Greg Ip, an editor at The Economist, in correspondence, recently directed me to Chapter 3 of the latest World Economic Outlook the International Monetary Fund, which among other things includes an analysis of a case that bears directly on the attempts of euro area countries to restore economic health through fiscal austerity and internal devaluation: Britain’s return to the gold standard after World War I.
As the report says, Britain demonstrated a fairly awesome commitment to austerity: “To achieve its objectives the U.K. government implemented a policy mix of severe fiscal austerity and tight monetary policy. The primary surplus was kept near 7 percent of (gross domestic product) throughout the 1920s. This was accomplished through large expenditure decreases, courtesy of the ‘Geddes axe,’ and a continuation of the higher tax levels introduced during the war. On the monetary front, the Bank of England raised interest rates to 7 percent in 1920 to support the return to the prewar parity, which — coupled with the ensuing deflation — delivered extraordinarily high real rates.”
Sad to say, however, the confidence fairy never arrived. Britain suffered prolonged economic stagnation even before the onset of the Great Depression. And it didn’t even succeed in reducing the debt/G.D.P. ratio, because deflation and slow growth outweighed the effects of austerity.
Not a good omen for Europe.
Same as It Ever Was
The Financial Times’s Alphaville blog recently went trawling through The New York Times’s archives to look at what people were saying about monetary policy in 1929-1933, and produced a wonderful article that’s both deeply reassuring and deeply frustrating.
The thing that’s both reassuring and frustrating is how much it sounds just like the discussions and debates we have today.
“Did you know, for example, that people were just as worried about debasement-induced inflation and money printing in the 1930s as they are today?” wrote the reporter Izabella Kaminska in an Alphaville post on Sept. 24. “That’s despite the U.S. Great Depression ending up as one of history’s best examples of a prolonged deflationary period.”
O.K., the reassuring part: as a card-carrying model-building economist, the justification for my existence relies on the belief that the issues and fundamental stories in economics are fairly stable over time. Not completely stable — I don’t think you want to apply modern Keynesian theory to the Roman Empire under the emperor Diocletian — but stable enough that, say, major financial crises generations apart share many of the same features; that a liquidity trap in the 1930s is recognizably the same kind of animal as a liquidity trap in the 21st century.
An alternative view would be that everything depends on the specifics, that our modern service-dominated economy, with globalized manufacturing and the Internet and all that, is nothing like the economy of our grandfathers, and all the rules are different. And over long enough stretches that is true — as I said, Diocletian’s economy, or indeed any economy dominated by agriculture, probably was completely different. But John Maynard Keynes’s (and Franklin D. Roosevelt’s) economy, it turns out, was enough like ours that the same stylized models still apply.
Now the disturbing part: Since we’ve seen this before, since we have models that are good enough to make sense of both the past and the present, it’s a huge failure of economics as a practical discipline that we’re hashing over the same debates our grandfathers had (and making many of the same mistakes). Some of this reflects the refusal of policy makers to listen to what we know; but regular readers won’t be surprised when I say that a lot of it reflects deliberate decisions by many economists to forget what we know, and the resulting lack of any clear professional guidance.
And so, having refused to learn history, we are indeed doomed to repeat it.
LESSONS FROM 1918
While the International Monetary Fund is known for imposing harsh austerity programs on indebted developing nations in the 1980s and 1990s, the organization has cautioned against the severity of Europe’s austerity measures in a new report.
On Sept. 27, against the backdrop of large demonstrations in Spain, Greece, Italy and Portugal, the I.M.F released its biannual World Economic Outlook, which explores a number of historical case studies in which the public debt of advanced nations reached 100 percent of gross domestic product, and outlines the different policy steps taken in each case, along with the resulting economic effects.
Among the report’s conclusions is that public debt should only be reduced very slowly through a process of long-term structural reforms and pro-growth policies, rather than through the implementation of short-term austerity measures, which depresses economic output. According to the I.M.F., the case study examining Britain’s situation in 1918 represents a cautionary tale for struggling euro-zone nations today.
Traditionally, when a country is faced with mounting debt, it can devalue its currency relative to the currencies of other nations, thereby bringing down the price of its exports and increasing its overall competitiveness. As Britain returned to the gold standard after World War I, the country attempted to pay down its debt without devaluing its currency, just as the GIPSI countries (Greece, Ireland, Portugal, Spain and Italy) have attempted to pay down their debts without the luxury of being able to devalue their common currency. The policy response in both cases was savage austerity — tax increases and sharp cuts to wages and social services through a process called internal devaluation.
In Britain, the policy was a disaster. Wages fell, unemployment rose and the country endured decades of economic stagnation. A decade later, real G.D.P. was lower than in 1918. Today, since adopting internal devaluation, the GIPSI countries have faced job losses and declining living standards.
The Problem Is Not Romney —It’s the Republican Party
Mitt Romney is catching a lot of flak his own side lately, which seems premature; this is by no means over. But let me say that even if he does spend election night weeping in his car elevator, his critics the right are being unfair.
Yes, he’s a pretty bad candidate — but the core problem is with his party, not with him.
What, after all, does Mr. Romney have to run on? True, he hasn’t offered specifics on his economic policies — but that’s because he can’t. The party base demands tax cuts, but also demands that he pose as a deficit hawk; he can’t do both in any coherent fashion without savaging Medicare and Social Security, yet he’s actually trying to run on the claim that President Obama is the threat to Medicare. On fiscal matters, doubletalk and obfuscation are his only options.
And no, Paul Ryan, his running mate, didn’t show that it can be done differently. His plan was, as I’ve documented many times, a fraud. Furthermore, he’s basically a Beltway creation; the Ryan legend was based on the desire of Washington types to anoint a Serious, Honest Conservative; expose him to the wider scene, and it all falls apart.
Nor can Mr. Romney do the George W. Bush thing of running as America’s defender against gay married terrorists.
First of all, that old standby, national security, isn’t working. Between Mr. Bush’s Iraq debacle and the fact that Mr. Obama was the one who got Osama bin Laden, the notion that only the G.O.P. will defend America is dead for the foreseeable future. And at this point social issues are cutting the wrong way: there are almost surely more affluent women who will vote against the party of Todd Akin than there are white working-class voters who will punish the Democrats for supporting gay marriage.
And underlying it all is the diminishing whiteness of the American electorate. This still might be a close election thanks to the weakness of the economy, and a better candidate than Mr. Romney might have had a better chance of pulling it off.
But the long-term fundamentals are not good for Republicans.
Delusions of Wonkhood
Dave Weigel, a political reporter at Slate, recently had some fun with credulous journalists who are sure that Paul Ryan must be a Very Serious Wonk because — wait for it — he uses PowerPoint. With pie charts!
This is really amazing.
Look, I know wonks. Mr. Ryan is not a wonk. Yes, he likes charts and slides. But he very clearly doesn’t know what his numbers actually mean. When the famous plan was unveiled, it was quite clear that he never even realized that the Heritage projection of his plan’s impact made a completely ridiculous assertion about what would happen to unemployment. Nor did he realize that his assumptions about discretionary spending would require cutting such spending — including defense! — to levels not seen since Calvin Coolidge.
One question one might ask is whether Mr. Ryan is aware that he isn’t actually a wonk — that he just plays one on TV. Maybe not.
Some of what he says suggests the Dunning-Kruger effect at work: he may be so innumerate that he doesn’t realize that he has no idea what the numbers he throws around mean. And after all, why would he, given all the praise he’s received for putting up a line graph or pie chart here and there?
If the fate of the republic weren’t at stake, it would be funny — and painfully embarrassing.
