James Montier, the former SocGen analyst now allocating assets at hedge fund GMO, is prone to occasional outbursts of macroeconomic theorizing.
He’s entered the austerity debate with his latest paper, and in the process reminded us of this:
- A Spacious Hive well stock’d with Bees,
- That lived in Luxury and Ease;
- And yet as fam’d for Laws and Arms,
- As yielding large and early Swarms;
- Was counted the great Nursery
- Of Sciences and Industry.
- No Bees had better Government,
- More Fickleness, or less Content.
- They were not Slaves to Tyranny,
- Nor ruled by wild Democracy;
- But Kings, that could not wrong, because
- Their Power was circumscrib’d by Laws.
- But Jove, with Indignation moved,
- At last in Anger swore, he’d rid
- The bawling Hive of Fraud, and did.
- The very Moment it departs,
- And Honesty fills all their Hearts.
- For many Thousand Bees were lost.
- Hard’ned with Toils, and Exercise
- They counted Ease it self a Vice;
- Which so improved their Temperance;
- That, to avoid Extravagance,
- They flew into a hollow Tree,
- Blest with Content and Honesty…
That’s an extract from The Fable of the Bees, penned by one Bernard Mandeville way back in 1705.
Quick translation: if everyone saves at once, we all get poorer.
Montier is clear about the dilemma facing economic policy makers: how to reduce government debt while avoiding falling into another recession.
If a fiscal surplus is pursued, and the domestic private sector is stuck in deficit spending mode, then the financial fragility of the economy is likely to increase, raising the probability that more fiscal spending will be needed in the future.
What both Mandeville and Montier are referring to here is the “paradox of thrift,” popularized by Keynes. Montier explains:
In essence, the paradox of thrift is a fallacy of composition. Whilst it may be perfectly rational for one household (or section of the economy) to save more, if everyone tries to save more, total income is lowered. If you aren’t spending, then neither are the people who depend upon you for their source of income. Firms won’t invest if there is no demand for their products, and we end up in a nasty downward spiral.
To avoid the paradox, Montier guides us to Olivier Blanchard and Carlo Cottarelli, blogging at IMFdirect, who prescribe “Ten Commandments” for fiscal adjustment in developed economies. In short:
Commandment I: You shall have a credible medium-term fiscal plan with a visible anchor (in terms of either an average pace of adjustment, or of a fiscal target to be achieved within four–five years).
Commandment II: You shall not front-load your fiscal adjustment, unless financing needs require it.
Commandment III: You shall target a long-term decline in the public debt-to-GDP ratio, not just its stabilization at post-crisis levels.
Commandment IV: You shall focus on fiscal consolidation tools that are conducive to strong potential growth.
Commandment V: You shall pass early pension and health care reforms as current trends are unsustainable.
Commandment VI: You shall be fair. To be sustainable over time, the fiscal adjustment should be equitable.
Commandment VII: You shall implement wide reforms to boost potential growth.
Commandment VIII: You shall strengthen your fiscal institutions.
Commandment IX: You shall properly coordinate monetary and fiscal policy.
Commandment X: You shall coordinate your policies with other countries.
More austerity in the usual place.
Related links:
The austerity debate – FT.com