Austerity? Stimulus? Or Happiness?

07/10/2012 02:47 pm ET | Updated Sep 09, 2012

Ordinarily the words "austerity and "stimulus" are used to describe a person's character and behavior. But now the words describe two divergent rescue policies for nations stricken with economic woes as Greece, Spain, Italy, Portugal and Ireland are today. These words also symbolize certain political leaders. "Austerity" rhymes with Angela Merkel and Herbert Hoover. "Stimulus" rhymes with Franklin Roosevelt and François Hollande.

But both words can lose their meaning when used for political ends. For example, Pierre Moscovici, the French minister of finance, was adamant last month: "I reject the idea of austerity in this country." The reasons for Mr. Moscovici's severe comment are plain enough. Politics required it; France is not willing to follow Germany, especially with Chancellor Merkel so firmly wedded to austerity. Au contraire, the president of France advocates stimulus.

But in neither case is it clear exactly what the chancellor or the president mean by these terms. Both are flexible positions. Merkel will probably not let the euro go down the drain. Hollande will be severely limited by budgetary considerations as to how many stimulus programs can be realistically envisaged as the salvation of Europe's recovery.

Lost in all of this -- thanks in part to those economists firmly committed to one solution or the other -- is what really lies behind the struggle between austerity and stimulus. In my opinion -- and on this point I am very opinionated -- "austerity" shares the thinking of the banking community, with its sacred capitalism and ideology of free enterprise all summed up with the traditional banker's sanctimonious concept of "good practice." More often than not, our political leaders fall into line with this philosophy. They know on which side their bread is buttered. The logic of "stimulus," on the other hand, holds that the economy is relevant both in sickness and in health. It has social goals that are not just as important but more important than profit.

Capitalism needs profit, of course. It will fail without the entrepreneurship that seeks profit. But at the extremity of private enterprise is greed, an appetite that runs amok when given the chance. Without regulations, without restraints backed up by law, the appetite for power -- money and position -- is uncontrollable. This human weakness, a lust which is quite basic in our nature, is behind all our economic recessions. Irresponsibility -- buccaneering -- is inevitable when entrepreneurs are left to themselves. Greed will win out!

What the business and financial people driving the economy have forgotten is that the gains they derive from profits produced by enterprise must be shared if our society is to function with any cohesion. We are one people, one nation. But is this today's reality? Income inequality is now a major issue in the United States. In his time Franklin Roosevelt talked plainly about this problem. He brought it out into the light and made it a cornerstone of the New Deal. What do we hear from our leaders today?

Economics has social goals -- a fact rarely mentioned in graduate business schools. The aim of economic stability and growth is the well-being of the community, of all of us. When this is ignored, what happens? An attitude of separateness between rich and poor produced the Great Depression and all the subsequent recessions of the past 30 years, including the recent (and, many would say, still ongoing) Great Recession of 2008. Read FDR's speeches for a clear framing of this dynamic.

And what of happiness? That's the word Laura Musikanski used when reporting on a United Nations conference convened last April: "The UN Embraces the Economics of Happiness." Don't turn away thinking some well-meaning NGOs have gone off the deep end again with some half-baked notions of pie in the sky. The conference was a serious affair attended by 650 luminaries and addressed by senior diplomats from many countries. On this occasion, the UN's Secretary General, Ban Ki-moon, proclaimed that "social, economic and environmental well-being are indivisible." Well-known experts from academia also spoke. Lord Richard Layard, John Helliwell and Jeffrey Sachs introduced the unfortunately titled "World Happiness Report."

Despite its name, the report is neither frivolous nor reckless. It seeks to introduce a new economic paradigm that shifts us away from looking at economic growth and recession as strictly financial matters, as if they were divorced from social consequences. It points to the current global order's failure, even inability, to implement the drastic changes required for realistic, sustainable societies. Implicitly indicted are the World Bank and the International Monetary Fund. Their previous conditions for loans we now see were often destructive to economies in the Third World instead of helpful. And yet we continue now on the same destructive path with the European Union's strict policies when loaning money to Greece, Ireland, Spain and Portugal.

I found the U.N. report useful. It helps to reinforce the basic thrust of this column. Government policies today, whether they emphasize austerity or stimulus, fail to recognize and correct the fact that the overall well-being of citizens continues to be outweighed by the protection of a single sector of our society, the financial one. No matter how important the financial sector may be, this state of affairs is unconscionable. Economic thinking that ignores the social element is not good economics.

So here's the million-dollar question: When will policymakers start to take happiness seriously?