Last week, in Saarland, one of the smallest States in Germany, a bridge over a busy highway was closed off for traffic overnight, although it is used daily by circa 40.000 car drivers. The bridge is in acute danger of collapse. The situation immediately led to veritable chaos, although there is less traffic than usual because children are still on Easter holidays. Nonetheless, enormous traffic jams generate on the small detour roads. This situation will probably last for many more months, in fact it can take a whole year to repair the bridge (see here for a report).
Surprisingly, hardly anyone is asking any critical questions. The Minister for Transport calls upon the population to remain calm and patiently wait. Nobody asks how it is possible that in a highly developed industrial country a bridge over a major highway may be in such serious danger of collapsing that it has to be closed off from one hour to the next. Hardly anyone asks why the German infrastructure is in such a dilapidated state – the same happened a while ago with the Schiersteiner bridge in Wiesbaden. Has this become the rule now? Remarkably, no one asked for the resignation of the Minister for Transport of Saarland and no one came up with the realisation that the sorry state of our infrastructure may be due to the absurd policies of the Federal Minister of Finance and that he also should pack his bags.
There is none of this and the population of the area affected by the diversions does not even dream of protesting against the noise, the pollution and all the other nuisances. Everybody knows the answer why our infrastructure is crumbling: there simply isn’t any money! Saarland is poor and, as also everybody knows, the federal government must save, because otherwise we will burden future generations with a mountain of debt.
This reasoning, if you can call it like that, can be used in Germany at every occasion in order to immobilise the population, regardless of the problem at hand. It suffices to shout ‘money, debt and intergenerational justice’ and the whole population falls into acquiescence and accepts the worst torments, as if it is in a trance.
It really is absolutely impressive how one has been repeatedly able, for many centuries in a row, to prevent 80 to 90 per cent of the population from forming autonomous thoughts by propagating some variation of an extremely primitive housefather’s ideology. Even more impressive is that there exists a so-called science of economics, which has no other goal than to support this deception by all means imaginable. Today, in our times of zero interest rate and desperately unusual measures of central banks, it cannot even any longer accurately be called deception. In reality, it is nothing but a hoax, a collective fraud imposed upon the ignorant masses by a phalanx of media, science and politics.
One only has to make a very simple calculation to understand how society as a whole is being cheated. Imagine that you would have started to repair the bridge in the Saarland as well as all other deficient infrastructure with government money when the de facto zero interest rate policy (i.e. first real interest rate went to zero and now even nominal interest rate has become zero) became foreseeable, so in 2011 at the latest. Imagine, furthermore, that the government would have borrowed 50 billion euro on the capital market and that it would have spent all of it in the meantime. Beyond the immediate benefits that would have accrued to the economy in the form of higher incomes and more employment, there would be a mass of other positive effects – greater road safety, less environmental pollution caused by traffic jams, less stress, etc. The state would directly benefit from increasing tax revenues, while during all this time its interest payments would have been consistently close to zero.
Imagine also that the government bonds would have had a term of five years. The government can let the term mature without paying back the loan and buy immediately new bonds for the same amount (50 billion) and with the same term (five years) – now even with a negative nominal interest rate. The total sum of government bonds thus increased to 100 billion euro over ten years, because it did not repay the first bonds, but instead replaced them by new ones. Most of those who already drew upon the first government bonds will also drew upon the next two. The reason is that there are few alternatives to government bonds in terms of safety (for example for insurances) on capital markets.
On top of this – and that is new – comes the effect that the ECB, because of its program to stimulate the economy and inflation, immediately buys a substantial part of the bonds back from the banks, which are the main holders of government bonds. In effect, in the coming months the ECB plans to purchase such investment grade (non bank) corporate bonds for 80 billion euro per month, which means nothing else than that the ECB (as the central bank) creates money out of nothing.
With these new bonds, the German government now has another 50 billion available to invest in whatever projects it sees fit. This financing is to a considerable extent made possible by the ECB because it provides fresh funding to the government – on its way to the banks – that can be spent on development – infrastructure, employment, education, whatever it is according to existing needs. The direct ‘costs’ for the state are zero or slightly positive, while the gains for overall society are clearly positive. Increased revenue for the state and reduced spending on employment benefits is, of course, also obviously positive.
It is possible to add one more zero to the number that we are talking about, so that we deal now with 500 billion for five years. This would not alter the result, except that the positive effects for society as a whole would further increase. This will always be the case as long as there is underutilised productive capacity and deflation. The only possible negative complication – but even this is not certain because of the positive effects on government revenue and expenditure and on aggregate income growth mentioned above – is that in the statistics, which usually relate public debt to the overall size of the economy, the numbers would slightly change. It could be possible that the ratio of public debt to the Gross Domestic Product (i.e. when comparing the stock of ‘the debt of all time’ to the flow of ‘overall income per year’) increases from 70 percent to 72 percent. What is disastrous about that?
This statistic itself is without value to begin with, because you have to compare debt with wealth and not with current income. The assets of the state, however, doubtlessly increased from the repair or the new construction of infrastructure, so that here, in the only economically comparison which is meaningful, in – the completely unlikely – worst case nothing changed and assets and debts both increased to the same extent. Of course, higher educational attainment and more ecologically responsible policies also increase social wealth. In normal circumstances, the ratio between wealth and debt clearly increases because of the activity of the state. This is because the macroeconomic positive effects of government investments increase society’s assets more than they increase government debt. Overall, something meaningful and tangible came out of nothing. No one has to forego anything in order to repair the infrastructure, but everyone gained. Society has to ask itself a question: do we really consciously prefer to renounce such heretical thoughts, because we fear the downfall of the West if more people would understand how the economy really works? Do we really intend to fool the population for the next 500 years too?
Let’s be straightforward: Many people do not understand these really simple relationships and others do not want to understand them. There is, however, also a stratum of people who do understand all of this, but who consider it irresponsible and dangerous to inform the populace that something positive and productive can arise out of nothing. Those who do not preach blood, sweat and tears to the population, but trust the state and its power over capital is, in their eyes, nothing but a demagogic seducer of the masses, an irresponsible populist, a dreamer.
This class of professional government critics wants nothing else than to transform a relatively uncomplicated economic question into an ideological confrontation in which, seemingly, the well-being of humanity and our moral principles are at stake. They do not fight macroeconomic considerations and insights because they consider them false or because they do not understand them, no, they fight them because they fear that the main macroeconomic actor, the state would become powerful, curtail their privileges and govern to the benefit of the common good, instead of favouring their private interests. This, then, is the debate that needs to take place. We need to move beyond purely scientific questions – and if you oppose Keynesian economics, you really did not understand much of macroeconomics. What we need is a broad and assertive public debate: informing the population, advocating proactive stances and policies, speaking truth to power and electing people into public office who can make a difference.
PS : A reader sent me an interview with Friedrich August von Hayek (see here), in which Hayek discredits John Maynard Keynes and his macroeconomic ideas by accusing Keynes that he was not even aware of the relevant literature of the 19th century and did not understand much about economics anyway. This is not only stupid, it is also unbelievably perfidious because in order to assess the new macroeconomic ideas of the 20th century it is completely unimportant whether Keynes knew or did not know the theory of the English economist Henry Thornton from the early 19th century (Hayek cites him as an example). But this is typical of the type of ‘confrontation’ in this field. If someone has no longer anything substantial to say, he will use personal defamation or lament about the lack of knowledge of the literature of his counterpart.