06/11/2012 07:50 pm ET Updated Aug 11, 2012

Ideology Matters

Who would have thunk it?

In this post-modern, post-Marxian, post-it seems everything world, ideology turns out to matter.

This was not supposed to be the case. For years now, politicians, academics, businessmen and women as well as -- it seems -- pretty much everyone else, have been telling us the exact opposite. With the fall of the Berlin Wall in 1989, and the Soviet Union a few years later, ideology -- the notion that decisions are made in a fashion pre-ordained by an all-encompassing theory or world view -- was to have died. Even the Chinese seemed to have killed it, though they refuse to re-name it.

We were all Einsteins now.

Or, if not that smart, at least Deweyites (as in John, not Tom) -- practitioners of the possible and the practical, pragmatists who always kept their eyes on the facts.

Yeah, right!

The number of ideological waves hitting our existential beach is starting to be uncountable. On the economy, both here and with a vengeance in Europe, Hayek's heirs have turned austerity into a religion to be practiced at all costs and in the face of any evidence to the contrary. Like the good apparatchiks of old, no fact is too true to be ignored in pursuit of fidelity to the overarching idea.

This past week, the European Central Bank (ECB) decided not to lower interest rates ostensibly to keep political feet to the fire and force continued fiscal austerity. This was done in the face of unemployment rates across the Eurozone that are north of 10 percent overall and astronomically high in certain countries and demographic groups. In Spain, the rate is well over 20 percent, and the same is true among Eurozoners under the age of 25. For Spaniards under the age of 25, the rate is over 50 percent. These are catastrophic numbers.

Though the ECB continues to promote the theory that fiscal excess caused the financial collapse of the last four years (and therefore the current problems), this is false. The collapse occurred as a result of conduct in the private (principally housing) sector, and there is no real correlation between debt to GDP ratios (an ostensible measure of fiscal profligacy) and national crisis. In fact, both Spain and Ireland had pre-crisis ratios below those of Germany but the latter is thriving while the former suffer enormously, mostly because there were private credit-induced housing bubbles in Spain and Ireland which never materialized in Germany, a nation of renters (and bankers, who were stoking the bubbles -- in housing and later in sovereign debt -- everywhere else).

Meanwhile, the hammerlock that is the European Currency Union marches on. The union is a sort of financial Articles of Confederation, the grossly unworkable plan of union initially created for the United States. The Articles made it impossible to fashion national policy, leading to different currencies and de facto trade policies throughout the country, which were then rendered impermeable to change given the narrow writ granted the national government and the power individual states effectively had to veto any national plan. The treaty establishing the ECU created an equally hamstrung central institution (the ECB), which lacks the power most other central banks (e.g., the Fed and the Bank of England) have to act as lenders of last resort, but with a mandate to combat inflation above all else. Inflation is the bugaboo of Germans who have studied the Wiemar '20s and do not want to repeat them. So instead, the Germans -- who are enthrall to fiscal austerity -- are endorsing policies that repeat the global '30s -- namely, Depression.

The solution here could be Eurobonds backed by all nations in the ECU. So far, however, Germany has resisted that tack, and even as it seems to ease its opposition, it attaches long term fiscal conditions to any possible policy reversal that, if not disingenuous, will certainly delay any response. And delay here is Europe's enemy. The unemployment Europe faces is exacting its toll now, and will continue to do so going forward (the data on the effects of underemployment and unemployment on new entrants into the labor force -- principally college graduates -- are scary; indeed, if you come of age in a Depression, your lifelong prospects are considerably reduced, and for some, just ended). There is also no evidence of structural problems, like a mismatch between jobs and skills. The austerians, of course, trumpet the need to take a long view. But (1) most of the austerians themselves have jobs, and (2) as Keynes remarked, "In the long run, we are all dead."

In a non-euro world, Spain, Ireland and Greece all would have devalued their currencies by now and solved any competitiveness problem vis-a-vis the north by simply producing cheaper goods and services. The ECU, however, makes this approach impossible for those in it. Not, however, that this necessarily matters to the austerity ideologues. Great Britain, for example, is not in the union and could have devalued the pound, but its conservative government has practiced fiscal austerity with such abandon that the British are now suffering a second recession along with the rest of Europe. This did not have to be the case. Iceland, which also is not in the union, suffered the same real estate bubble induced implosion that killed Europe and the US, but it just devalued its currency and told the banks to behave like good capitalists and suck it up (i.e., fail), which is what is supposed to happen in our ostensibly free market but often does not among the "too-big-to-fail" banks that get a pass (and a government handout to survive).

This is the ideology of austerity. In it, government debt is the villain (even when it isn't) and fiscal rectitude the solution (even when it won't be). Real villains -- like the lenders who induced the Spanish real estate bubble -- often get a pass, and institutions that in the past would have combated the problem -- like the European Central Bank -- lack the tools to do so. Sensible solutions like Eurobonds are suffocated in the ponderous treaty changes that would have to occur for them to take effect. Meanwhile, spectators who do not have to follow this path nevertheless do so. This is the case with Britain and it is the case with the American Republican party. They are both preaching at the altar of austerity and embracing the false claims necessary to keep that failed approach afloat and alive. In this, they are in league with their Euro-brethren.

Ideologies are magnets. They create force fields of group think so strong that few are able to resist.

They did not end in 1989, or in our post-modern world of supposed uber-empiricism.

They just changed.