Remember the Great Depression? No, it doesn’t seem that anyone does
Alarming global economic trends, policy misapprehensions, lack of leadership – for those who have studied the Great Depression, today’s crisis looks unsettlingly similar
The Observer, Sunday 17 June 2012
Having failed in Britain, George Osborne now seems to want to dictate economic policy in the eurozone. He goes on about the “relentless logic” of the need for the eurozone to become a fiscal union, and he drops heavy hints that he believes they should start the revolution without Greece.
The spectacle of a rightwing Conservative chancellor advocating European fiscal union is ironic in the extreme – and the extreme right of the Conservative party must have very sore eyes. As for the potential conflict between the eurozone’s ideas of financial and banking regulation and those that suit the City of London, we have seen nothing yet.
But it is an ill wind that blows no chancellor any good, and the travails of the eurozone have given Osborne the perfect cover for a major U-turn in economic policy.
Aside from the torrent of news about continuing banking crises around Europe, even if the banking system is fixed – a big if – the tenor of Germany’s plans for the economic policy of the eurozone is deeply worrying.
If one looks around the world, one finds that most of Europe, including the UK, is in a depression; that China and other emerging economies are slowing down; and that the US, which seemed at one stage to have a more stimulatory economic policy than the rest, is in fact “recovering” far more slowly than had been hoped.
No wonder President Obama and his entourage are taking such a close interest in events in the eurozone. Economic trends, and a lack of leadership, are reviving all too vivid memories of the 1930s.
We know how honourable were the motives of Chancellor Kohl and President Mitterrand in pushing for monetary union after the reunification of Germany in 1990. But, as the former Bank of England and United Nations economist Mica Panic concludes in a masterly study of globalisation and the eurozone: “The main problem with [the eurozone] in its present form is that, whatever the original intention, it has turned out in practice to be nothing less than an attempt, in the macroeconomic management and the welfare state in particular, to put the clock back to the 1930s!” (Globalisation – A Threat to International Cooperation and Peace?, 2011.)
It is abundantly clear that everyone is dissatisfied with the eurozone in its present form. Unfortunately, the plethora of putative remedies flowing out of the body politic, whether they involve eurobonds, banking unions or medium-term plans for a quasi-fiscal union, do not address the central economic issue of our time: how to emerge from the depression that is with us here and now.
During the depression of the early 1930s, Keynes was fully behind the kind of monetary stimulus that is all the rage in the UK these days. But he came to the conclusion that monetary policy was not enough. Among the many distinguished modern practitioners who agree with him is none other than that great student of the Great Depression, Ben Bernanke, chairman of the Federal Reserve, the world leader in monetary policy!
The error being committed by the Germans with their “fiscal pact”, and our own chancellor with his austerity programme, is essentially one of timing. It is all very well trying to balance the budget if and when we emerge from depression. But the attempt at fiscal rectitude now risks – indeed, almost certainly guarantees – prolonging the depression.
As Bernanke recently said in the US context: “A severe tightening of fiscal policy at the beginning of next year that is built into current law – the so-called fiscal cliff – would, if allowed to occur, pose a significant threat to the recovery.” He added: “Fortunately, avoiding the fiscal cliff and achieving long-term fiscal sustainability are fully compatible and mutually reinforcing objectives. Preventing a sudden and severe contraction in fiscal policy will support the transition back to full employment.”
The evolution of Keynes’s thinking on the issue of stimulatory monetary policy being necessary but not sufficient to achieve emergence from depression is well captured in Robert Skidelsky’s and DE Moggridge’s biographies. A more recent account is contained in Sylvia Nasar’s Grand Pursuit – The Story of Economic Genius.
As Nasar says: “Once monetary policy was rendered ineffectual, the only option for shoring up demand was getting money into the hands of those who could spend it.” With monetary policy almost at its limits – although the Bank of England now seems to be trying even harder – a pithy observation of Keynes’s strikes a chord: “The inability of the interest rate to fall has brought down empires.”
The indefatigable US economist Paul Krugman concludes his new book End This Depression Now! with the words of Christina Romer, Obama’s former economic adviser: “The evidence is stronger than it has ever been that fiscal policy matters – that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term.”
The point is not only that fiscal contraction should be eschewed in times of depression, but that, with the private sector not spending enough, the government should be using fiscal policy actively to offset private sector contraction.