Economies and the Three-Legged Stool

To be believable, any response to the global economic crisis must deal simultaneously with all three of the major problems we face — namely, the credit shortage, aging societies and global warming — in a single, internally consistent policy.

The public knows instinctively that a return to the pre-crisis economic model of high levels of credit and wasteful consumption is demographically and environmentally unsustainable. This sentiment makes them sensibly reluctant to respond to government-directed "stimulus" by spending more.

The public, unlike the experts who are working away in their separate cocoons marked “economy,” “aging” and “climate,” knows that the three problems interact with one another. And it knows that an attempt to solve one must be designed in a way that helps solve the other two, or we will end up wasting scarce political and economic capital.

Policymaking on these three related topics cannot be left, as at present, to financial experts, to demographers or to climate scientists, each arguing in separate fora, independently of one another.

It is for political leaders to bring these three strands together and present a new model of society based on a new model of consumption of goods and services. That is the intellectual challenge of our times.

Ideologies devised in the 19th or 20th century, when physical and human resources were virtually unlimited, are of little help to us in facing this 21st century challenge.

Keynes did not have to apply himself to the problem of climate change. Marx and Hayek did not have to concern themselves with aging societies.
In the brave new world we live in, many institutions have to do serious amounts of relearning — and rethinking. Take the German Bundesbank. It has criticized other countries for running large balance of payments deficits over the years.

Apart from the fact that countries that are developing rapidly have a good reason to run a payments deficit because they need to import machinery and capital to build a bigger, more productive infrastructure to support a bigger economy, the Bundesbank should not criticize balance of payments deficits as such.

Why? Because if Germany is to continue its policy of running balance of payments surpluses, someone else somewhere must run a deficit.

Surpluses force a country to buy foreign assets, and it is easier to make mistakes buying something abroad than when one buys at home, with which one is necessarily more familiar.

That said, I think the "Anglo Saxon" economists who are demanding that the German government stimulate its economy by encouraging more private spending should ask themselves how they reconcile this proposed stimulus with the other two major concerns of the present time — the aging of western societies and climate change.

The cost of pensions and health care will rise as Germany’s society ages, so it makes complete sense for Germany to accumulate surplus cash to meet these costs. The German birth rate is very low, and Germany must compensate for the inevitable decline in its taxpaying, working population by saving money and putting it aside for the time when these workers retire and are no longer paying as much in taxes.

Those American and other Keynesian economists who demand that Germans spend more and save less now, need to come up with a better answer to that dilemma. Does Paul Krugman really think it would be wise for Germany to blow all its savings on buying American exports today, when it has so many extra things that it knows it will have to use those savings to pay for tomorrow?

Likewise, if Germans and Chinese save more and spend less, fewer consumer goods have to be flown across the globe to Germany and China, and there will be less carbon emissions caused by the manufacture and disposal of these goods.

No matter how many initiatives are undertaken to increase the carbon efficiency of extra production, any extra production involves more carbon emissions than if the extra goods were not produced at all.

It is for national and global political leadership to present a new model of society and of consumption of goods and services. That is the intellectual challenge of our times.