the risky interest rate faced by corporate borrowers – not the risk-free gilt yield. So the question is whether QE will reduce not only gilt yields but also the risky interest rate.

 

Secondly, lower interest rates may not stimulate growth in lending and economic activity. This is a question of demand – even with a lower risky interest rate, will demand for borrowing increase? This is the only channel whereby the interest rate can drive spending.

 

So how did the first round of quantitative easing, which pumped £200m into the economy between March 2009 and February 2010 fare on these two counts? The Bank has just published its own assessment.

 

On interest rates, it concludes that QE was effective in reducing risk-free interest rates (gilt yields). However, even for the very few companies that can borrow in the bond markets, the effect on the interest rate faced by investment grade companies over and above this was virtually non-existent. The net result was a very modest reduction in the interest rate they faced (of around 0.7 per cent), which was dwarfed by changes driven by the evolving macroeconomic picture.

 

For the majority of companies that can only borrow from banks, even this small victory was absent. The Bank reported “little evidence that effective new bank lending rates for households or firms fell significantly following QE purchases”.

 

On the second slip, the evidence is pretty damning. Lending to private non-financial companies has fallen by more than 12 per cent since QE1 began in March 2009, and lending to small and medium sized enterprises has been even harder hit.

 

There are two reasons for the two slips. Risky interest rates remain stubbornly high. The banking sector is broken and is not transmitting monetary policy through to borrowers. And borrowing is shrinking for two reasons: over-indebted households and companies do not want to borrow at any interest rate. Among those that are not over-indebted, confidence is shattered – uncertainty is so high that few want to put capital at risk.

 

The verdict is already in. Indeed, the Bank’s governor has given it on countless occasions: monetary policy cannot save the economy. Seriously negative interest rates might work – but only at the cost of debauching the currency, which is the last refuge of a desperate government. Since the governor rejects both this and fiscal stimulus, his only remedy seems to be to grin and bear it until the global economy is set to rights.

 

The most terrifying thing to emerge from the Bank of England’s reports is that the Bank embarked on its experiment without any macro-economic model specifying how money was to be transmitted to income. In other words, QE was launched on a wing and prayer.

 

So it is up to the politicians to rescue the economy from years of stagnation. As I have said before, we urgently need a Plan C: a strategy for investment and growth. The chancellor will have a chance to unveil one in his pre-budget statement of 29 November. But will he have an ace up his sleeve?

 

 

 

The economy is a classic field for this strategy. Three years after the global economy’s near-collapse, the feeble recovery has already petered out in most developed countries, whose economic inertia will drag down the rest. Pundits decry a “double-dip” recession, but in some countries the first dip never ended: Greek GDP has been dipping for three years.

 

When we ask politicians to explain these deplorable results, they reply in unison: “It’s not our fault.” Recovery, goes the refrain, has been “derailed” by the eurozone crisis. But this is to turn the matter on its head. The eurozone crisis did not derail recovery; it is the result of a lack of recovery. It is the natural, predictable, and (by many) predicted result of the main European countries’ deliberate policy of repressing aggregate demand.

 

That policy was destined to produce a financial crisis, because it was bound to leave governments and banks with depleted assets and larger debts. Despite austerity, the forecast of this year’s UK structural deficit has increased from 6.5% to 8% – requiring an extra £22 billion ($34.6 billion) in cuts a year. Prime Minister David Cameron and Chancellor George Osborne blame the eurozone crisis; in fact, their own economic illiteracy is to blame.

 

Unfortunately for all of us, the explanation bears repeating nowadays. Depressions, recessions, contractions – call them what you will – occur because the private-sector spends less than it did previously. This means that its income falls, because spending by one firm or household is income for another.

 

In this situation, government deficits rise naturally, as tax revenues decline and spending on unemployment insurance and other benefits rises. These “automatic stabilizers” plug part of the private-sector spending gap.

 

But if the government starts reducing its own deficit before private-sector spending recovers, the net result will be a further decline in total spending, and hence in total income, causing the government’s deficit to widen, rather than narrow. True, if governments stop spending altogether, deficits will eventually fall to zero. People will starve to death in the interim, but the budget will be balanced.

 

That is the crazy logic of current economic policy in much of Europe (and elsewhere). Of course, it will not be carried through to the bitter end. Too much will crack along the way – the banks, the monetary system, social cohesion, the legitimacy of the political regime. Our leaders may be intellectually challenged, but they are not suicidal. Deficit reduction eventually will be put into cold storage, either openly, as I would prefer, or surreptitiously, as is politicians’ way. In the United Kingdom, there is already talk of Plan A +.

 

Those who see the need for such a growth strategy, but who also want to help their friends, like the idea of tax cuts – especially for the rich. This knocks a hole in current deficit-reduction plans, but, provided government continues to cut spending, it has the benefit (from a conservative’s point of view) of shrinking the state’s role over time.

 

Apart from questions of fairness, cutting top tax rates is an inferior way to increase spending, because the rich have a higher propensity to save. Tax reductions should be targeted specifically at the poor if one wants the money to be spent to stimulate the economy.

 

In fact, the best option of all is for the government to spend the money itself. Governments can do this consistently with a medium-term deficit-reduction plan by making a crucial distinction between their budgets’ current and capital accounts. The current account covers spending on services and perishable goods that produce no assets. The capital account is for buying or building durable assets that give a prospective future return. The first is a charge on taxation; the second is not.

 

If today’s accounting rules are too insensitive to make this distinction, a separate entity could do the investing. A national investment bank would be capitalized by the government, borrow from the private sector, and invest in infrastructure, housing, and “greening” the economy. This would simultaneously plug a hole in demand and improve the economy’s long-term growth prospects. There are signs that officials in the UK and the United States are starting to move in this direction.

 

If nothing works, it will be time to sprinkle the country with what Milton Friedman called “helicopter money” – that is, put purchasing power directly into people’s pockets, by giving every household a spending voucher with an expiration date. This would at least keep the economy afloat pending the development of the longer-term investment program.

 

It would be better if such schemes could be agreed upon by all by G-20 countries, as was briefly the case in the coordinated stimulus of April 2009. If not, groups of countries should pursue them on their own.

 

The European Union desperately needs a growth strategy. Its current bailout schemes only help countries like Greece and Italy to borrow money cheaply in the face of prohibitively high market interest rates, while the schemes’ insistence on more budget-deficit reduction in these countries will reduce European purchasing power further. The recipient governments will have to cut their spending; the banks will have to take large losses.

 

In the long run, the eurozone must be recognized as a failed experiment. It should be reconstituted with far fewer members, including only countries that do not run persistent current-account deficits. Everything else that has been proposed to save the eurozone in its current form – a central treasury, a monetary authority that does more than target inflation, fiscal harmonization, a new treaty – is a political pipe dream.

 

 

 

The banks, however, are not just part of the problem, but an essential part of the solution. The same institutions that caused the crisis must help to solve it, by starting to lend again. With global demand flagging, the priority has to be recovery, without abandoning the goal of reform – a difficult line to tread politically.

 

The common ground of reform is the need to re-regulate the financial services industry. In the run-up to the crisis, experts loudly claimed that “efficient” financial markets could be safely left to regulate themselves. Reflecting the freebooting financial zeitgeist that prevailed at the time, the International Monetary Fund declared in 2006 that “the dispersion of credit risk by banks to a broader and more diverse group of investors…has helped make the banking and overall financial system more resilient…” As a result, “the commercial banks may be less vulnerable to…shocks.”

 

It is impossible not to hear in such nonsense the cocksure drumbeat of the Money Power, which has never failed to identify the public interest with its own. For 50 years after the Great Depression of the 1930’s, the Money Power was held to account by the countervailing power of government. At the heart of the political check was America’s Glass-Steagall Act of 1933.

 

Glass-Steagall aimed to prevent commercial banks from gambling with their depositors’ money by mandating the institutional separation of retail and investment banking. The result was 65 years of relative financial stability. In what economists later called the “repressed” financial system, retail banks fulfilled the necessary function of financial intermediation without taking on suicidal risks, while the government kept aggregate demand high enough to maintain a full-employment level of investment.

 

Then the Money Power struck back, aided and abetted by its apologist cohort of economists. The Big Bang of 1986 in London ended the separation of banking functions in the United Kingdom. After prolonged lobbying by the financial-services industry, US President Bill Clinton repealed Glass-Steagall in 1999. From that point on, commercial and investment banks could merge, and the composite entities were authorized to provide a full range of banking services, including underwriting and other trading activities.

 

This was part of a wave of deregulation that swept away Franklin Roosevelt’s promise to “chase the money changers from the temple.” Clinton also refused to regulate credit-default swaps, and the US Securities and Exchange Commission allowed banks to triple their leverage. These three decisions led directly to the sub-prime extravaganza that brought down the US banking system in 2007-2008.

 

Since that crash, efforts have been made to reconstruct the dismantled system of financial regulation in order to prevent the “over-lending” that led to the collapse. The new doctrine is called “macro-prudential regulation.” Under an international agreement known as Basel III, banks are to be required to hold a higher ratio of equity capital against “risk-weighted assets,” and leverage is to be limited to a smaller percentage of such assets. National regulators are exploring ways to vary ratio requirements over the business cycle, and have started subjecting banks to regular “stress tests.”

 

In the UK, a Financial Policy Committee within the Bank of England is to monitor the “systemic risk” of financial failure, with a Prudential Regulatory Authority supervising systemically important institutions. According to monetary economist Charles Goodhart, a significantly faster-than-normal growth rate for bank credit, house prices, and leverage will give the authorities sufficient warning of impending crisis.

 

The new orthodoxy places its faith in regulators’ ability to improve on banks’ measurement of risk, while leaving the structure of the banking system unchanged. But, when it comes to upping equity requirements against “risk-weighted assets,” who is to do the weighting, and according to what methodology?

 

Goodhart concedes that banks’ “risk weightings” in the pre-recession period were subject to political pressure and “financial-industry capture and manipulation.” This is inevitable, because, as John Maynard Keynes pointed out, the “riskiness” of many investments, being subject to inherent uncertainty, is immeasurable. In short, the new regulatory philosophy replaces the illusion that banks can safely be left to manage their risks with the illusion that regulators will do it for them.

 

Meanwhile, initial enthusiasm for restoring Glass-Steagall – breaking up banking functions into separate institutions – has fallen by the wayside. It is only logical that banks with state-guaranteed deposits should be safe and boring, with other necessary, but risky activities hived off to separate companies. But little progress has been made in (re)implementing this idea.

 

The “Volcker rule,” whereby commercial banks would be barred from trading on their own account, and from owning hedge funds and private-equity firms, languishes in Congress. In the UK, an Independent Commission on Banking, headed by Sir John Vickers, rejected separation of retail from investment banking, recommending instead “ring-fencing” deposits from the investment arms of universal banks.

 

Trust-busters argue that such “Chinese walls” always break down under pressure, owing to huge shareholder demand for universal banks to boost profits at the expense of a sound commercial banking core. And senior executives will still have a legal obligation to maximize profits. The Vickers commission’s proposals also depend on sophisticated regulation, which assumes, against history, that regulators will always be one step ahead of bankers.

 

The Money Power never surrenders easily. Whether relying on regulation, or gesturing towards institutional separation, most proposals for banking reform remain at the drawing-board stage, and are sure to be emasculated by financial lobbies.

 

Moreover, whatever their intrinsic merits, none of these proposals addresses the global economy’s most immediate problem: undersupply, not oversupply, of credit. In other words, the challenge is to revive lending growth in full awareness that we must begin devising ways to rein it in.

 

If you missed it, watch the debate online at Youtube

 

The resulting damage over the past four years has been huge. The world economy contracted by 6 per cent between 2007 and 2009, and recovered 4 per cent. It is 10 per cent poorer than it would have been, had growth continued at the rate of 2007, and the pain is not yet over. Today, we are in the first stages of a second banking crisis. It may already be too late to avoid a “double dip”, but it may still be possible to avoid a triple dip. For this we need a robust intellectual analysis of what is required to ensure durable recovery, and the collective political will to implement it.

 

Backdrop to the crisis

 

Economics is in a mess. With the shattering of the dominant Chicago School paradigm, whose rational expectations hypothesis ruled out, by assumption, the kind of collapse we have just experienced, two old masters, Friedrich von Hayek and John Maynard Keynes, have risen from the dead to renew the battles of the 1930s, equipped this time with explanations for what has gone wrong. We can label these “money glut” and “saving glut”.

 

The Hayekian argument for the slump is that lax monetary policy made it possible for the commercial banks to lend more money to businesses than the public wanted to save out of its current income. Hence, a whole tranche of investments – “malinvestments”, Hayek called them – was being financed by credit creation, not genuine saving. This led to a bubble in the real estate and financial sectors which powered a consumption boom. When (belatedly) the money tap was turned off, the bubble burst and the American economy slumped. The slump is simply the liquidation of the unsound investments.

 

By contrast, the problem for Keynesians was not insufficient saving, but insufficient investment. Investment is governed by uncertainty, while saving is a stable fraction of income. Keynes’s economy tips over into recession when, for some reason, profit expectations decline relative to the volume of saving being done. Businesses start to prefer liquidity to investment. This pushes up the rate of interest, or cost of borrowing, just when you want it to come down. Saving and investment are then brought back into balance, not by a fall in interest rates, but by a fall in incomes. The recession of 2008-2009 was caused by a collapse in investment, not by overindebtedness; overindebtedness was a consequence, not a cause.

 

Both explanations have an international dimension. The Hayekian story starts with the overissuing of dollars by the US Federal Reserve, made possible by the dollar’s role as the world’s leading reserve currency. This enabled Americans to live beyond their means and to spend more than they produced.

 

The Keynesian story starts with Chinese oversaving. The Chinese save a much higher proportion of their incomes than their economy, as organised, can absorb. It was the voluntary recycling of excess Chinese savings into the US economy by means of the Chinese central bank’s purchase of US Treasury bills which allowed the United States to become the world’s “consumer of last resort”. The “money glut” in the US was a consequence, not a cause, of the more fundamental “saving glut” in China.

 

The two stories are derived from contrasting theories about how a market economy works. The first sees it as a self-regulating mechanism, in which the “invisible hand” smoothly channels the self-interested actions of individuals towards a social optimum in the absence of monetary disturbances. The Keynesians accept the social value of the market system, but deny that, in the presence of irreducible uncertainty, it is optimally self-regulating. The “invisible” hand guides economies not to a social optimum but to “underemployment” equilibrium. As such, government intervention is needed to ensure full use of potential resources.

 

On a cool view, there are elements of truth in both explanations of the recession. We do not have to choose between American profligacy and Chinese frugality. Our policies for recovery have to deal with both contributions to the unravelling of prosperity.

 

Austerity v stimulus

 

The differences just described over the origin of the crisis underpin the present debate between austerity and stimulus. According to Meghnad Desai, writing in the Financial Times of 15 September, “The long recession is a Hayekian phenomenon and not a Keynesian one . . . The need is to deleverage, not to spend.” The private and public sectors alike need to increase their saving, even though this will reduce aggregate demand in the short run. Letting assets find their proper value will bring genuine demand at realistic prices and punish those who have taken wrong decisions.

 

There will be more pain in the short term, but the Keynesian alternative of stimulus delays the adjustment, unfairly forcing taxpayers to pay the price of rescuing those who took too much risk. The boom was the illusion; the slump is the opportunity to liquidate the malinvestments.

 

To this, Keynesians pose two objections. First, they deny that there was “too much” spending in the US economy before the collapse.

There were no signs of general overheating: inflation was low, and there was no shortage of labour. What they would concede to the Hayekians is that cheap money made possible a great deal of misdirected, or speculative investment, which fuelled a wealth-driven consumption boom. But this is not the same as saying that there was overinvestment in the strict sense that further investment would have yielded a zero rate of return, or that there was too much consumption in general. It is absurd to believe that the demand for goods and services of those 46 million Americans living below the poverty line had reached the point of saturation. The houses and construction facilities built in the bubble economy are still there: they require an increase, not a reduction, in the incomes of the low-paid in order to become “affordable”.

 

But more fundamentally, Keynesians argue that, even if the Hayekian diagnosis is right, the remedy of austerity is wrong. It derives, they say, from the medieval medical practice of bleeding a sick person to purge the rottenness from his blood – a species of cure that frequently led to the death of the patient. Lionel Robbins, retracting his opposition to Keynesian stimulus policies in the 1930s, wrote:

 

Assuming that the original diagnosis of excessive financial ease and mistaken real investment was correct – which is certainly not a settled matter – to treat what developed subsequently [by austerity policies] was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond on the ground that his original trouble was overheating.

 

(Compare this with the German finance minister, Wolfgang Schäuble: “You can’t cure an alcoholic by giving him alcohol.”) The point is this: if both the government and the private sector are trying to increase their saving at the same time, you don’t just liquidate the bad investments, you kill the economy as well, by reducing national income until everyone is too poor to save.

 

That is why I have been arguing in the UK that when private enterprise is asleep, for lack of effective demand, the state must step in to stimulate the moribund investment machine back into lively activity.

 

The truth is that the policy of all-round “cutting down” increases the problem of indebtedness. The bond markets have diagnosed accurately that, in the absence of growth policies, one lot of debts after another will become “unsustainable”. Both the national debt and the debts of private institutions will shrink automatically as a fraction of national income if national income grows, and conversely will grow if it shrinks. Growth, not debt reduction, should be the chief aim of economic policy today. Where there are too many debt collectors, they end up ruining themselves. The eurozone today is awful witness to this truth.

 

With austerity in the ascendant, the world recovery is petering out. Europe is on the edge of a precipice, in a feedback loop from bank insolvency to an explosion of sovereign debt to a second round of bank insolvency. The United States is in little better shape, with its fiscal policy paralysed and the markets expecting a Japanese-style stagnation.

 

Latin America, the Middle East and Russia are benefiting from a commodity boom. Of their main markets, however, the US and Europe are hardly growing, and China is slowing down as Beijing tries to rein in an inflationary bubble in real estate, and because its export-led growth depends on the continuing increase in American and European demand. If China’s voracious appetite for commodities slows, growth in Latin America, the Middle East and Russia will grind to a halt, which in turn will limit demand from them for Chinese goods. So the circle of pain widens, as each misfortune feeds back on itself.

 

The plain fact is that there is too little aggregate demand in the world, and the net effect of all the policies being pursued is to reduce it further. So, what will the future bring?

 

We know what happened in the 1930s: the world economy broke up. The conventional wisdom is that this is impossible today under any circumstances. The cliché has it that economic integration is irreversible; that the revolution in information and communications is ineluctably turning the world into a “global village”. However, this benign prospect ignores the possibility of great crises and collapses. People were saying exactly the same thing in 1914. Historically, globalisation has come in waves, which recede under the impact of crisis and catastrophe as economic life retreats to the relatively safe haven of national jurisdictions.

 

We have reached the end of that phase of globalisation in which we dealt with the problem of permanently mispriced currencies by means of recycling mechanisms that pumped up speculative bubbles. But what follows it? There are two alternative hypotheses, which may be described as Disintegration and Co-ordination.

 

The first hypothesis is that, as we fail to solve our problems globally, the global economy will start to fragment. At present, domestic demand is being suppressed both by countries that depend heavily on export-led growth and by countries that are trying to reduce their current account deficits. What this signals is that the global authorities are engaged in a simultaneous effort, for different reasons, to reduce aggregate demand.

 

This is completely the wrong policy. Christine Lagarde, the new managing director of the International Monetary Fund, is right to argue that fiscal retrenchment in the teeth of a recession is suicide. The break will come when the deficit countries, unable to endure any further “bleeding”, start to resort to currency depreciation and protectionism. If the eurozone fails to organise growth policies, Greece and possibly other eurozone countries will resume their monetary and trade independence. Currency and trade wars will erupt across the globe: indeed, these wars have already begun.

 

The second hypothesis, Co-ordination, is what Gordon Brown calls a “G20 growth compact”. Essentially, he is calling for a revival of the spirit of international co-operation which produced the stimulus of 2009 and halted the slide into another Great Depression.

 

Elements of such a compact would include a reform of the global monetary system, aiming to end the era of current account imbalances; a reform of the financial system, aiming to avoid the excesses of bank lending that triggered the crisis; and macroeconomic policies that aim to boost world demand in the short run.

 

Progress has come on the second item. Basel III has accepted the need for the banks to hold more capital against their liabilities. Individual countries have also began to beef up their regulatory systems. In the UK, the Vickers report has proposed splitting the retail from the investment functions of banks. Hayek would have approved.

 

The more fundamental problem is the political power of the big banks. Not only does finance have to be reformed, it must be tamed. Winston Churchill put it well in 1925, as chancellor of the exchequer: “I would rather see finance less proud and industry more content.” So far no government has had the guts to stand up to the banks. This suggests that financial re-regulation will be emasculated.

 

On the other two items, there is no progress to report at all. Reform of the world monetary system needs be based on a grand bargain, mainly between China and the US, on reserves and exchange rates, but there is no sign yet of any serious attempt to achieve this. As for the third item, the only macroeconomic co-ordination is in the direction of cutting down, not building up, the world economy. There is no investment in growth.

 

Yet the world economy cannot cut its way out of recession: it has to grow its way out. If the bond markets force deficit reduction programmes on highly indebted governments, states must look to alternative instruments – such as national or regional investment or infrastructure banks – to mobilise private savings going to waste for want of profitable investment opportunities.

 

Disintegration scenario

 

Sovereign wealth funds and pension funds would invest in growth if there was any growth going on. As it is, they invest in government debt, which carries low yields but is at least relatively safe. The former US deputy Treasury secretary Roger Altman has made the point that historically low yields on long-term government debt in the US, the UK and Germany can be explained only by anticipation of “negligible demand for capital”.

 

Of the two scenarios, Disintegration is the more likely. This is not just because political leadership is not up to the job of forging a global compact, but because the adjustments required of our current national economic models are too great to be undertaken voluntarily. Americans will need to consume less and export more; China and Germany will have to consume more and export less. Such change requires a fundamental rethinking of ways of living into which all three countries are locked.

 

In the US case, adjustment will require a break with a credit-fuelled economy, which is the only way American capitalism has of dealing with the vast inequalities of wealth and income that it has created by outsourcing most of its manufacturing to low-wage countries. There is little sign, however, of the US being willing to rethink its version of capitalism.

 

In the case of the Chinese, their country’s low consumption ratio, as Michael Pettis, on his blog China Financial Markets, points out, is “fundamental to the [Chinese] growth model, and the suppression of consumption is a consequence of the very policies – low wage growth relative to productivity growth, an undervalued currency and, above all, artificially low interest rates – that have generated the furious GDP growth”.

 

Germany, too, is locked in to export-led growth, and does not seem fully to understand that if it beggars its European neighbours by running a permanent export surplus, it will end up by beggaring itself.

 

If China and Germany insist on being 21st-century mercantilists – exporting more than they import – the rest of the world will start to protect itself against them. Germany’s policy will lead to the breakdown of the eurozone, China’s to the breakdown of the world trading and payments system.

 

The two scenarios – Co-ordination and Disintegration – have in common that they presuppose more reliance by countries or groups of countries on domestic sources of growth, and less on foreign trade. That is what we mean when we talk of a more balanced world economy. The sole question is whether the retreat from the wilder shores of globalisation will be orderly or disorderly: whether we drift into the bloc economics of the 1930s, or whether we have the wisdom to build a managed and modified form of globalisation, free from the illusion that everything can be left safely to the markets.

 

And here’s the point – a disorderly, acrimonious retreat from globalisation is bound to overshoot the mark, reviving the economics and the politics of the 1930s; but leading, in an era of nuclear proliferation, to consequences that are even more terrifying. So we must resolutely work for the best, without illusion, and with only modest hope.

 

 

In structure, the book is a bit like a medical treatise: the symptoms are identified, their causes diagnosed, the cures prescribed. However, the science is a bit of a veneer. Sachs is a very political doctor. This does not mean he has written a bad book. He is a fine economist and statistician, and if you want to stockpile facts and arguments for radical advocacy, this is the book for you. I had hoped, though, for something more arresting than a millennium manifesto for the Democratic party.

 

It is also a very American book. This is not just because it is exclusively about the United States – with the existence of a few European countries acknowledged occasionally as reference points; it is suffused with classic American optimism. The "American people" are good, but policy has been captured by the "interests". Dethrone the interests and the goodness of the people will assert itself. American conservatives and radicals both sing to this hymn sheet, differing only about the source of the evil: for the Tea Party it is "big government", for Democrats such as Sachs it is big business. Both find difficulty in explaining why the good people are so often duped by one or the other.

 

Sachs's list of American diseases is familiar: no jobs or bad jobs for those with poor education; decaying infrastructure; collapse of saving; lagging educational standards; increasing inequality; soaring healthcare costs; rampant corporate dishonesty. The diagnostician traces the source of these evils to the "free market fallacy" leading to "Washington's retreat from public purpose"; to the "new globalisation" which cost jobs, lowered wages, and skewed rewards to the very rich; to social and ethnic fragmentation; and to the domination of politics by "corporate lobbies" and "spin masters of the media", who have distracted the American people with the "relentless drumbeat of consumerism".

 

Chapter eight, on the techniques of mass persuasion, is full of fascinating details. Did you know that Edward Bernays, the pioneer of public relations and techniques of hidden persuasion, was Freud's nephew? Or that the average American "consumes" information for 11 hours, 48 minutes a day? Or that the internet rewires our neural networks, making us less able to concentrate, and monitors our tastes, giving advertisers unrivalled opportunities to target their messages to its users? All of which should, as they say, give grounds for concern.

 

Having diagnosed the diseases, our clinical economist writes out his prescriptions. These aim to replace the "distracted" society with the "mindful" society. "Mindfulness", we learn, comes in eight dimensions, and is conveyed along three paths: cognitive, meditative, and practical. These paths lead to eight economic goals for the next 10 years – to "raise employment and quality of work life", "improve the quality of and access to education", "reduce poverty", "avoid environmental catastrophe", "balance the federal budget", "improve governance", "national security", and "raise America's happiness and life satisfaction". The social reform goals can be reconciled with the balanced budget requirement only through a heavy increase in taxes on the rich. Sachs calls for an end to the Bush tax cuts for those with incomes over $250,000, and an increase in the top rate of income tax to 40%, a wealth tax, closing of tax loopholes, tightening tax compliance, and increased taxes on oil and fossil fuels, as well as substantial cuts in defence spending.

 

Implementation of these ambitious reforms calls for "seven habits of highly effective government". (I can just imagine Sachs and his multi-disciplinary, multi-tasked team jogging down Riverside Drive in New York.) Government must set clear goals and benchmarks, mobilise expertise, make multi-year plans, pay attention to the far future, emasculate the power of the business lobbies, rebuild public management of public projects, and decentralise operational control of programmes to the states, while retaining central tax collection. An idea worth extracting from this mind-numbing regimen is that presidential state of the union speeches should always contain a section describing the implications of actions today for an average American 40 years hence.

 

Extrication of American politics from the clutches of the "corporatocracy" will require the provision of public money for campaign financing, free media time, a ban on campaign contributions from lobbying firms, and a stop to the "revolving door" between lobbying firms and federal employment. However, Sachs doubts whether effective government can be achieved without the rise of a "credible third party" to break the corrupted Republican-Democratic duopoly. He cites John Anderson in 1980, Ross Perot in 1992 and 1996, and Ralph Nader in 2000 and 2004 as precedents, but prudently omits George Wallace, the racist governor of Alabama, who, in 1968, was the last independent presidential candidate to achieve any votes in the electoral college. Theodore Roosevelt in 1912 would have served his purpose better.

 

There are at least two omissions from the doctor's diagnosis. The first is that he ignores the role of inadequate demand in causing the current high level of unemployment and unwanted part-time employment, treating it purely as a supply-side problem. Thus, while aiming to reduce unemployment from 9.4% to 5% by 2015, he rejects "macroeconomic measures to boost aggregate demand, including more fiscal stimulus and quantitative easing by the Fed". Instead he offers various supply-side reforms, such as putting "millions of young people currently unemployed" back in school or college, increased job sharing, and job retraining schemes. But current unemployment is both a supply-side and a demand-side problem. Sachs's dislike of Bush-era budget deficits, which combined huge increases in military spending with tax cuts for the rich, is understandable, but to suppose that supply-side measures alone will halve unemployment in four years' time is pie in the sky.

 

Second, Sachs's diagnosis of America's ills understates the deleterious effect of globalisation. He doesn't question the economics or morality of offshoring American production abroad, regardless of its consequences for American jobs or real wages, simply saying that the winners should compensate the losers. Not only has this not happened, but it is increasingly unlikely to happen, because globalisation has greatly increased the political clout of the winners. Since the 1980s owners of capital have enjoyed not just a big rise in pre-tax earnings, but a substantial cut in tax rates, taking inequality back to levels last seen before the First World War. This has made the task of social democrats like himself that much more difficult. The United States of the 1950s and 60s, which Sachs looks back to as a golden age, did not transfer production abroad, protected itself against imports, and had stringent immigration controls. The wealthy were less rich and less powerful, and there was strong "countervailing" power in the trade unions. All this was swept away by globalisation. But Sachs fails to draw the pretty obvious lesson that globalisation actually destroyed the basis of the plural American society he admires, leaving the "American people" impotent to affect political outcomes.

 

Finally, Sachs, in my view, has an inadequate grasp of social health or "wellbeing". He identifies the good society with the happy society, praises the King of Bhutan for making "Gross Domestic Happiness" his goal, and faults Americans only for their deluded belief that happiness can be achieved by ever "higher take-home pay and consumption of goods". But there are two problems with making happiness the ultimate goal of economic activity. First of all, we don't actually know enough about what makes people happy. Perhaps everyone living to 90 will increase the sum of "life satisfaction", perhaps not. Second, happiness is not the same as "wellbeing", still less is it the same as "goodness". The ancient Greek concept of eudaimonia, loosely translated as "happiness", is an admirable and desirable state of being, not a subjective state of mind. So "clinical economics" cannot tell you either how to be happy, or why being happy is good. For the latter one needs a philosophy of the good life, which the good doctor lacks.

 

 

The two were long-standing political allies, and Darling had served under Brown amicably as chief secretary to the Treasury from 1997-98. Yet Brown saw him as a stop-gap chancellor, keeping the seat warm for his protégé Ed Balls, newly elected to parliament, who needed to acquire ministerial experience. That Darling stayed until the end was the result of Brown's political blunder in not calling a general election in 2007, when he could have won. The British phase of the global crisis started soon after that. By the time Brown tried to remove Darling, in 2009, it was too late.

 

Brown stalks Darling's story as a continually disturbing presence, impossible to cast off but impossible to settle down with. The book will be remembered, if at all, as an unflattering portrait of him as a political leader. Darling puts much of the blame for Labour's debacle in 2010 on his boss - on his chaotic work habits, his paranoia, his "attack dogs" (Charlie Whelan and Damian McBride) who "briefed" against his supposed enemies, his penchant for consulting with small groups and playing them off against each other, his dithering, his failure to use the cabinet for collective discussion, his political blunders, and so on.

 

All this may be true, or partly true, but it is only one side of the story, and Brown has not told his version of events (his book Beyond the Crash was devoid of politics). In fact, he soon lost confidence in Darling's ability to stand up to Treasury orthodoxy, especially once the economic tsunami got going in 2008. Whether a Brown-Balls partnership would have made a better fist of things between 2007 and 2010, it is impossible to say. Given the constraints, Labour did not do badly, and this is reflected in the inconclusive result of the 2010 general election. But the politics of Brown and Darling's management of economic policy were terrible. From the summer of 2008, there was an all-too-visible rift between the Treasury View and the Brown View, with Darling caught in the middle. The lack of a coherent narrative undermined the public's confidence in the government's ability to handle the financial crisis.

 

What exactly was it they disagreed about? It is hard to get a very clear sense of this from Darling's somewhat disjointed storyline. In headline terms, the conflict arose from Brown's determination to portray the dispute between Labour and the Conservatives as being one of "investment v cuts" and Darling's recognition that Labour would have to cut, too. Brown accepted, or came to accept, the need to slash the growing budget deficit, but to him presentation and timing were crucially important. That is why he was furious when Darling, on holiday in the Hebrides in August 2008, was trapped by a Guardian journalist into saying that conditions were "arguably the worst they've been in 60 years", spun in the headline into "Economy at 60-year low, says Darling". (The choice of 60 years illustrates a carelessness with dates which runs through the book: 1949 was certainly a year of economic troubles, but by no means the start of a big downturn. Eighty years would have been accurate.)

 

Yet presentation and timing do not get to the heart of the matter. Both men were trapped by the lack of an accepted theory with which they could justify rising public deficits in a slump. Darling writes: "In late 2008, I was influenced hugely by Keynes's thinking, as indeed were most other governments dealing with the fallout from the crisis." Stimulus policies, applied nationally and globally, averted a slide into another Great Depression, but the cost to governments of keeping insolvent firms afloat and unemployment down became dreadfully large, calling into question the sustainability of public finances. So, from mid-2009, Keynes was put back in the cupboard and the making of public policy was handed to the bond markets, which demanded austerity. Darling accepted the logic of this and set the Treasury the task - congenial, considering its history - of "balancing the budget". Brown accepted the logic, too, and yet found it intolerable. "I will not be another Philip Snowden," he raged, referring to Labour's pre-Keynesian, budget-balancing chancellor of 1931.

 

However, because he could neither overthrow Darling nor suggest a coherent alternative, Brown finally had to put the best face he could on his chancellor's deficit-reduction strategy. Darling's last budget, in March 2010, aimed to halve the structural deficit by 2013-2014 in a series of yearly steps. In practice, George Osborne's commitment in his first budget to eliminate it entirely by 2014-2015 was not much different, except for the relish with which it was undertaken. Both plans were equally dependent on estimates of structural deficits and growth forecasts for years ahead which were little better than guesses.

 

Back from the Brink will be read as a disobliging portrait of a defeated political leader. This is a pity, not only because there is a great deal of admiration for Brown mixed up with the resentment, but also because Darling offers good inside accounts of many other aspects of his chancellorship. His description of the failure of Northern Rock in September 2007, and the dysfunctional system of financial regulation that did not anticipate it or understand its ramifications, is particularly notable. He also refutes the charge that Labour's pre-recession spending had become profligate, but concedes that it assumed "tax receipts would continue to flow in from the financial sector".

 

The book points to the huge difficulty of making sensible policy in the continual glare of the media spotlight as the press thrived on the crisis. Premature disclosure of the rescue plan for Northern Rock by the BBC's Robert Peston "precipitated the first run on a British bank in more than a century". (Wrong - there were runs on the retail banks in 1914.)

 

For a politician, Darling writes well, and his story is agreeably if sparsely sprinkled with choice anecdotes and tart observations - the literary equivalent of raising those bushy eyebrows. My favourite is Tony Blair's description of talking to Brown as being like having dental treatment without anaesthetic: "The drilling goes on and on."

 

And what about Darling? He emerges as able, decent and thoughtful, but he lacked the ability to think "outside the box" that is essential to command Treasury officials who are superb at thinking within a framework of fixed ideas. Nigel Lawson was able to do this as chancellor, and Brown, at his best, could also do it. Darling was a safe pair of hands. In those thousand days, however, one needed something more.

 

 

These are essentially refinancing mechanisms. Heavily indebted eurozone members can apply to borrow from them at less than the commercial rate, conditional on their committing to ever more drastic fiscal austerity. Principal and interest on outstanding debt have been left intact. Thus, creditors – mainly German and French banks – are not expected to suffer losses on their existing loans, while borrowers gain more time to “put their houses in order.” That, at least, is the theory.

 

So far, three countries – Greece, Ireland, and Portugal – have availed themselves of this facility. In mid-July 2011, Greece’s sovereign debt stood at €350 billion (160% of GDP). The Greek government currently must pay 25% for its ten-year bonds, which are trading at a 50% discount in the secondary market.

 

In other words, investors are expecting to receive only about half of what they are owed. The hope is that the reduction in borrowing costs on new loans, plus the austerity programs promised by governments, will enable bond prices to recover to par without the need for the creditor banks to take a hit.

 

This is pie in the sky. Unless a large part of its debt is forgiven, Greece will not regain creditworthiness. (Indeed, by most accounts, it is about to default.) And the same is true, albeit to a lesser degree, for other heavily indebted sovereigns.

 

Any credible bailout plan must require creditor banks to accept that they will lose at least half of their money. In the United States’ successful Brady Bond plan in 1989, the debtors – Mexico, Argentina, and Brazil – agreed to pay what they could. The banks that had loaned them the money replaced the old debt with new bonds at par value, which averaged 50% of the old bonds, and the US government provided some sweeteners.

 

It was write-offs and devaluations, not austerity programs, that allowed bond prices to recover. In the Greek case, creditors have yet to accept the need for write-offs, and European governments have provided them with no incentives to do so.

 

Germany’s opposition to debt forgiveness is thus bad economics, bad politics (except at home), and bad history. The Germans should remember the reparations fiasco of the 1920’s. In the Treaty of Versailles, the victorious Allies insisted that Germany should pay for “the cost of the war.” They added up the figures, and in 1921 they presented the bill: Germany “owed” the victors £6.6 billion (85% of its GDP), payable in 30 annual installments. This amounted to transferring annually 8-10% of Germany’s national income, or 65-76% of its exports.

 

Within a year, Germany had asked for, and obtained, a moratorium. New bond issues, following a big debt write-down in 1924 (the Dawes Plan), enabled Germany to borrow the money to resume payments. There then followed a crazy system: Germany borrowed money from the US in order to repay Britain, France, and Belgium, while France and Belgium used a bit of it to pay back Britain, and Britain used more of it to pay back the US.

 

This whole tangle of debts was finally de facto written off in 1932 in the middle of the global slump. But, until 1980, Germany continued repaying the loans that it had incurred to pay the reparations.

From the start, the economist John Maynard Keynes had been a fierce critic of the reparations policy imposed on Germany. He made three main points: Germany didn’t have the capacity to pay were it to regain anything like a normal standard of living; any attempt to force it to reduce its standard of living would produce revolution; and to the extent that Germany was able to increase its exports to pay reparations, this would be at the expense of the recipients’ exports. What was needed was cancelation of reparations and inter-Allied war debts as a whole, together with a big reconstruction loan to put the shattered European economies back on their feet.

 

In 1919, Keynes produced a grand plan for comprehensive debt cancellation, plus a new bond issue, guaranteed by the Allied powers, whose proceeds would go to victors and vanquished alike. The Americans, who would have had to provide most of the money, vetoed the plan.

 

The point to which Keynes kept returning was that the attempt to extract debt payments over many years would have disastrous social consequences. “The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable,” he wrote, “even if it does not sow the decay of the whole civilized life of Europe.”

 

History never repeats itself exactly, but there are lessons to be learned from that episode. Germans today would say that, unlike reparations, the Greek and Mediterranean debts were voluntarily incurred, not coerced. This raises the question of justice, but not the economic consequences of insisting on payment. Moreover, there is a fallacy of composition: if there are too many debt collectors, they will impoverish the very people on whom their own prosperity depends.

 

In the 1920’s, Germany ended up having to pay only a small fraction of its reparation bill, but the long time it took to get to that point prevented the full recovery of Europe, made Germany itself the most conspicuous victim of the Great Depression, and bred widespread resentment, with dire political consequences. German Chancellor Angela Merkel would do well to ponder that history.

 

 

 

Hayek’s apotheosis came in the 1980’s, when British Prime Minister Margaret Thatcher took to quoting from The Road to Serfdom (1944), his classic attack on central planning. But in economics there are never any final verdicts. While Hayek’s defense of the market system against the gross inefficiency of central planning won increasing assent, Keynes’s view that market systems require continuous stabilization lingered on in finance ministries and central banks.

 

Both traditions, though, were eclipsed by the Chicago school of “rational expectations,” which has dominated mainstream economics for the last twenty-five years. With economic agents supposedly possessing perfect information about all possible contingencies, systemic crises could never happen except as a result of accidents and surprises beyond the reach of economic theory.

 

The global economic collapse of 2007-2008 discredited “rational expectations” economics (though its high priests have yet to recognize this) and brought both Keynes and Hayek back into posthumous contention. The issues have not changed much since their argument began in the Great Depression of the 1930’s. What causes market economies to collapse? What is the right response to a collapse? What is the best way to prevent future collapses?

 

For Hayek in the early 1930’s, and for Hayek’s followers today, the “crisis” results from over-investment relative to the supply of savings, made possible by excessive credit expansion. Banks lend at lower interest rates than genuine savers would have demanded, making all kinds of investment projects temporarily profitable.

 

But, because these investments do not reflect the real preferences of agents for future over current consumption, the savings necessary to complete them are not available. They can be kept going for a time by monetary injections from the central bank. But market participants eventually realize that there are not enough savings to complete all the investment projects. At that point, boom turns to bust.

Every artificial boom thus carries the seeds of its own destruction. Recovery consists of liquidating the misallocations, reducing consumption, and increasing saving.

 

Keynes (and Keynesians today) would think of the crisis as resulting from the opposite cause: under-investment relative to the supply of saving – that is, too little consumption or aggregate demand to maintain a full-employment level of investment – which is bound to lead to a collapse of profit expectations.

 

Again, the situation can be kept going for a time by resorting to consumer-debt finance, but eventually consumers become over-leveraged and curtail their purchases. Indeed, the Keynesian and Hayekian explanations of the origins of the crisis are actually not very different, with over-indebtedness playing the key role in both accounts. But the conclusions to which the two theories point are very different.

Whereas for Hayek recovery requires the liquidation of excessive investments and an increase in consumer saving, for Keynes it consists in reducing the propensity to save and increasing consumption in order to sustain companies’ profit expectations. Hayek demands more austerity, Keynes more spending.

 

We have here a clue as to why Hayek lost his great battle with Keynes in the 1930’s. It was not just that the policy of liquidating excesses was politically catastrophic: in Germany, it brought Hitler to power. As Keynes pointed out, if everyone – households, firms, and governments – all started trying to increase their saving simultaneously, there would be no way to stop the economy from running down until people became too poor to save.

 

It was this flaw in Hayek’s reasoning that caused most economists to desert the Hayekian camp and embrace Keynesian “stimulus” policies. As the economist Lionel Robbins recalled: “Confronted with the freezing deflation of those days, the idea that the prime essential was the writing down of mistaken investments and…fostering the disposition to save was…as unsuitable as denying blankets and stimulus to a drunk who has fallen into an icy pond, on the ground that his original trouble was overheating.”

 

Except to Hayekian fanatics, it seems obvious that the coordinated global stimulus of 2009 stopped the slide into another Great Depression. To be sure, the cost to many governments of rescuing their banks and keeping their economies afloat in the face of business collapse damaged or destroyed their creditworthiness. But it is increasingly recognized that public-sector austerity at a time of weak private-sector spending guarantees years of stagnation, if not further collapse.

 

So policy will have to change. Little can be hoped for in Europe; the real question is whether President Barack Obama has it in him to don the mantle of President Franklin Roosevelt.

To prevent further crises of equal severity in the future, Keynesians would argue for strengthening the tools of macroeconomic management. Hayekians have nothing sensible to contribute. It is far too late for one of their favorite remedies – abolition of central banks, supposedly the source of excessive credit creation. Even an economy without central banks will be subject to errors of optimism and pessimism. And an attitude of indifference to the fallout of these mistakes is bad politics and bad morals.

 

So, for all his distinction as a philosopher of freedom, Hayek deserved to lose his battle with Keynes in the 1930’s. He deserves to lose today’s rematch as well.

 

 

 

On this topic, there is no shortage of expert plans – among them bond buy-backs, bond swaps, and the creation of Eurobonds, a European version of the “Brady” bonds issued by Latin American countries that defaulted in the 1980’s. What all such schemes amount to is piling one lot of bonds on top of another in an attempt to square the circle of Greece’s inability to pay, and to minimize the losses faced by its creditors – mostly European banks.

 

Every week, a preposterous coterie of European bankers and finance ministers drags itself from one capital to another to discuss which default/restructuring plan to adopt. Meanwhile, Greece’s agony continues, and the “markets” wait to swoop down on Portugal, Ireland, Italy, and Spain.

 

No one who is not well versed in financial legerdemain can make much sense of this battle of the bonds. But behind it lie two moral attitudes, which are much easier to grasp.

 

The first is traditional disapproval of debt. The oldest rule in personal finance is to avoid debt – that is, never spend more than you earn. Economists and moralists have been united in believing that you should actually spend less than you earn – in order to “save” for the proverbial rainy day or for old age.

 

Getting into debt was long associated with profligacy or fecklessness. And, if a person became indebted, it was a point of honour to repay the obligation when it fell due, by selling assets, reducing consumption, working harder, or some combination of the three. Indeed, it was often more than a point of honour: failure to repay debt on time landed the debtor in prison.

 

The same attitude governed institutional debt. Banks grew out of a practice by gold smiths and silver smiths, who, for a small price, accepted deposits for safekeeping. When they became lending institutions, their earliest rule was to keep almost 100% of cash reserves against their loans, so that they would not be caught short if most of their depositors decided to withdraw their money at the same time.

 

Similarly, before the introduction of limited liability in the nineteenth century, a company’s shareholders or partners were each liable for all of the firm’s debts, which severely restricted businesses’ willingness to borrow to finance trade.

 

For public finance, too, the orthodox rule was that budgets should always be balanced; except in emergencies, governments should never spend more than they “earned” in taxation. Again, it was a point of honour for governments to pay back such debts as they were incurred, whatever the sacrifice to the country. Until recently, the conventional view was that “mature” sovereigns always honoured their debts, while only banana republics failed to do so.

These historically embedded norms and practices were only slowly superseded. But, in the twentieth century, with greater security of conditions and continuous economic growth, it became normal for individuals, companies, and governments to borrow in anticipation of earnings – to spend money they did not have, but that they expected to have.

 

With fear of bank runs and defaults receding, banks’ reserve ratios became ever smaller, thus increasing their lending facilities. On this bedrock rose an imposing edifice of bond markets and banks that drove down the cost of finance, and thus sped up the rate of economic growth.

 

It was this system of financial intermediation whose near-collapse in 2008 seemed for many to justify the ancient warnings of the perils of indebtedness. In their exhaustive historical review of financial crises, Carmen Reinhart and Kenneth Rogoff write: “Again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.”

 

But there is a contrary moral attitude, the essence of which is that, whereas excessive debt is to be deplored, the blame for it lies with the lender, not the borrower. “Neither a borrower nor a lender be,” Polonius admonished in Hamlet. Lending money at interest was identified with “usury,” or making money from money rather than from goods and services – a distinction that goes back to Aristotle, for whom money was barren. The moneylender was the most hated figure in medieval Europe.

 

The last legal restrictions on taking interest on money were lifted only in the nineteenth century, when they succumbed to the economic argument that lending money was a service, for which the lender was entitled to charge whatever the market would bear. But the theory of usury survived in the view that it was morally wrong to extract some additional amount that was made feasible by the borrower’s weak bargaining position or extreme need.

 

These two moral attitudes confront each other today in the battle of the bonds. The demand for debt repayment confronts the philosophy of debt forgiveness. In the lender’s view, the 17% interest rate that Greece’s government now has to pay for its 10-year bonds accurately reflects the lender’s risk in buying Greek government debt. It is the price of past profligacy. But in the borrower’s view it is usurious – taking advantage of the borrower’s desperation.

 

The sensible middle position would surely be an agreed write-off of a portion of the outstanding Greek debt, combined with a five-year moratorium on interest payments on the remainder. This would immediately relieve pressure on Greece’s budget and give its government the time and incentive to put the country’s economy in order.

 

In the long run, however, we will have to answer the broader question that the eurozone’s various debt crises have raised: Is the social value of making finance cheap worth the days of reckoning for stricken debtors?

 

 

The reason the current strategy will fail was succinctly stated by John Maynard Keynes. Growth depends on aggregate demand. If you reduce aggregate demand, you reduce growth. This is what is happening.

 

When he assumed office in May 2010, the Chancellor claimed Britain’s government faced a loss of investor confidence that demanded fiscal retrenchment The initial reaction to his emergency Budget of June 2010 was favourable: on the markets gilt yields fell and Mr Osborne basked in the approval of the International Monetary Fund.

 

Yet these two crucial pillars of support for the coalition’s policy look shaky. First, the international technocrats now seem much less certain that the Chancellor is leading us out of recession. In its latest and most sophisticated study of fiscal austerity, the IMF concluded that it did have “contractionary effects on private domestic demand and GDP”.

 

This should hardly come as a surprise: IMF studies from 2009 and 2010 found the same. Potentially much more destructive, however, investors are also beginning to change their tune.

 

In the early days of the Eurozone sovereign debt crisis the markets did indeed identify fiscal profligacy as the problem. Investors demanded an austerity plan in Greece, and were delivered one in May 2010. The results have disappointed, however – with the continued shrinkage of the Greek economy leading to missed fiscal targets, despite aggressive cuts. Last month, the original bail-out programme had to be extended, as investors continued to flee Greek bonds.

 

When, in July, the crisis spread to Italy, many analysts were puzzled. Why should the only Eurozone country scheduled to run a primary fiscal surplus in 2011 be under attack? The message from the bond markets is clear: investors have begun to realise that austerity alone is proving a false trail. The royal road to creditworthiness runs not via cuts alone, but via growth.

 

These recent bond market developments should worry the Chancellor. His one-dimensional focus on austerity was once the government’s greatest asset. It is fast becoming its major liability.

 

Fortunately, he already has the tools he needs to change course.

As we have argued, a scaling-up of the government’s new Green Investment Bank – to become a full-scale National Investment Bank – can play a major role. Keynes advocated digging holes and filling them up again if the government could think of nothing better to do. But the coalition has already identified a more useful range of investments – like halving carbon emissions from 1990 levels by 2025.

 

The obstacle so far has been funding: the Treasury has provided the Green Investment Bank with only £3bn of capital and will not allow it to borrow. Yet here too the coalition is already close to a solution. Nick Clegg, deputy prime minister, recently began a debate over how to dispose of the government’s shareholdings in the UK’s bailed-out banks. Yet rather than his plan to distribute shares to voters, the government should use the proceeds of selling its stock to capitalise a full national investment bank.

 

This would be neutral for public debt and require no new deficit spending. With (say) £10bn and the power to borrow, the enlarged bank could begin to mobilise frozen private savings to offset the effects of fiscal contraction, while also preparing the economy for a greener future. This would not be a Plan B or even Plan C. Instead it would be Plan A+, to which all sides ought to be able to agree.

 

 

In fact, George Osborne unexpectedly inherited an economy ruined by the great global contraction which started in 2008. When he became Chancellor the British economy had shrunk by 5.5% from its pre-recession peak, and the budget deficit had risen from 2.5% of GDP to 10%, the second being a counterpart of the first. But it also soon became conventional to say that the Labour government’s revenue projections had been based on quite unrealistic growth expectations, and that therefore the ‘structural deficit’ – that bit of the deficit not due to the downturn – was nearer 8% than 2.5%. There is a lot of truth in this. But, pre-crash, the Conservatives did not challenge Labour’s revenue estimates. Osborne and Alastair Darling were equally fooled by the brittle buoyancy of the British economy.

 

The British economy started to recover from the recession in the last quarter of 2009. This recovery had nothing to do with the cuts, because they had not happened. The two most likely causes were the 21% depreciation of sterling against competitor currencies, and a £200bn injection of cash into the banking system, starting in February 2009. However, there is no golden light at the end of the tunnel.

 

Broadly speaking, we are bouncing along the bottom, with growth expected to slow down, not to speed up. It is still way below the trend growth rate of 2.5% a year. Unemployment has remained flat at 7.7%. Bank lending to British businesses contracted by 4.3% in twelve months to February 2011, and the effective rate on new mortgage lending, at 3.85%, was exactly the same as it was at the beginning of 2010. The FTSE 100 index is the same as it was just before the election. Britain is very much in the slow lane of global recovery, and this is all before the cuts have started to bite.

 

In 2010, both Darling and Osborne produced deficit reduction plans, mainly through spending cuts. The Labour chancellor Alastair Darling promised to take £73bn out of the economy in four years, Osborne to take out £112bn over the same period. But the cuts proper would only start in April 2011. Osborne claimed that his tighter reduction plan was necessary to restore the confidence of the markets –which by June 2010 were reeling from the Greek crisis. The important point to note is that in Osborne’s first year the bulk of public spending remained untouched. So far his Iron Chancellorship has been rhetorical. The extra pain is yet to come.

 

 

What will be the effect of reducing the deficit by £112bn in the next four years? The Osborne theory is that any reduction in government borrowing is equivalent to transferring money to the private sector. The private sector will have £83bn more (£112bn minus the £29bn in higher taxes) – to spend - to invest in and lend to businesses rather than the state. Workers released from the public sector will be absorbed in private sector jobs. Since private spending is more profitable than public spending and since, in addition, the tighter Conservative deficit reduction programme will boost confidence in the economy, the result will be a net increase in aggregate demand, and a higher growth rate. Fiscal contraction is the royal road to buoyant recovery.

 

The Keynesian view is the exact opposite. Taking £112bn. out of the economy will be a net subtraction from aggregate demand. The £83bn cuts in public spending will not be matched by an equivalent increase in private spending because their first effect will be to reduce employment, and hence reduce the national income. (The newly unemployed will earn less than before). So part of the money the government ‘saves’ will simply disappear as the national income shrinks. Fiscal contraction is the royal road to stagnation, not recovery.

 

These two theories are about to be tested. The Keynesians –among whom I number myself –will have to eat their words if growth picks up, and unemployment falls in the next twelve months, as £32bn is subtracted from the economy in taxes and spending cuts. Osborne should eat his words if there is no improvement in growth and unemployment, but he almost certainly won’t. If things fail to go his way, he will claim that a sound strategy was ‘blown off course’ by unforeseen events. Politicians always claim that it is the world which is wrong, not their policy.

 

Nevertheless, even the Chancellor will find it prudent to have Plan B up his sleeve if the economy continues to stagnate. (Though of course he will never admit to having it).Most analysts expect Plan B to be another bout of the ‘quantitative easing’ which helped stabilized the economy in 2009-10. So, despite the sharp, but probably temporary spike in inflation, I would expect the Bank to try again.

 

But monetary policy is a very uncertain instrument. It’s not the printing of money, but the spending of money that is important for recovery, and printing money does not ensure that it is spent, if the public is not in a spending mood. As Keynes graphically put it: ‘If…we are tempted to assert that money is the drink which stimulates the economy to activity, we must remind ourselves that there may be several slips between the cup and the lip’.

 

That is why we may need a Plan C. I have been advocating a National Investment Bank, with a mandate to invest in green projects, transport infrastructure, social housing, and export-oriented businesses. A limited fiscal commitment of say £10bn. over four years would allow the bank to spend say £100bn with conservative gearing, provided it was allowed to borrow. It would create a new class of bonds with a slightly higher yield than gilts, which would suit long-term investors like pension funds, while offering loans at slightly below the commercial rates. The Chancellor already possesses the necessary instrument in the Green Bank, but with a meagre capitalisation of £3bn and no borrowing power, it cannot do any good over the period of the cuts.

 

An investment bank of the kind I am suggesting would enable the Chancellor to continue to preach public austerity while silently undermining its depressive effects. And who could ask better than that?

 

 

When we in the West look outward, this remains our view. We condemn governments that silence, imprison, and even kill writers and journalists. Reporters Sans Frontières keeps a list: 24 journalists killed and 148 imprisoned just this year. Part of the promise we see in the “Arab Spring” is the liberation of the media from the dictator’s grasp.

 

Yet freedom of speech in the West is under strain. Traditionally, British law imposed two main limitations on the “right to free speech.” The first prohibited the use of words or expressions likely to disrupt public order; the second was the law against libel. There are good grounds for both – to preserve the peace, and to protect individuals’ reputations from lies. Most free societies accept such limits as reasonable.

 

But the law has recently become more restrictive. “Incitement to religious and racial hatred” and “incitement to hatred on the basis of sexual orientation” are now illegal in most European countries, independent of any threat to public order. The law has shifted from proscribing language likely to cause violence to prohibiting language intended to give offense.

 

A blatant example of this is the law against Holocaust denial. To deny or minimize the Holocaust is a crime in 15 European countries and Israel. It may be argued that the Holocaust was a crime so uniquely abhorrent as to qualify as a special case. But special cases have a habit of multiplying.

 

France has made it illegal to deny any “internationally recognized crimes against humanity.” Whereas in Muslim countries it is illegal to call the Armenian massacres of 1915-1917 “genocide,” in some Western countries it is illegal to say that they were not. Some East European countries specifically prohibit the denial of communist “genocides.”

 

The censorship of memory, which we once fondly imagined to be the mark of dictatorship, is now a major growth industry in the “free” West. Indeed, official censorship is only the tip of an iceberg of cultural censorship. A public person must be on constant guard against causing offense, whether intentionally or not.

 

Breaking the cultural code damages a person’s reputation, and perhaps one’s career. Britain’s Home Secretary Kenneth Clarke recently had to apologize for saying that some rapes were less serious than others, implying the need for legal discrimination. The parade of gaffes and subsequent groveling apologies has become a regular feature of public life.

 

In his classic essay On Liberty, John Stuart Mill defended free speech on the ground that free inquiry was necessary to advance knowledge. Restrictions on certain areas of historical inquiry are based on the opposite premise: the truth is known, and it is impious to question it. This is absurd; every historian knows that there is no such thing as final historical truth.

 

It is not the task of history to defend public order or morals, but to establish what happened. Legally protected history ensures that historians will play safe. To be sure, living by Mill’s principle often requires protecting the rights of unsavory characters. David Irving writes mendacious history, but Mill would have been horrified by Irving’s prosecution and imprisonment in Austria for “Holocaust denial.”

 

By contrast, the pressure for ‘political correctness’ rests on the argument that the truth is unknowable. Statements about the human condition are essentially matters of opinion. Because a statement of opinion by some individuals is almost certain to offend others, and since such statements make no contribution to the discovery of truth, their degree of offensiveness becomes the sole criterion for judging their admissibility. Hence the taboo on certain words, phrases, and arguments that imply that certain individuals, groups, or practices are superior or inferior, normal or abnormal; hence the search for ever more neutral ways to label social phenomena, thereby draining language of its vigor and interest.

 

A classic example is the way that “family” has replaced “marriage” in public discourse, with the implication that all “lifestyles” are equally valuable, despite the fact that most people persist in wanting to get married. It has become taboo to describe homosexuality as a “perversion,” though this was precisely the word used in the 1960’s by the radical philosopher Herbert Marcuse (who was praising homosexuality as an expression of dissent). In today’s atmosphere of what Marcuse would call “repressive tolerance,” such language would be considered “stigmatizing.”

 

The sociological imperative behind the spread of “political correctness” is the fact that we no longer live in patriarchal, hierarchical, mono-cultural societies, which exhibit general, if unreflective, agreement on basic values. The pathetic efforts to inculcate a common sense of “Britishness” or “Dutchness” in multi-cultural societies, however, well-intentioned, attest to the breakdown of a common identity.

 

Public language has thus become the common currency of cultural exchange, and everyone is on notice to mind their manners. The result is a multiplication of weasel words that chill political and moral debate, and leads to a widening gap between public language and what many ordinary people think.

 

The defense of free speech is made no easier by the abuses of the popular press. We need free media to expose abuses of power. But investigative journalism becomes discredited when it is suborned to “expose” the private lives of the famous, with no issue of public interest involved. Entertaining gossip has mutated into an assault on privacy, with newspapers claiming that any attempt to keep them out of people’s bedrooms is an assault on free speech.

 

You know that a doctrine is in trouble when even those claiming to defend it do not understand what it means. By that standard, the classic doctrine of free speech is in crisis. We had better sort it out quickly – legally, morally, and culturally – if we are to retain a proper sense of what it means to live in a free society.