Walker's World: False choices

ZURICH, Switzerland, July 2 (UPI) -- The current European and increasingly global debate whether to focus on a strategy of austerity or of growth is a horrible choice. It is also a false one.

In political terms, this is coming down in Europe to a standoff between German Chancellor Angela Merkel, now portrayed as Frau Austerity, and her French counterpart Francois Hollande who wants to be seen as Monsieur Growth.

But this caricature of the dilemma of economic policy-making can also be discerned in in the tussle between White House and Congress as the United States heads towards the fiscal cliff at the end of this year.

It is also the key dynamic in Japan and it is becoming more apparent in China, where the government is simultaneously trying to deflate a property bubble, control inflation and shift from an investment-led to a consumption-led economy, all while keeping growth close to 8 percent this year.

In terms of economic theory, this can also be seen as an intellectual argument between two dead economists: John Maynard Keynes, the British economist who believed that governments could indeed borrow and spend their way out of recession, and the monetarist Milton Friedman, who believed they could not.

But the choice is false for two reasons. The first is that governments in Europe, Japan, the United States and perhaps India have little choice. They are almost out of fiscal ammunition. Some like Italy and Spain can no longer borrow at affordable rates and their tax rates are already high enough to squeeze out the prospect of a swift return to growth.

Countries which can still borrow cheaply, like Japan, the United States and Britain, are already facing monstrous debt burdens. They can only borrow because investors are desperate to find a safe haven for their money, even if they lose money by doing so. But even they know that they have to reduce their budget deficits and their debt burdens, because the growing numbers of retirees and of health costs is going to put intense strain on national finances in the future.

Public spending is going to have to be controlled, and the social contract which underpins that spending must be rethought and renegotiated. A welfare state that assumed people would retire at age 65 and die before they were 70 is unsustainable now that more and more people are living into their 80s.

On the other hand, it is politically dangerous and may be impossible in a democracy to offer the electors an unrelieved diet of austerity. People need hope. The unemployed need jobs. Businesses need to be able to borrow working capital. And in Britain and the United States the national infrastructure of roads and bridges, airports and rail networks, water and sewage systems, desperately need investment.

The question is how to balance the fiscal need for austerity and the political need for growth and for hope that things can eventually get better. The obvious solution is to combine a strategy of austerity and controlling public spending with a specific tactic of targeted growth investment where it will do most good. And there is a problem here. Infrastructure investment no longer provides a lot of jobs.

In the 1930s, Adolf Hitler could slash German unemployment by building autobahns and employing tens of thousands of people wielding shovels. These days road building employs a handful of skilled workers operating bulldozers and automatic tarmac-laying machines.

But there is one obvious place to target the money. Young Europeans below the age of 25 have been hardest hit by the recession. They make up only about one 10th of the workforce but they account for 30 percent of the jobs lost. And a new study by the European commission finds that half of the young Europeans in work do not have permanent jobs.

In Spain, the youth unemployment rate is now 52 percent, the highest ever recorded in an advanced economy. Greece is close behind, with a youth unemployment rate nudging 50 percent. In Italy, Portugal and Bulgaria it is over 30 percent, and Poland, France, Sweden, Britain, Belgium and Finland each topped 20 percent. The last detailed figures from the Bureau of Labor Statistics gave a U.S. rate of 18.1 percent rising to 20.1 percent among Hispanics and 31 percent for blacks.

The first is that the young unemployed, and society as a whole, will pay for this for a long time to come. Previous recessions have taught us that young people who have been unemployed for a year or more in their youth will suffer lower incomes for the rest of their lives. We are in danger of creating a lost generation. If we are going to spend and invest anywhere, our young people should be top of the list.