Can Sovereign Borrowing Be a
Criminal Offence?
By Anthony de Jasay
There is a winding path in our
contemporary history from the Keynesian multiplier through the double-dip
recession, majority rule and sovereign debt default, to the penal
responsibility of a former Hungarian socialist premier for the excessive budget
deficit of his country—a path whose twists and switchbacks it is perhaps
instructive to survey.
Three generations of
economists have been brought up on the Keynesian mechanism of the economy. They
think in the terms John Maynard Keynes formulated
to describe the Meccano construction he put up—the propensity to consume, the
saving-investment identity, liquidity preference, the marginal efficiency of
capital—even when they are in substantive disagreement with Keynes about what
these levers really do and how they ought to be pulled to get certain results.
The domination of Keynes's model is not undeserved. It is clearer, less
ambiguous than its predecessors, it is far easier to teach to students and more
convincing to the man in the street because it holds out the prospect of simple
remedies against the ills of unemployment on the downside, and overheating on
the upside that a market economy is apparently so apt to catch.
Over the three years
2008-2010, most governments in Europe and America have been knowingly
swallowing big doses of the Keynesian remedies to pull their economies out of
recession. Some did so as a matter of deliberate choice; the U.S.A. is the
clearest example. Others, of which France is the most typical, merely allowed
their vast welfare overhang to act as an automatic stabilizer. With well over
50 per cent of GDP absorbed by government spending and independent of market
demand, and with the oncoming recession actually stimulating government
spending on unemployment benefits while government income falls as tax receipts
fall, the French-style modern welfare state generates the rising dissaving
needed to offset the falling private investment and consumption. This big government
is supposed to act as its own stabilizer. In fact, during the grim years of
2008 and 2009, France's GDP fell noticeably less than the Western European
average, and the country's mostly left-leaning intelligentsia had much
satisfaction in pointing out that a model biased toward "social
protection" is proving to be more stable and resistant to shocks than one
biased toward unfettered free markets.
However, the automatic
stabiliser effect of the welfare state involves an equally automatic swelling
of government debt, for the stabilisation operates through additional
government dissaving. A rough measure of this dissaving is the budget deficit.
Whether the deficit rises thanks to automatic shortfalls in tax revenues and
costlier social protection, or because governments deliberately pump up
anti-crisis spending programmes, the effect is the same. Over the three years
2008-2010, the sovereign debt (roughly, the cumulative budget deficit) of the
European states as well as of the United States rose by 20 to 30 percentage
points of their GDP, reaching 85 per cent in France and 100 in the United
Kingdom and also in the United States. Current economic consensus holds that
the 90 per cent level is critical and once beyond it, it is inordinately
painful if not impractical to work it down again.1 A
fundamental and almost sacrilegious question then arises: does the Keynesian
mechanism work as it was supposed to do? Do the stabilizers really stabilize?
Could it be that while the deficit ought to stimulate output and employment
through the effect of the Keynesian multiplier, the rising level of the
national debt acts as a kind of negative anti-multiplier that offsets the
stimulus?
We may soon be witnessing the
coming in the journals and textbooks of a "new paradigm" in which
macro-economic activity is governed, not by one multiplier, but two. One is the
old and familiar Keynesian one in which incremental government dissaving
increases aggregate demand by an amount greater than itself. The other—call it
the counter-multiplier—kicks in when the level of sovereign debt approaches the
worrying level. Some countries may start worrying at 60 per cent of GDP (which
they have agreed to do in the late lamented Maastricht treaty that no one took
seriously), while others, like Italy today, keep a poker face with sovereign
debt at 120 per cent. But once at the worry level, any incremental sovereign
indebtedness will actually decrease aggregate demand as industry gets
frightened and cuts investment and employment, and as households try to reduce
credit card and mortgage debt.
If this "new
paradigm" of the two multipliers is at all right, it brings a silver
lining with the black clouds. Whilst massive increases in the deficit and
monetary "easing" of unheard-of proportions fail to stimulate the
recovery and may in fact suffocate it, deficit-cutting may, contrary to
orthodox beliefs, act as a stimulant: a negative change in government deficit
multiplied by the negative multiplier would then produce rising aggregate
demand. If only protestations of fiscal rectitude and promises of balanced
budgets could be believed!
Under the "new
paradigm", there is no counter-cyclical excuse for the deficit. It is
plainly bad not only for the next generation which does not count for much in
democracies, but also for the present one, which is usually quite ready to vote
for it and shoot itself in the foot. In Hungary, which has been known to invent
some original ideas in the past, the question has now been raised: can a
government or its head be held responsible, and perhaps criminally responsible,
for running the national debt? The present centre-right government of Viktor
Orban is waiting for the courts to rule whether legislation to this effect is
constitutionally admissible.
In Hungary, over two four-year
terms of a socialist government from 2002 to 2010, the national debt was run up
from 53 to 80 per cent of GDP. With the sales of the "family silver",
i.e. state assets mainly to foreign buyers, and with inadequate maintenance of
the capital stock, national impoverishment was greater than this. Profligacy
peaked in 2006. The government of the ex-communist billionaire Ferenc Gyurcsany
looked like losing the general election, but with some bold promises of an
extra month of payments to all pensioners and other gestures of social
generosity, he "bought" re-election. (Soon afterwards in a
surreptitiously recorded closed-door speech to party cadres he admitted to have
"lied morning, noon and night."2) Buying an
election by taking the money from the electorate's own poorly lined pocket is
perhaps not a felony. Perhaps it is not even an indictable offence. But then
what is it? Unless Hungary were to legislate differently, it is nothing at all,
it is just normal practice under majority rule.
Politically correct Western
European opinion never forgave Hungary for giving Mr. Orban's centre-right a
two-thirds majority in the 2010 election. The language barrier is so
impenetrable that news agencies and foreign correspondents rely for information
and interpretation on a small soft-left core of Hungarian intellectuals well
versed in the jargon of political correctness. The very idea of making a head
of government like Ferenc Gyurcsany in some manner accountable for using
deficit finance to get himself re-elected turned in Western European media to
an appalling symptom of the anti-democratic leanings of the Hungarian
centre-right. Even the elite press from the Economist and the Financial
Times downwards, condemned it as authoritarian. An editorial in the
latter declared that such matters should be left to the courts—which is what
the Orban government has done by referring it to the constitutional court even
before benefiting from the advice of the Financial Times editorial.3
Chances are that no
legislation that would make it an indictable offence to use the nation's credit
and to steal money from the electorate to bribe it and get oneself re-elected
will get on to the Hungarian statute book. The evidence the prosecution could
ever muster would always be equivocal. This is a great pity, for such a law is,
to put it no higher, an urgent necessity, and not in Hungary alone.
Footnotes
1. For more
information on this question see the paper "The Real Effects of Debt"
by Stephen G. Cecchetti, M. S. Mohanty and Fabrizio Zampolli which was prepared
for the "Achieving Maximum Long-Run Growth" symposium sponsored by
the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 25-27 August
2011. Abstract.
2. See "Excerpts,
Hungarian 'Lies' Speech". BBC News, September 19,
2006. See also "'We
lied morning, noon and night' - PM's tape that left nation on brink" by Balazs Koranyi. The
Scotsman, September 20, 2006.
3. See "Orban
drags Hungary through rapid change," by Neil Buckley. The
Financial Times, February 7, 2011.
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