There is a winding path in our contemporary history from the Keynesian multiplier through the double-dip recession, majority rule and sovereign debt default, to the penal responsibility of a former Hungarian socialist premier for the excessive budget deficit of his country—a path whose twists and switchbacks it is perhaps instructive to survey.

Three generations of economists have been brought up on the Keynesian mechanism of the economy. They think in the terms John Maynard Keynes formulated to describe the Meccano construction he put up—the propensity to consume, the saving-investment identity, liquidity preference, the marginal efficiency of capital—even when they are in substantive disagreement with Keynes about what these levers really do and how they ought to be pulled to get certain results. The domination of Keynes’s model is not undeserved. It is clearer, less ambiguous than its predecessors, it is far easier to teach to students and more convincing to the man in the street because it holds out the prospect of simple remedies against the ills of unemployment on the downside, and overheating on the upside that a market economy is apparently so apt to catch.

Over the three years 2008-2010, most governments in Europe and America have been knowingly swallowing big doses of the Keynesian remedies to pull their economies out of recession. Some did so as a matter of deliberate choice; the U.S.A. is the clearest example. Others, of which France is the most typical, merely allowed their vast welfare overhang to act as an automatic stabilizer. With well over 50 per cent of GDP absorbed by government spending and independent of market demand, and with the oncoming recession actually stimulating government spending on unemployment benefits while government income falls as tax receipts fall, the French-style modern welfare state generates the rising dissaving needed to offset the falling private investment and consumption. This big government is supposed to act as its own stabilizer. In fact, during the grim years of 2008 and 2009, France’s GDP fell noticeably less than the Western European average, and the country’s mostly left-leaning intelligentsia had much satisfaction in pointing out that a model biased toward “social protection” is proving to be more stable and resistant to shocks than one biased toward unfettered free markets.

However, the automatic stabiliser effect of the welfare state involves an equally automatic swelling of government debt, for the stabilisation operates through additional government dissaving. A rough measure of this dissaving is the budget deficit. Whether the deficit rises thanks to automatic shortfalls in tax revenues and costlier social protection, or because governments deliberately pump up anti-crisis spending programmes, the effect is the same. Over the three years 2008-2010, the sovereign debt (roughly, the cumulative budget deficit) of the European states as well as of the United States rose by 20 to 30 percentage points of their GDP, reaching 85 per cent in France and 100 in the United Kingdom and also in the United States. Current economic consensus holds that the 90 per cent level is critical and once beyond it, it is inordinately painful if not impractical to work it down again.1 A fundamental and almost sacrilegious question then arises: does the Keynesian mechanism work as it was supposed to do? Do the stabilizers really stabilize? Could it be that while the deficit ought to stimulate output and employment through the effect of the Keynesian multiplier, the rising level of the national debt acts as a kind of negative anti-multiplier that offsets the stimulus?

If it had gone by the book, the recovery that started in the second half of 2009 should have been gaining speed and roaring ahead full blast in 2011. Instead, in most of Western Europe and the U.S.A., it has slowed down to near stalling speed and stock markets are dramatically signaling the coming of the second dip of a double-dip recession soon.

We may soon be witnessing the coming in the journals and textbooks of a “new paradigm” in which macro-economic activity is governed, not by one multiplier, but two. One is the old and familiar Keynesian one in which incremental government dissaving increases aggregate demand by an amount greater than itself. The other—call it the counter-multiplier—kicks in when the level of sovereign debt approaches the worrying level. Some countries may start worrying at 60 per cent of GDP (which they have agreed to do in the late lamented Maastricht treaty that no one took seriously), while others, like Italy today, keep a poker face with sovereign debt at 120 per cent. But once at the worry level, any incremental sovereign indebtedness will actually decrease aggregate demand as industry gets frightened and cuts investment and employment, and as households try to reduce credit card and mortgage debt.

If this “new paradigm” of the two multipliers is at all right, it brings a silver lining with the black clouds. Whilst massive increases in the deficit and monetary “easing” of unheard-of proportions fail to stimulate the recovery and may in fact suffocate it, deficit-cutting may, contrary to orthodox beliefs, act as a stimulant: a negative change in government deficit multiplied by the negative multiplier would then produce rising aggregate demand. If only protestations of fiscal rectitude and promises of balanced budgets could be believed!

Under the “new paradigm”, there is no counter-cyclical excuse for the deficit. It is plainly bad not only for the next generation which does not count for much in democracies, but also for the present one, which is usually quite ready to vote for it and shoot itself in the foot. In Hungary, which has been known to invent some original ideas in the past, the question has now been raised: can a government or its head be held responsible, and perhaps criminally responsible, for running the national debt? The present centre-right government of Viktor Orban is waiting for the courts to rule whether legislation to this effect is constitutionally admissible.

In Hungary, over two four-year terms of a socialist government from 2002 to 2010, the national debt was run up from 53 to 80 per cent of GDP. With the sales of the “family silver”, i.e. state assets mainly to foreign buyers, and with inadequate maintenance of the capital stock, national impoverishment was greater than this. Profligacy peaked in 2006. The government of the ex-communist billionaire Ferenc Gyurcsany looked like losing the general election, but with some bold promises of an extra month of payments to all pensioners and other gestures of social generosity, he “bought” re-election. (Soon afterwards in a surreptitiously recorded closed-door speech to party cadres he admitted to have “lied morning, noon and night.”2) Buying an election by taking the money from the electorate’s own poorly lined pocket is perhaps not a felony. Perhaps it is not even an indictable offence. But then what is it? Unless Hungary were to legislate differently, it is nothing at all, it is just normal practice under majority rule.

Politically correct Western European opinion never forgave Hungary for giving Mr. Orban’s centre-right a two-thirds majority in the 2010 election. The language barrier is so impenetrable that news agencies and foreign correspondents rely for information and interpretation on a small soft-left core of Hungarian intellectuals well versed in the jargon of political correctness. The very idea of making a head of government like Ferenc Gyurcsany in some manner accountable for using deficit finance to get himself re-elected turned in Western European media to an appalling symptom of the anti-democratic leanings of the Hungarian centre-right. Even the elite press from the Economist and the Financial Times downwards, condemned it as authoritarian. An editorial in the latter declared that such matters should be left to the courts—which is what the Orban government has done by referring it to the constitutional court even before benefiting from the advice of the Financial Times editorial.3

Chances are that no legislation that would make it an indictable offence to use the nation’s credit and to steal money from the electorate to bribe it and get oneself re-elected will get on to the Hungarian statute book. The evidence the prosecution could ever muster would always be equivocal. This is a great pity, for such a law is, to put it no higher, an urgent necessity, and not in Hungary alone.


For more information on this question see the paper “The Real Effects of Debt” by Stephen G. Cecchetti, M. S. Mohanty and Fabrizio Zampolli which was prepared for the “Achieving Maximum Long-Run Growth” symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming, 25-27 August 2011. Abstract.

See “Excerpts, Hungarian ‘Lies’ Speech”. BBC News, September 19, 2006. See also “‘We lied morning, noon and night’ – PM’s tape that left nation on brink” by Balazs Koranyi. The Scotsman, September 20, 2006.

See “Orban drags Hungary through rapid change,” by Neil Buckley. The Financial Times, February 7, 2011.


*Anthony de Jasay is an Anglo-Hungarian economist living in France. He is the author, a.o., of The State (Oxford, 1985), Social Contract, Free Ride (Oxford 1989) and Against Politics (London,1997). His latest book, Justice and Its Surroundings, was published by Liberty Fund in the summer of 2002.

The State is also available online on this website.

For more articles by Anthony de Jasay, see the Archive.