The Road to Tahrir

The roots of Egyptians' rage can be traced back to bad economic advice from the IMF -- and the crony capitalism it left behind.

It was 1990, and President Hosni Mubarak's Egypt was in turmoil. The statist economic order built by former President Gamal Abdel Nasser had come apart at the seams: Egypt's banks were failing, inflation hovered around 20 percent, and -- following the collapse of the Egyptian pound on the international currency markets -- Egyptians had begun hoarding American dollars. Mubarak also had to contend with tanking oil prices, which impacted both exports and remittances from the Gulf, and a dangerous upsurge in terrorist attacks. The assassination of Rifaat al Mahgoub, speaker of the Egyptian People's Assembly, as well as two horrific attacks against Israeli tourists (one between Cairo and Ismailiya and one on the Egyptian-Israeli border near Eilat) in 1990 alone called into question the proficiency of the state's security forces and resulted in a precipitous decline in tourism revenues. Egypt's economy -- based on subsidies, bureaucracy, and a bloated public sector -- was limping feebly toward the 21st century.

Revolution, it is often said, appears impossible before it happens -- just as afterwards it seems inevitable. For the young revolutionaries that powered Egypt's Jan. 25 uprising, the tipping point must have felt like magic. (Indeed, Alaa Al Aswany, a noted Egyptian writer and activist, describes it as a "miracle" in the forward to his most recent book, On the State of Egypt.) But the chapter between impossible and inevitable in Egypt's history is rather more prosaic -- less celestial, more terrestrial. That chapter -- and the beginning of the end for Mubarak -- starts with the economic crisis of 1990.

Iraqi President Saddam Hussein's invasion of Kuwait in August of that year seemed to provide the Egyptian strongman with an answer to his financial woes. In exchange for lending diplomatic and military support to the U.S.-led coalition formed to oppose Iraq's aggression, Egypt received a "bonanza of economic rewards," as Bruce Rutherford, an assistant professor of political science at Colgate University, writes in Egypt After Mubarak: Liberalism, Islam, and Democracy in the Arab World. Loans from the United States and the Paris Club, an informal group of private creditors from 19 of the world's biggest economic powers (12 of which sent military personnel to aid the U.S. invasion of Iraq), were written off and Egypt was showered with some $15 billion in emergency economic assistance. Mubarak, it seemed, could not have played his cards any better.

The aid, critical though it was to reviving Egypt's failed banking sector and stabilizing the economy, contained the seeds of Mubarak's eventual destruction. Conditioned on a demanding International Monetary Fund (IMF) restructuring program, the loans required that Mubarak cut government services, liberalize interest rates, and undertake an ambitious privatization program. They required, as Dina Shehata, a senior researcher at the Al-Ahram Center for Political and Strategic Studies, has argued, that Mubarak break "Nasser's bargain" -- a promise to provide social services, employment, subsidies, education, and health care in exchange for exercising total control of the political environment.

Taking a longer view of events that led to the Jan. 25 revolution does not deny the importance of immediate catalysts such as the fraudulent 2010 parliamentary election or the murder of Khaled Said, a blogger who was beaten to death by police officers and for whom a Facebook page calling for the revolution was named. Nor does the focus on material well-being obscure the role of existential factors -- freedom, dignity, justice -- that inspired Egyptians to risk their lives for political change. But the gradual deterioration of economic conditions in Egypt throughout the 1990s and early 2000s coupled with the rise of an independent labor movement -- one that played an important if not critical role in Egypt's 18-day revolution -- suggests that a longer reading of history might reveal the origins of Mubarak's fall. After all, as Robert Zaretsky, a professor of history at the University of Houston, recently observed in Foreign Affairs, "pyramids crumble slowly." Perhaps so did the man who many Egyptians joked might someday build his own. 

The liberalization experiment

From a macroeconomic standpoint, liberalization was a resounding success. Egypt's economy, which had shrunk by 2 percent in 1990, was growing at a healthy 5 percent by 1996. Inflation, which had exceeded 20 percent in the late 1980s, was down to 7 percent, and investor confidence had recovered. Ten years later, Egypt would be named the IMF's "top economic reformer," recording a bullish 7 percent GDP growth for 2007. "Egypt's economy had another year of impressive performance supported by sustained reforms, prudent macroeconomic management, and a favorable external environment," concluded the IMF report from that year, which heaped praise on the "reformist cabinet" for pressing ahead with adjustments despite vocal opposition, "fuelled in part by high food-price inflation and some frustration about the lag in the 'trickle down' of the benefits of growth."

But for many Egyptians, the lack of "trickle down" at all was the story. Impressive growth numbers, from their perspective, simply meant layoffs, pay cuts, forced early-retirement schemes, and the loss of benefits. The impact of reform on employment was so pernicious, in fact, that Stella, Egypt's local beer, and Coca Cola were the only two cases where privatization led to an increase in the number of jobs, according to Joel Beinin, a professor of Middle East history at Stanford University. Yasar Jarrar, a partner at PricewaterhouseCoopers in Dubai and a panelist at a recent World Bank conference on investing in the wake of the Arab Spring, put it this way: "you had to be a macro-citizen to benefit" from economic liberalization.  

Membership in the World Trade Organization (WTO) in 1995 only made things worse for many Egyptian laborers, as reduced tariff and nontariff barriers impeded the state's ability to protect certain labor-intensive sectors. Egyptian textiles, an industry that dates back to the age of the Pharaohs, suffered mightily as Chinese and Southeast Asian producers took advantage of reduced tariffs to expand their market share. There was little doubt beforehand about how this would impact the Egyptian labor force: One USAID report in 2004 projected that the textile industry would lose 22,185 jobs and about $203.9 million in shipments, a figure that represented roughly 4 percent of the country's non-oil sector exports.

Those firms that did benefit from liberalization and WTO membership, moreover, only serviced a tiny fraction of the Egyptian populace. These firms, owned by a small number of families close to the regime, dealt primarily in construction materials, export/import, tourism, real estate, food and beverages, and high-end consumer goods that the majority of Egyptians could not afford, according to Tim Mitchell, a political economist at Columbia University. As Mitchell argued in the Middle East Report in 1999, the "major impact [of the state's neoliberal program] has been to concentrate public funds into different, but fewer hands. The state has turned resources away from agriculture, industry and the underlying problems of training and employment. It now subsidizes financiers instead of factories, speculators instead of schools."

As the IMF-led reforms progressed, laws were enacted to protect laborers from the potentially harmful side effects of liberalization, but there was often "a lack of popular or political will to enforce them," Rutherford told me in an interview. The result was that "tens of thousands of workers lost their jobs and access to subsidized housing."

At the same time, across-the-board subsidy cuts dictated by the IMF restructuring program further eroded "Nasser's bargain" with the people and compounded the plight of working class Egyptians. Although bread subsidies remained intact -- a near revolution in 1977 after President Anwar Sadat tried to revoke them was enough to keep them off the chopping block this time around -- the number of subsidized household items was slashed from 18 to 4 (bread, wheat flour, sugar, and cooking oil), according to Rutherford. But retaining bread subsidies wasn't enough to keep Mubarak's dimuqratiyyat al-khubz -- or "democracy of bread," as the Tunisian scholar Larbi Sadiki once described it -- from collapsing. When world grain prices spiked between 2007 and 2008, the price of bread increased as much as fivefold in private bakeries, meaning that many Egyptians who did not ordinarily rely on subsidies could no longer afford to eat. The country subsequently erupted into "bread riots" that raged until the army took over the baking and distribution of bread. In the aftermath of the riots, bread became a "symbol of defiance," as journalist Annia Ciezadlo has argued. It represented both the regime's broken promises and the yawning gap between Egyptians' expectations and the reality they faced.  

World Bank numbers paint a sobering portrait of that reality: Between 2000 and 2008 (the only dates for which statistics are available) both urban and rural poverty rates increased, with rural rates spiking from 22.1 to 30 percent. The official unemployment rate -- often criticized for being artificially depressed -- rose from 8.9 percent to 9.2 percent during the same period, although it reached as high as 11.4 percent in 2005. The long view from 1990-2008 reveals an equally telling 1.2 percent rise in joblessness. Meanwhile, the income share of the top 10 percent of wage earners increased between 1990 and 2008, and the top 1 percent made out like bandits. As Ossama Hassanein, senior managing director of Newbury Ventures and a business school professor at the American University in Cairo, told me, roughly 200 families managed to abscond with 90 percent of the country's wealth.

While Egypt's rich and poor were being wrenched in opposite directions, something new began to emerge out of the chaos. Workers started to organize. They held strikes and tentative protests, and before long Egypt had given birth to an independent labor movement -- one that was coalescing outside of the strictly monitored worker's federations, unions, and syndicates that had previously doubled as tools of government control.

Labor rears its ugly head

The labor movement caught like wildfire. Between 1998 and 2011, Egypt experienced 3,500 protests and labor strikes that mobilized more than 2 million workers, according to Beinin. The bulk of these protests occurred after 2004, when a new government, known as "the government of the businessmen," came into power. Led by Mubarak's son, Gamal, and a number of his business associates, such as steel tycoon Ahmad Ezz and economists Hussam Badrawi and Mahmud Mohieldin, the new government "privatized more in terms of total asset value in their first year in office than had been sold off in the previous 10 years," Beinin noted in a recent interview with Stanford's Center for the Humanities. "Almost immediately in the second half of 2004, you see a big spike in the number of strikes, sit-ins and other kind of workers' collective actions," said Beinin.

Most of the protests were directed at securing better wages and protecting workers from the mass layoffs that often (illegally) accompanied privatization. Protests at the Qalyub Spinning Company erupted in 2005, for example, after the mill's sale to a private investor led to widespread speculation about layoffs and wage-reductions -- speculation that was not at all unfounded given the record of Qalyub's parent company, ESCO, in previous privatizations. According to a 2005 report published by Beinin in the Middle East Report, the six ESCO companies that had been privatized before Qalyub went from employing a total of roughly 24,000 employees in 1980 to 3,500 employees in 2000.

More strikes and sit-ins occurred in 2007 at the Mansura-Spain textile factory in Dakahlia, east of Cairo, and still more in 2006, 2007, and 2008 at the Misr Spinning and Weaving Company in Mahalla al-Kubra. Labor unrest was by no means confined to the textile sector: air traffic controllers, railway engineers, and oil and gas workers all went on strike at various times over the last decade. By the eve of the revolution, labor unrest was so commonplace that even the sleepy desert campus of the American University in Cairo, where I was working at the time, had seen workers strike on more than one occasion. To the careful observer, therefore, the events of Jan. 25 should have seemed more a natural progression of things than a decisive break with the past. As Khaled Khamissi, author of the best-selling novel Taxi, put it: "There is continuity between those strikes [of the last decade] and the 2011 revolution."

It is, of course, impossible to trace a direct line between the gradual evolution of Egypt's labor movement and the ad-hoc decision by young people to protest the National Police Day on Jan. 25. Ahmad Maher, one of the founders of April 6, has even disputed the notion that workers played a significant role in the protests that toppled the Mubarak regime. But the origins of April 6 -- a protest that included tens of thousands of students, unemployed Egyptians, and textile workers in Mahalla al-Kubra -- suggests otherwise. As Tarek Masoud, an assistant professor of public policy at Harvard's Kennedy School of Government, put it recently in the Journal of Democracy, "It is part of the genius of the April 6th Movement... that they were able to yoke labor's newfound militant energy to the national drive for democracy." In Tahrir Square, that energy took the form of slogans that linked politics with the same basic concerns that had driven workers to protest time and again over the last decade. "They are eating pigeon and chicken and we are eating beans all the time," went one of the revolution's refrains. "Oh my, 10 pounds can only buy us cucumbers now, what a shame what a shame."

A look at the young revolutionaries' initial demands also reinforces the link between the Facebook-generation activists and their intellectual forebears. In addition to demanding the dismissal of Interior Minister Habib El-Adly, the end of Egypt's infamous emergency law, and presidential term limits, protest organizers had a fourth demand: the implementation of a fair minimum wage, which last January was a meager 118 Egyptian pounds per month, roughly $20. This is a demand that had been made time and again by labor agitators over the last two decades.

Workers also played a direct role in toppling the Mubarak regime earlier this year. A sampling of headlines from the New York Times, NPR.org, and Al-Ahram, Egypt's state-owned newspaper, in the three days leading up to Mubarak's ouster yields the following: "Labor Actions in Egypt Boost Protests," "Labor Strikes Add to Pressure on Egypt's Leaders," and "Egyptian workers join the revolution." Thousands of laborers had participated in the uprising on an individual basis, but their decision to launch organized strikes on February 9 and 10 may well have solidified Mubarak's fate.

Labor unrest born of decades of economic hardship, however, was not the only way the economic restructuring that began in 1990 shaped the outcome of the 2011 revolution. The decision to open Egypt's economy also set Mubarak's government on a crash course with the military.

Sizing up the military

Egypt's armed forces, which have maintained close ties to the presidency ever since the Free Officers' coup of 1952 that brought Nasser to power, remains something of a mystery to those outside its ranks. "It's amazing how little we know about the military," said Rutherford, referring Egypt's longstanding tradition of shielding the army's financial dealings from public or parliamentary view. What we do know is that it controls a substantial portion of the Egyptian economy. Estimates of the military's economic empire -- comprised of dozens of hotels, resorts, and manufacturing plants -- run from 5 percent to 40 percent of GDP.

As the proprietor of public sector firms that enjoy a number of advantages over the domestic competition, including tax exemptions and conscript labor, the military has little to gain from market liberalization. As Rutherford explained, "If you open up the market, that cuts into the market that the military is selling to. And the military can't compete with Asian and South Asian actors." It isn't altogether surprising therefore that a 2008 U.S. Embassy cable published by WikiLeaks concluded: "We see the military's role in the economy as a force that generally stifles free market reform by increasing direct government involvement in the markets.... Most analysts agreed that the military views the [Government of Egypt]'s privatization efforts as a threat to its economic position, and therefore generally opposes economic reforms."

The Mubarak regime's increasingly cozy relationship with real estate tycoons also rankled top military officials, who "viewed Mubarak's policy of selling land to developers at low rates as inimical to their interests," according to Harvard's Masoud. As Egypt's single largest land developer, the military has faced increased competition from private businessmen like Hisham Talaat Moustafa, a real estate mogul who was convicted last year of murdering his girlfriend, a Lebanese pop star, who have cashed in on the rapid expansion of Egypt's capital city.

While liberalization and cronyism were cutting into the military's bottom line, Gamal Mubarak appeared to be positioning himself to succeed his father. In 2002, Gamal was appointed general secretary of the ruling National Democratic Party's Policy Committee, and in 2006 he became the party's deputy general secretary, a role that many speculated would launch him into the presidency. As the ringleader of the "government of the businessmen" and the source of many of the pro-business reforms, Gamal represented a two-pronged threat to the country's military establishment: Ideology and military allegiance -- or lack thereof. A banker who believed in free-market liberalism, his policies would continue to erode their economic interests, and as Egypt's first civilian president, he would effectively pry the military away from the presidency. Steven A. Cook, a senior fellow for Middle Eastern Studies at the Council on Foreign Relations and the author of the forthcoming book The Struggle for Egypt: From Nasser to Tahrir Square, put it this way: "You got the impression before the revolution that the military was very uncomfortable with [the succession] idea. Now they are very forthright about their distaste for it."

As late as Dec. 25, 2010, the younger Mubarak was still bullish on liberalization. "We need to immediately start a second wave of reforms... that are more ambitious and more daring," he proclaimed at the annual conference of the ruling National Democratic Party in Cairo. When anti-Mubarak sentiment hit a flashpoint a little more than a month later, in February, the military had few reasons to stand behind a regime that would be inherited by Gamal, and plenty of reasons to let it fall. By sending Mubarak packing to Sharm el-Sheikh and effectively ending discussion of a Mubarak dynasty, the military was able to assume control of the reform agenda, thereby protecting its economic interests, while also maintaining its image as the "guardian of the revolution."

The Supreme Council of the Armed Forces (SCAF) -- the military junta now governing Egypt -- has since indicted a number of the most prominent figures in Gamal's inner circle, including former finance minister Youssef Boutros Ghali and former trade minister Rashid Mohamed Rashid. Perhaps this decision was simply one of expedience. After all, Ghali and Rashid are both supremely unpopular these days as a result of their association with the younger Mubarak. But as one source that has had frequent contact with Egypt's business elite over the last decade suggested, it might have been a little more personal. "The military has taken the opportunity to set these guys on the run -- a little bit of retribution -- because they were really pushing to open up the economy in ways that would hurt their interests," said the source, who asked to remain unnamed. Either way, it seems unlikely that many at SCAF headquarters lament the fact that the "government of the businessmen" won't be reconstituted anytime soon.

Peering into the future

Though Egypt's tight-lipped generals are in their sixth month at the helm, they have given few clues about where Egypt's economic policy is headed. Of the three publicly available communiqués issued by SCAF, none deals directly with the subject. Moreover, the process of passing a budget earlier this summer -- which involved rejecting IMF loans before quietly accepting $2 billion from the World Bank -- has left us with more questions than answers. It is obvious that SCAF "doesn't want to be seen as pursuing Gamal's vision," as CFR's Cook told me. But to what extent it is actually willing to reverse the trends of the last decade remains to be seen. Beyond sacking Mubarak and his cadre of reform-minded cronies, SCAF has not, in Cook's words, "fundamentally altered Egypt's economic policymaking."

Still, SCAF's decision to pass up IMF dollars in favor of soft loans from Saudi Arabia and other Persian Gulf states -- loans that come without the kinds of fiscal-policy prescriptions that contributed to Egypt's current predicament -- makes clear that neoliberal advice has fallen out of favor. The biggest question that remains unanswered, though, is what role the military will play in setting policy after this fall's parliamentary election, which is expected to usher in a new civilian government. Preferring, as Cook puts it, to reign without directly governing, the military is likely to concede many of government's quotidian requirements to elected officials. But nobody expects Egypt's generals to allow their economic interests to slip too far beyond their control. Why stop now? What remains to be seen is whether they can reverse joblessness and poor living conditions -- the harbingers of Tahrir Squre -- without dipping into their coffers. The answer to that, however, is not eminently clear.  


Life After Debt

In this month's market upheavals in the United States and Europe, we are witnessing the end of a seven-decade economic experiment. But does anyone have any clue what comes next?

Over the past few weeks, the world's public debt crisis, simmering for months, has come to the boil. When the problems were confined to small countries such as Greece and Ireland, it was assumed that any fallout could be contained. Now, however, the crisis has threatened to engulf nearly everyone. The high-wire confrontation over the debt ceiling in the U.S. Congress raised the prospect of a default by the world's biggest borrower. At the same time, the markets turned their attention to Italy, the eurozone's third-largest economy and the world's fourth-biggest debtor, threatening to raise its borrowing costs to unaffordable levels, or even to cut off its access to funds. The two crises differed in many ways -- not least in that America's borrowing costs fell while Italy's rose -- but the outcomes were similar in one respect: both countries have enacted plans to sharply cut their budget deficits.

How different it seems from two years ago. In the wake of the 2008 financial crisis, the ideas of John Maynard Keynes, the early 20th century British economist who came to fame during the Great Depression, reigned supreme. It was almost universally accepted that his prescription of massive doses of deficit spending constituted the only possible cure for the global economic collapse. But although large-scale government stimulus programs averted economic catastrophe, apparently justifying Keynes's theories, it now seems that the Keynesian plan to rescue the global economy is being left half-baked. His ideas are being abandoned even though unemployment remains far above pre-crisis levels and the economic recovery is stalling. Keynesian economists and politicians may describe their austerity-minded opponents as turkeys voting for Christmas, but they appear to be losing the battle.

Is this just a moment of collective folly, a wilful blindness to the lessons of the past? To Keynesians, after all, the historical record is clear. Misguided attempts to balance the budget in the wake of the 1929 crash turned a nasty recession into the Great Depression. It was only when the government started to run a substantial deficit from 1932 onwards that the slump abated and the economy recovered, aided by President Franklin D. Roosevelt's devaluation of the dollar in 1933. But the recovery was aborted while unemployment was still high, as a result of the premature withdrawal of fiscal and monetary stimulus in 1937. A sharp and unnecessary second recession followed in 1938, and full employment was only restored by the massive additional stimulus provided by war spending, after which Keynesian economic doctrines produced a period of almost uninterrupted growth that lasted until the 1970s.

The recession of 1938 is a pivotal event in this historical narrative, because it seems to parallel so closely the present situation. By attempting to balance the budget before the economic recovery is fully established, the West risks a double-dip recession, just as occurred in the 1930s.

Yet this story is not quite as simple as Keynesians would like to think -- and the events of 1938 are not the only historical example that can be brought to bear on current events. If Keynesians can point to the impact of wartime spending on the economy, austerity advocates can point to the retreat from it, after both world wars. In 1918 and 1945, both the United States and Britain found themselves with very high public debts and economies that had been artificially boosted during the war as a result of deficit spending and loose monetary policies. Their average budget deficit in the last year of war was 25 percent of gross domestic product (GDP). Yet within two years after the end of the wars, both countries had returned not just to sustainable levels of deficit, but to surplus. This was a far greater level of fiscal tightening than anything contemplated nowadays, and it was achieved exclusively through spending reductions.

The outcomes of these post-war retrenchments are instructive. In three out of the four cases of British and American post-war adjustment, the economies initially shrunk, but then started a period of strong and sustained growth with low unemployment. (The exception is Britain after World War I, which entered a decade-long economic depression in many ways as severe as America's in the 1930s. The difference here is in monetary policy: While the United States countered post-war inflation with interest rate hikes that brought prices back to 1919 levels but no lower, Britain made a concerted attempt to deflate prices to pre-war levels so as to get back onto the gold standard at the old parity. In other words, it attempted an "internal devaluation" like the one now being prescribed for the uncompetitive peripheral countries of the eurozone -- and the result was disastrous.)

The post-war experience appears to offer some comfort for America and Britain -- if not for the eurozone. It seems that even extreme fiscal contractions can be pursued without long-term harm as long as monetary policy is left easy and deflation is avoided. After the wars there was an inevitable period of difficult adjustment as the economy underwent a change in focus, reducing its dependence on military spending. But once that adjustment was endured, economies rebounded rapidly. This was all the more remarkable because between them, the Allies comprised close to half of the world's GDP, so there was no hope of exporting to some "consumer of last resort."

But there are two big reasons to think austerity will not work in 2011 the way it did in 1919 and 1945. The first is political. In the aftermath of the world wars there was a near universal acceptance of the need to dismantle the wartime economy, even if it involved short-term costs. After 1945, military spending was replaced as the largest drain on public resources by welfare spending. Unlike the warfare state, the welfare state has established deep roots and myriad stakeholders; there is little consensus about whether, let alone how, to cut it back.

The second reason is economic: The world's debt portfolio today looks almost nothing like it did then. Public debt may have risen dramatically during both wars, but at the same time private sector debt shrank -- not least because private borrowers were excluded from the capital markets for the duration of the war. The effect was most pronounced in World War II, during which private-sector debt shrank from 130 percent of GDP in 1940 to a 20th-century low of 65 percent in 1945. That decline completely offset the rise of public debt from 60 percent to 125 percent of GDP over the same period. With such a low level of private debt, it was scarcely surprising that the post-war economy was primed for a recovery, as pent-up demand for consumer goods provided a ready market for industries retooling from war production.

But private-sector debt is so immense today that it is almost inconceivable that such a benign economic outcome will unfold in the face of fiscal austerity. By 2007, private debt in the United States had reached an astonishing 300 percent of GDP -- two to three times what it was before the Great Depression and from the 1950s to the 1980s.

The Keynesian prescription for the current economic crisis entails the government keeping the economy afloat until the painful process of deleveraging is accomplished, and consumers -- their debt obligations reduced -- can once again take their place as the engine of growth. If this means that government debt rises, that is fine, as long as the rise is offset by a comparable fall in private sector debt. So far, this has occurred in the current crisis much as it did during the world wars: Public sector debt has risen by 30 percent of GDP since the end of 2007, while private sector debt has fallen by a similar amount.

This process should be allowed to continue. After all, the federal debt held by the public is currently 65 percent of GDP -- far lower than 1945 levels. But is such an escalation of public debt safe, or even possible? Private sector debt still stands at a near record 270 percent of GDP. How far does it need to fall to be considered stable? No one knows. We have been living through, and are now probably witnessing the end of, an era with no historical parallels: what might be described as the "great debt experiment."

There have been three ingredients in this experiment. The first was the introduction of Keynesian economics itself. Before that time, there were only two accepted reasons for public borrowing: financing wars and, starting in the 19th century, financing infrastructure projects, in particular railways. These kinds of deficit spending could be variously justified as a necessary response to a national emergency or as a good investment. Keynesian economics not only increased the amount of public debt over time, but also introduced a completely new rationale for running deficits that eroded the traditional disapproval of borrowing to finance pure consumption. In the new jargon, public deficits were not really borrowing at all, but merely an internal accounting procedure to boost purchasing power.

The heyday of Keynesian economics came to an end in the stagflation of the 1970s. But curiously, budget deficits actually grew after Keynesianism fell from favor -- not only in the United States, but throughout the Western world. The explanation lies partly in a covert acceptance of deficit spending even by governments nominally hostile to Keynesian doctrine, but also in part in the increasing pressures on public spending created by the second ingredient in the great debt experiment: unfunded long-term financial promises to voters.

The post-war era witnessed not only the triumph of Keynesian economics, but also the establishment of public pensions throughout the Western world. Almost all these pension plans were set up on a pay-as-you-go basis that provided high rates of return to the first generation of pensioners (which, perhaps not coincidentally, was the generation that voted them into existence) at the cost of an unfunded commitment to later generations. Public pension plans are the biggest element in the off-balance-sheet obligations of states, which also include unfunded health-insurance liabilities and the 2008 guarantees to the banking system. In most countries these "implicit" public debts dwarf their traditional obligations traded in the bond market. In the United States, the total long-term commitments for Social Security, public sector pensions, and Medicare have been estimated at over 300 percent of GDP on the basis of current policies.

The third ingredient in this intoxicating debt brew has been the extraordinary rise in private-sector borrowing since the 1980s. This growth was made possible by the interaction of a number of widely held beliefs. The first was the notion that everyone should have access to credit, partly in the interests of social justice and partly in the interests of general economic prosperity. Such credit could be made available because of the belief that, properly structured, the debts of traditionally uncreditworthy borrowers were as sound as anyone else's. This idea was part of a broader conviction that advances in financial technique were increasing the amount of debt that the economy could sustain with safety. A new generation of mathematically trained bankers -- quants -- was dreaming up instruments such as structured credit vehicles and complex derivatives that contained and dispersed risk. And a new generation of wise central bankers had learned the lessons of the deflationary 1930s and the inflationary 1970s and were now able to guide the economy into the "great moderation" of low and stable inflation and interest rates.

By the early 2000s, it seemed that the solution for almost every problem in the Western world, personal as well as macroeconomic, was to borrow. Not anymore. The message received from both markets and voters Europe and in America is that the era of ever-higher debt is over.

Indeed, one of the most striking aspects of the eurozone crisis is that bond markets have not discriminated between causes of excessive debt. Greece was denied credit and had to go begging to Brussels for a bailout, not because it had taken part in the real estate bubble but because it had abused entry to the eurozone to enjoy a public borrowing spree. Ireland was denied credit because, even though its public finances were in solid shape, it had allowed its banks to overwhelm them. Italy is perhaps the most remarkable case of all. It is now threatened with loss of credit, not because of any post-euro borrowing, nor because of its current budget deficit (which is not much higher than Germany's). Rather, it is being punished for sins committed in the 1980s and early 1990s when it built up its public debt to levels that the markets have suddenly decided are unsustainable. What we are seeing, in other words, is a wholesale revision of the rules about debt that have held true for decades.

The markets have highlighted a fundamental shortcoming in Keynes's ideas: He assumed that governments would always be able to borrow. If they cannot, then Keynesian economics is dead in the water. In the European periphery, the markets have preempted the austerity debate by refusing to lend. But even where markets have not forced the issue, voters have been taking matters into their own hands. Germany may have enacted stimulus measures in 2008, but it followed that by adopting a stringent deficit reduction program in 2009, including a balanced budget amendment to the constitution. Britain's Conservatives, who had been wandering in the political wilderness for more than a decade, seemed out of the mainstream when they proposed cutting the deficit in 2009. The following year, the party was voted into power amid a debate that changed the political climate so dramatically that all parties were soon proposing relatively similar austerity programs. The United States, the last holdout of fulsome deficit spending under President Barack Obama, lurched sharply rightward in the 2010 congressional election. Now, as in Britain, what originally seemed like a minority opinion in favor of fiscal austerity has become accepted policy, with congressional Republicans bent on slashing the budget at any cost and the White House's Keynesian voices now drowned out by the administration's chorus of deficit hawks.

It is not clear that the bond markets or voters who have called an end to Keynesianism have a clear vision of what lies ahead. The former know only that they are no longer willing to lend, the latter that they are no longer willing to borrow. The great debt experiment has left the Western world with a problem that has no easy solution. The outcome is hard to predict, but in the end it is likely to involve the reduction of both private and public debts to levels that the markets consider sustainable -- whether by debt write-offs or through inflation. One thing seems clear: For the first time in decades, borrowing will not form part of the solution.

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