Iwan Morgan Iwan Morgan blog brought to you by History News Network. Wed, 08 Dec 2021 07:36:23 +0000 Wed, 08 Dec 2021 07:36:23 +0000 Zend_Feed_Writer 2 (http://framework.zend.com) https://historynewsnetwork.org/blog/author/8 The Debt Limit Imbroglio  

We foreigners are getting very nervous about the debt limit impasse in the US.  Until last week media pundits and financial analysts evinced a "Of course, both sides will compromise in the end" optimism.  This seemed a perfectly reasonable assumption since the debt limit had been raised 106 times since 1940, including 18 times under Ronald Reagan and 7 times under George Bush - so the Republicans had form on this one.  And it is the GOP that gets the blame overseas for the imbroglio - just this weekend Vince Cable, Business Secretary in the UK Conservative-Liberal Democrat Coalition Government, said on national television that the culprits were a bunch of "right wing nutters" (his phrase, not mine).  In the last few days, however, there is a palpable shift over here to confronting the worst-case scenario, even though the betting is still on a last minute deal.  Both The Guardian and Financial Times are devoting a lot of coverage to what might happen if there's a default.  The fact that UK 10-year government bonds now have a 0.02 percent lower yield than US treasuries is seen as a significant indicator of what Deutsche Bank analysts have called a flight to quality.  Contrary to the conservative Republican/Tea Party belief that there will be no severe consequences if the debt limit is not changed, the sense over here is that the adverse effects will be considerable.  Many financial analysts are anticipating a credit downgrade for the US that could lead to a sell-off of US treasury bonds that would lead in turn to a general tightening of US credit markets.  It's ironic as one of the rationales for the Republican refusal to raise taxes as part of a deficit reduction/debt limitation deal is not to hurt the economy.  A debt default would likely have a worse effect in that regard, however.  It still seems inconceivable that this will happen, but not impossible.  My favourite quote in today's newspapers comes from Nils Pratley in The Guardian.  "To European minds, one element of any plan to tackle the US's debt woes seems obvious - higher taxes for the corporate sector and the rich, who have prospered mightily during two decades of debt-financed growth."  Maybe - but it's going to take a shift in the political culture of some magnitude to get to that point of rationality.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/140972 https://historynewsnetwork.org/blog/140972 0
The Perils of Moderation In the past Europeans have often been critical of American political parties for being non-ideological coalitions dedicated to election-winning and deal- making.  Now these distant days seem like a golden age of common sense and pragmatism!

We hear a lot over here about Republican ideological commitment, currently manifested in intransigence over raising the debt limit.  But we're not sure what to make of the Democrats.  If American politics is polarized, it's difficult to make out where President Obama's party is situated.  They are certainly nowhere near as liberal as the Republicans are conservative - in fact, the partisan battle seems to be right v center-right rather than right v left.  Paul Krugman's commentary "The Centrist Cop-Out" in yesterday's New York Times has certainly resonated over here.   

President Obama has made so many concessions to the Republican preferences on taxation and spending that it is difficult for us outsiders to make out what the fight is all about.  The agenda seems dominated by the party that controls just one chamber of Congress, while the party that controls the other chamber and the White House appears in retreat from power. This was not how it was when the balance was reversed during the first six years of the Reagan presidency.

Whatever happens in 2012, the political prospects seem very bleak for any renewal of progressive politics.  As Larry Elliott points out in today's Guardian, a short-term fix over the debt limit and the budget might help Obama get reelected but whoever is in the White House in 2013 looks likely to be faced with having to make massive spending cuts and preserve the Bush tax cuts.

The Age of Reagan pronounced dead by many in 2008 seems very much alive - only more so than when the Gipper was president.  

The US needs to put its fiscal house in order, but in a way that spreads the burden to ensure that the well off make a reasonable contribution in the national interest. If the Democrats want to find out what happens when a conservative fiscal retrenchment program is implemented, they can check out the UK; slow to zero economic growth, serious youth unemployment; fundamental weakening of the public services, and the worst hits falling on everybody but the rich! 




Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/140978 https://historynewsnetwork.org/blog/140978 0
The debt deal in sight - but what next? To the relief of financial markets from the Far East to London and by now Wall Street, the congressional leadership appears to have a debt limit deal to hand.  Assuming that it gets approved by both Houses, however, the debt problem is simply moving onto a different level rather than being resolved.

There's still a danger that the current imbroglio over debt limitation will result in a downgrading of the US debt by credit rating agencies.  That's less serious than would have happened in the event of a default, but lenders could interpret it as signaling that the US is no longer risk-free in terms of debt repayment.

More significantly for those of us more interested in the impact of the debt issue on ordinary people, there's a lot of politics still left to flesh out the details of the debt limit agreement.  There's still room for revenue enhancement and a portion of the spending retrenchment will come from the rundown of US involvement in Iraq and Afghanistan.  But that still necessitates a big bite out of federal domestic spending.

Whatever the distribution of the eventual fiscal retrenchment that will follow a debt limit deal, the effect on the economy is likely to be contraction.  There is a school of economic thought which argues that fiscal austerity brings expansionary benefits because it persuades financial markets that interest rates can be lowered.  However a IMF study of fiscal policy stretching back to the 1930s concludes that fiscal consolidation is much more likely to result in economic contraction than expansion.  The lesson from this is that boom times are best for budget retrenchment, as the 1990s showed.

The danger facing the US is that a political concern for debt reduction in the short-term makes it difficult to sustain long term by harming prospects for economic growth.  The US needs to cure its public debt habit and its private one, but it has still not made up the economic ground lost in 2007-09.  In these circumstances, new IMF head Christine Lagarde has suggested that its best option is to announce the details of a credible fiscal plan but delay its implementation until the economy is fully recovered.  That's the sensible solution, but the recent history of budget politics does not encourage optimism that such an approach will be adopted.  

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/141022 https://historynewsnetwork.org/blog/141022 0
A minority victory without precedent? Drawing on nearly forty years of teaching and researching US history and politics, I cannot think of a greater victory won by a minority party than the Republican success in forcing a solution to the debt limitation controversy that met GOP preferences.

I would be grateful if anyone could provide me with a better example.

The Democrats know all too well that they have been bested.  It's possible to pick out any number of admissions to this effect after the House vote, but two will suffice.  Raul Grijalva (Arizona) declared: "We have given much and received nothing in return.  The lesson today is that Republicans can hold their breath long enough to get what they want." Congressional Black Caucus chair Emmanuel Cleaver of Missouri , a Methodist pastor, graphically described the House bill as a "sugar-coated Satan sandwich."

Republican success is mainly built on the party's determination to stand by its clearly held beliefs, while the Democrats were always looking for a deal (though not necessarily this one).  The impending crisis of default also played to the advantage of the intransigent party in the negotiations.  Yet it should be recognized that the GOP's success is further built on its ability to define the debt/deficit problem as a spending problem.  This was spelled out clearly in what was effectively John Boehner's victory address after the vote - whatever the issues over his leadership in the crisis, it should be recognized that he ended up on the winning side!

Defining the deficit as a spending issue traces its Republican pedigree from the New Deal through the Eisenhower era to the Reagan presidency and down to the present.  Amazingly today's Democrats have let the GOP get away with this, in contrast to their 1980s and 1990s forbears.

A simple history lesson should undermine the contention that the deficit only arises from too much spending rather than insufficient revenue.  The US balanced the budget four times in the Clinton second term with tax levels that were higher than when the budget deficit ballooned in the Bush era.  In Fiscal Year 2000 the federal government operated a surplus of $236 billion dollars with revenues that equated to 20.9 percent GDP, the highest level since 1944. 

Another way of looking at this is to consider spending and revenue levels over the long term.  In the half century prior to the economic collapse of 2008, US expenditure averaged just over 20 percent of GDP, a relatively modest level, while tax revenues averaged an even more modest 18.5 percent of GDP.  Not insignificantly the US has only balanced its budget 5 times in this period, and the pattern on each occasion was consistent. Spending ranged between 18.4 and 19.4 percent GDP and receipts were never less than 19.7 percent GDP.  In other words fiscal balance resulted from spending control and revenue enhancement.

A main reason, admittedly not the only one, that the Clinton-era surpluses vanished in the twenty-first century was  the loss of revenue from the Republican tax cuts of 2001, 2003, and 2005.  It is remarkable how the GOP has been able to sustain these into the Obama era with an anti-tax campaign that blatantly ignores the distributive benefits of the Bush-era tax cuts in favor of the rich.  According to Joseph Stiglitz, the income of the wealthiest 1 percent  has risen by 18 percent in the last ten years with the assistance of the skewed tax cuts of 2001, 2003 and 2005; in contrast that of male blue collar workers has fallen by 12 percent over this period. Further benefiting economic elites is the declining significance of corporation income taxes over the last half-century, revenues from which only netted  2.7 percent GDP in Fiscal Year 2006 compared to 4.9 percent GDP in 1956.

Any insistence that the deficit/debt result solely from excess spending is a spurious argument that needs to be countered at every opportunity if the US is to put its fiscal house in order without inflicting most of the pain on those in society least able to bear it. 

Perhaps the Republicans would do well to recall the words of Dwight D. Eisenhower from 1953: "Every real American is proud to carry his share of any tax burden... I simply do not believe for one second that anyone privileged to live in this country wants someone else to pay his fair and just share of the cost of his Government." Ike was speaking in opposition to a Democratic proposal to raise the income base at which eligibility to pay income taxes began, which would have exempted millions of low-income tax payers from their obligations.  They are even more applicable to today's tax system that exempts the wealthy from carrying their fair share of the deficit reduction burden. 

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/141062 https://historynewsnetwork.org/blog/141062 0
Are America and Europe Sinking into Meltdown 2.0? On August 5, the Dow had its largest single-day fall since December 1, 2008.  Things were just as bad across the Atlantic, with the equivalent of nearly $80 billion wiped off the shares of Britain's 100 biggest companies.

The recent debt ceiling crisis in the U.S. produced a very inward-looking perspective among pundits and economist, and the same was true in Europe when the financial crisis hit individual countries over here.  However, yesterday's stock market declines show that America and Europe are in the same sinking boat.  We are no longer the different planets of Mars and Venus, to use Robert Kagan's terms.  We're one and the same planet  (and I'd say it was Pluto with its all its gloomy connotations). 

Our mutual characteristics are mounting public debt, weak economies, rising social welfare costs in response to demographic trends, fear for the future, and (though not universal throughout Europe) gridlock in government.  On the latter point, the economic crisis is polarizing politics and producing populist movements of the right like the Tea Party in the U.S., the Dutch Freedom Party, and the True Finns.  If you think the U.S. has gridlock, check out Belgium—it has not been able to form an official government since June 2010 because none of the possible coalition partners can agree terms!

However the current crisis in not like Meltdown 1.0 of 2007-08—it's sparked by sovereign debt rather than private debt.  As financial entities, stock markets operate through the anticipation of change.  Those in New York, London and elsewhere rise at the bottom of the cycle in expectation that the economy is set to improve, and fall when things are expected to get worse, as now.  Gloomy news on unemployment in the U.S., once the engine of the global economy—and even signs that the new powerhouse of China is slowing—makes the markets nervous.  What's more worrying for them, however, is the solvency of nation-states.  Though finally settled, the debt ceiling controversy raised doubts about the reliability of the U.S. as a borrower and the capacity of its government to deal with economic problems.  In Europe, we're not looking up at a debt ceiling but down into a debt chasm in the case of Greece, Ireland, Portugal, Spain, and Italy.  In 2007, the markets could draw comfort that the banking crisis did not become a sovereign debt crisis.  Now, however, the signs are that it is in process of doing so.  This is why investors are looking to gather as much liquidity as possible by selling off shares.

Public policymakers formed the rescue party (post-Lehman Brothers) in the Meltdown 1.0 crash caused by unwise lending by banks.  Cheap money and big budget deficits on both sides of the Atlantic averted a second Great Depression, but they have not been sufficient to boost a strong recovery.

This begs the question of what policy shots are left in the locker to avoid a new meltdown.  Easy money appears to have reached its limits.  The first two installments of Federal Reserve quantitative easing had limited expansionary effect on the U.S. economy, so a third is unlikely to work wonders.  In the UK the lowest official interest rate since the Bank of England was created in 1964 has not inspired great armies of consumers back into the nation's stores.  The Obama fiscal stimulus of 2009 helped to prevent the recession becoming a slump, but it was not large enough or sufficiently well-focused to generate strong recovery.  And now fiscal austerity is the order of the day on both sides of the Atlantic, which does nothing for economic growth and jobs. 

In reality, however, fiscal action is needed for expansion and reflation, but the statecraft required to drive this forward is seemingly absent. As Friday's editorial in the Financial Times, hardly a voice of the left, put it, "Only politicians and the Treasuries they control have the tools to turn economic fear into hope.  Their recent  form is reason enough to stay scared."

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/141133 https://historynewsnetwork.org/blog/141133 0
Five days that shook America There was fictional movie called "Seven Days in May" about the foiling of a military coup in the United States. There's unlikely to be a film called "Five Days in August" because it's difficult to see how the real events of this time can have a happy ending.  These were certainly five days that shook America, beginning with the last minute congressional agreement over the debt limit, proceeding to stock market turmoil, and ending with the S&P downgrade of its debt.  

The downgrade of the debt was something of a national humiliation - "it's hit the self-esteem of the United States, the psyche" Alan Greenspan pronounced.   Some commentators spoke of this as the moment that marked the end of America's global economic hegemony.   America's biggest creditor, the People's Republic of China, made angry noises about the US having to mend its indebted ways, rather like parents telling off a teenager off about misuse of the credit card that they were financing. The downgrade will almost certainly lead to higher interest rates not only in the US but also virtually everywhere else (because the markets have long priced all other bonds relative to America's).  As such there will be damage to global economic growth.  However, the downgrade marks a distant fear about possible American default rather than the imminent threat of one, as exists in Italy and Spain.  The likelihood, therefore, is that China and others will still go on lending to America for some time yet.

Arguably, the debt limitation deal was the single most significant event of the momentous first week of August because in economic terms it helped to make a double-dip recession more likely, which did much to roil the financial markets, and in political terms it precipitated the debt downgrade in displaying to S&P (in its words) that "the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time on ongoing fiscal and economic challenges."   

The debt deal signaled that the US, the country that had stuck longest to expansionary policy in the financial-economic crisis that started in 2007 and is still ongoing, was now shifting to austerity mode. However, the public debt is a medium-to-long term problem, the economy is a here-and-now problem.  The most dangerous deficit facing America today is that in jobs not the public finances. Despite 17 consecutive months of private-sector job creation, the US still has 6.8 million jobs fewer and an unemployment rate 4.1 percentage points higher than at the start of the recession.

The outcome of the debt limit imbroglio was driven by political ideology rather than economic common sense.  It would have been far better to sustain or expand federal spending in the short term, particularly on infrastructure projects, as well as allowing temporary extension of the tax cuts in return for agreement over large-scale entitlement reform and tax reform (i. e. revenue enhancement) in the medium term.  Instead Congress came up with a deal that failed to support the economy or stabilize the debt.  The Republicans' new found dedication to fiscal stringency also suggests that they will hold out against other much needed expansionary actions, notably extension of unemployment compensation for workers who have exhausted their benefits and of the payroll tax cut beyond their scheduled expiry at the end of 2011.

In 2009, fiscal actions added some 1.8 percent to GDP; the debt limit deal will cost 0.3 percent GDP in 2012 and the expiry of the aforementioned temporary measures will, more damagingly, cost 1.4 percent GDP growth.  An economy already showing signs of slowing down cannot afford that loss of fiscal steam, so the danger of a double-dip recession in 2012 is very real.

 If America does suffer another downturn, the likelihood is that this will pull the global economy into another recession with it, a development that will almost certainly put paid to the Euro currency.  Without plans for growth rather than austerity, some respected analysts have warned that it could take America and much of Europe twenty years to achieve real economic recovery from the  financial crisis of 2007-08.

A recession in 2012 could well spell the end of Barack Obama's presidency.  It will make him look like Jimmy Carter did in 1980 rather than Franklin D. Roosevelt, as his supporters hoped in 2008.  Of course, FDR won reelection in 1936 when the economy had still not recovered to its 1929 level of output, but things appeared to be getting better  - as indeed they were until the policy error of shifting from stimulus to austerity led to new recession in 1937.  Obama may have had a poisonous economic legacy to deal with, but his handling of the debt limitation issue has not inspired confidence in the quality of his leadership or the strength of his convictions.  Things may still turn around for the president but it bears testimony to his parlous situation that his strongest thread of hope currently hangs on the Republicans nominating a candidate who is too conservative for America.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/141157 https://historynewsnetwork.org/blog/141157 0
The Fed's Not the Cavalry in this Crisis  

Iwan Morgan is Professor of U.S. Studies and Head of U.S. Programmes at the Institute for the Study of the Americas [ISA].  He was previously Professor of Modern American History and Head of Department of Politics and Modern History at London Guildhall University and Professor of American Governance at London Metropolitan University.  He has also taught at Indiana University-Purdue University at Fort Wayne as a Fulbright Educational Exchange Lecturer. 

Most recently, Professor Morgan's work The Age of Deficits won the American Politics Group's 2010 Richard Neustadt Book Prize.

On August 9, the Federal Open Market Committee, the central bank's main monetary policy body, announced that the short-term interest rates under its control would be held at their ultra-low level for a further two years in order to boost U.S. economic recovery.  In June, it had committed to only a few months of holding down the federal funds rate, broadly interpreted as meaning to the end of the year at most.  At the same time, however, it held back from launching a third installment of quantitative easing so soon after the completion of the last one.  Wall Street reaction was generally but not universally positive, with majority opinion holding that the Fed had gone as far as it could without appearing panicky.  Nevertheless, the dryly worded central bank statement was an effective admission that it did not expect a real expansion in jobs till mid-2013 and did not possess the magic wand to produce one.

The Fed's limited impact in pursuit of economic recovery contrasts starkly with its reputation as the guarantor of economic growth during the final decade of the twentieth century.  Journalist Bob Woodward celebrated its success in this earlier era with a book unblushingly entitled Maestro: Greenspan's Fed and the American Boom, published in 2000.  It is unlikely that anyone will write a similar book about Bernanke (or about Greenspan post-2000 for that matter). The problems facing the current chair, however, are of a different order to those confronting any of his recent predecessors.

Bernanke heads an institution more renowned for fighting inflation than boosting jobs.  The Fed's reputation had sunk to a low ebb in the seventies because of its efforts to balance price stability and job growth in an era of stagflation.  In the eyes of critics, its failure to pursue a consistently tight money policy was instrumental in producing the high inflation of that decade.  On becoming chairman in 1979, Paul Volcker set out to restore the central bank's credibility on this score by adopting a tough policy of controlling money stock growth (quantitative tightening in today's lingo).  As a consequence of this three-year dose of monetarism, consumer price inflation was brought down from 13.3 percent in 1979 to 3.2 percent in 1983, but at the cost of the worst recession since the 1930s in 1981-82.  The Fed withstood the criticism from the White House and Congress that it kept its foot on the monetary brakes too long and too hard because it had the support of Wall Street.  A far from enthusiastic Reagan administration therefore had little choice but to appoint Volcker to a second term as chair in 1983.  Inflation remained low for the rest of the eighties, but even after monetary easing ended the recession in late 1982 unemployment did not sink to its 1980 level until 1986.

Alan Greenspan continued his successor's strategy of making inflation the Fed's number-one priority and not trading this off against employment concerns. Greenspan's anti-inflation raising of interest rates in 1988-89 helped slow the economy into recession in 1990, to George H.W. Bush's fury, and his restoration of these in 1994, to Bill Clinton's anger, restrained the recovery in the interests of keeping inflation low.  Only when he was convinced that productivity gains from high-tech innovations now constrained inflation did Greenspan ease interest rates to produce the great boom of 1996-2000.  His foot, however, went back on the monetary brakes when inflation revived in 1999-2000, which was a factor in precipitating a new recession in early 2001.  Greenspan eased again in response to this downturn and the 9/11 shock, but moved back to tightening in 2005 to curb house price inflation, a response that created difficulties in the sub-prime mortgage market that led in turn to the toxic consequences of 2007-08. 

While Bernanke is committed to the continuation of easy money, the Fed is not united in support of this because the anti-inflation priority is deeply embedded into its institutional culture.  In the August 8 Open Market Committee vote on holding interest rates low for two years, the Dallas, Minneapolis and Philadelphia Reserve Bank presidents dissented in a 7-3 split—the first time since 1992 (when Greenspan favored ease to boost recovery from the 1990 recession) that a chairman has encountered a 'rebellion' of this scale.  The cause of this disagreement was concern that the Fed was letting inflation rise because of its focus on employment and economic growth.  It is open to question, therefore, whether Bernanke will have sufficient support on the twelve-person committee if he opts for a further round of quantitative easing.

It is even more open to question, perhaps, if a third round of QM would have any more effect in boosting employment than the previous two.  To date, easy money may have helped to stop the recession turning into a slump, but it has not helped twenty-five million Americans to get full-time jobs. 

In today's climate of economic uncertainty and job insecurity, ordinary Americans are more inclined to save money if they possibly can than to continue their borrowing habit to fund consumption.  The best way of breaking this concern is to put money back in people's pockets through fiscal actions—ranging from infrastructure investments to employment tax cuts and unemployment insurance extension—to create jobs directly or indirectly.  Fiscal policy also has better distributive effects than monetary policy in helping those most in need.  As Greenspan himself admitted in his Harvard commencement address of 1999, when the boom he helped to create was at its peak, "The gains have not been as widely spread across households as I would like."  It may be heresy to say so in today's political climate, but the Keynesian multiplier represents the best chance of boosting employment and expanding income amongst the working and middle classes.   

The Fed chair was the chief manager of prosperity in the era when inflation was deemed the number-one economic problem, but times have changed.  The president should resume that role now that unemployment is the principal concern, and presidential fiscal policy is needed to address it.  Whether Barack Obama can accept this, and, even if he does, is able to break free of partisan fetters to take up that responsibility is another matter. 

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/141228 https://historynewsnetwork.org/blog/141228 0
The European Sovereign Debt Crisis and America Three years ago, the conventional wisdom in Europe was that its economic problems were made in America.  This was widely believed true because of the toxic spread of the sub-prime crisis from the U.S. through the agency of debt-financing derivatives.  Now, however, Europe's problem with sovereign debt has worrying consequences for the United States.  As such, America's prospects of economic recovery continue to be entwined with those of Europe.  

Although other euro zone countries have experienced sovereign debt problems, the epicenter of the crisis continues to be Greece.  Fear of a Greek default remains the source of considerable agitation in European banking circles.  It is now evident that French banks, which were largely immune from the effects of the sub-prime crisis, are particularly vulnerable to such a development because of their holdings in Greek bonds.  This is especially the case with BNP Paribas (the biggest French funder), Societe Generale, and Credit Agrocole.  To make matters worse, French banks did not build up their reserves in the wake of the sub-prime crisis in the manner of U.S. and UK banks because they did not consider the effects to be so severe for them. 

With similar problems already besetting Italian banks, the Greek debt crisis now threatens to affect the core of Europe rather than just its periphery.   The future of the Euro zone depends on whether Germany, still the financial and economic power house of the continent, has the political will to rescue the project yet again.  However, the unpopularity of further Greek bailouts among German voters constrains Chancellor Angela Merkel's room for maneuver on that score.

More immediately, there are dangers that bank lending in key European economies could freeze up to produce another sharp financial downturn on both sides of the Atlantic.  American financial institutions are by no means immune from the effects of the Greek contagion because of their lending to French banks.  Reflecting this concern, prime U.S. money funds reduced their holdings in certificates of deposits issued by French banks by about 40 percent in the three months through August 11, 2011.  The proportion of the remaining U.S. French bank holdings maturing in less than a month increased to 56 percent on August 11 from 17 percent on June 11. 

The inevitable consequence of this is to push up French bank borrowing costs, which is likely to have ripple effects on both sides of the Atlantic because of the necessity of asset sales to reassure nervous investors.  One sign of this is the announcement by Societe General on September 12 that it is planning to free up 4 billion euros ($5.44 billion) in capital through such sales by 2013 (it holds about 900 million euros in Greek bonds).  

Reducing exposure to the debt of French banks is only part of the story for American money funds, however, because they have increased their holdings of European debt from 38 percent of assets in the second half of 2006 to more than half by June 2011 as a result of European demand for dollar-based holding and the decreased supply of U.S. bank-issued debt.

In this crisis, no nation is an island.  The interactions of American and European financial interests mean that problems on one side of the Atlantic will beset the other.  The ripple effect of toxicity may have initially spread from the U.S. to Europe, but the reverse effect has now become increasingly problematic.  

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/141830 https://historynewsnetwork.org/blog/141830 0
Lessons from History on the Double-Dip Recession

In early August, The Economist put America's chances of a double-dip recession in the coming year at 50 percent.  If anything, things look even bleaker some two months on.  The recovery that began in 2009 is in danger of petering out.  In the first two quarters of 2011 the United States achieved an annualized growth rate of just 0.8 percent, far below the 2.5 percent annual expansion that economists consider the minimum necessary to make a dent in the present unemployment rate of 9.2 percent.  On a per-person basis, inflation-adjusted GDP now stands at virtually the same level as in the second quarter of 2005.  If this trend continues the United States is in the sixth year of what could go down in history as its version of Japan's "lost decade" of the 1990s.

Comparing the current situation with other recessions in America's modern history offers little comfort.  Recessions punctuated America's postwar history with a regularity that may seem surprising in view of the period's association with the "long boom."  From 1949 (the date of the first downturn) through 1982, there were eight recessions: in 1949, 1953-54, 1957-58, 1960-61, 1970, 1974-75, 1980, 1981-82.  This made for an average of one downturn every four years or so.

Most of these downturns were policy-induced, with the primary trigger being Federal Reserve monetary tightening to restrict inflation.  As a result, it was relatively easy to reverse course, so that these downturns tended to be short-lasting and shallow, with the exceptions of 1974-75 and 1981-82.  In most instances, monetary easing and the beneficial effect of automatic fiscal stabilizers produced speedy recovery.  Only two recessions turned into double-dip recessions, and again the root cause was public policy.  Recovery from the 1957-58 recession was short-lived because of Dwight D. Eisenhower's insistence on balancing the Fiscal Year 1960 budget to reassure foreign dollar-holders that inflation was under control, thereby preempting a threatened run on U.S. gold reserves (a concern in the age of dollar fixed-rate convertibility into gold).  However, this denied the recovery its needed fiscal adrenaline, with the result that a new downturn in late 1960 was an instrumental factor in the GOP's loss of the presidency in that year's election.  The double-dip recessions of 1980 and 1981-82 were the result of the Federal Reserve's monetarist experiment to choke off double-digit inflation.  In the latter downturn unemployment surpassed 10 percent of the workforce for the first time since the Great Depression, but economic recovery was relatively speedy once the Fed reversed course in late 1982.  In the second full year of recovery, economic output jumped forward by 5.6 percent compared to its anemic growth of 1.6 percent in the second year of the current recovery cycle.    

In comparison, recessions have been much less frequent in recent times—with only three downturns since 1982: 1990-91, 2001, and 2007-2009.  Low inflation was one reason for this pattern.  The Fed's conquest of runaway price instability through the monetarist experiment of 1979-1982 enabled the central bank to adopt a relatively relaxed stance on interest rates over the next quarter-century.  However, inflation concerns did not entirely disappear—interest rate hikes helped to precipitate each of the three post-1982 downturns.

If America is heading for a double-dip recession, this will raise questions as to whether it is now in a depression.  A recession is defined as the economy undergoing two quarters or more of negative economic growth (that is decline in output), but it is also characterized by relatively speedy recovery.  A depression is marked by the abnormality of its long duration, large increases in unemployment, and steep falls in the availability of credit. 

It's far too early to suggest that the US is in a new depression even if there is a double-dip downturn: output loss, jobless growth, and credit scarcity do not match those of America's previous depressions.  On the other hand there are pessimistic markers of comparison.  The nineteenth-century depressions were set off by financial crisis in 1837, 1873 and 1893, as was the Great Depression of the 1930s by the 1929 Wall Street crash.  Downturns precipitated by financial crises historically tend to last much longer than recessionary declines.

In line with this, the IMF's World Economic Outlook, released last week, suggested that recovery in the U.S. and other advanced economies faced not one but two potential feedback threats. 

One involves the interplay of growth, deficit reduction and the banks:  weak growth leads to bigger budget deficits, in turn leading governments to further fiscal tightening, which lowers growth, which puts pressure on bank balance sheets with the result that banks lend less, leading once more to weaker economic activity and bigger deficits.  In the case of the U.S., the spending cuts mandated by the debt limitation deal could affect short-term growth.  More seriously, failure to extend the soon-to-expire unemployment insurance benefit extensions and  temporary 2 percent payroll tax reduction into 2012 and the expiry of stimulus spending from the 2009 bill could trim 1.7 percentage points off expected growth in 2012.  This has parallels with Herbert Hoover's futile and disastrous efforts to balance the budget through fiscal retrenchment in 1932.

The other feedback threat reflects concern that the deepening European debt crisis could have knock-on effects for other economies—even those outside the Eurozone, like the U.S. and UK, where policymakers already detect strains on banks stemming from Europe.  This has prompted concern that a Greek debt default could do in 2011 what the failure of Lehman Brothers did in 2008.  The historic parallel with this is the collapse of Austria's largest bank in May 1931, which set off a string of bank failures throughout central Europe.  The international effects of this, among other things, were to force Britain off the gold standard and to increase uncertainty in U.S. financial circles, choking off any glimmer of economic recovery.

If America does manage to avoid a new recession and achieve stronger growth, it will be a testimony to the underlying strength of its economy.  At present its political leadership in both the executive and legislative branches does not appear to have the same reserves. 

If a new recession does occur, it would do considerable damage to Barack Obama's reelection prospects:  the hopes of 2008 that he would be the new FDR have long since evaporated; the danger the 44th president now faces in terms of personal reputation is to go down in history as the new Herbert Hoover.

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Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/142060 https://historynewsnetwork.org/blog/142060 0
The European Debt Crisis: A Problem of Political Will? Back in the summer, as US politicians seemed on the verge of failing to agree a debt limit extension to avoid default on America's obligations, Europeans looked on in scornful amazement at an apparent failure of leadership.  Now the shoe is very much on the other foot.  Speaking on November 16, President Barack Obama accused the Eurozone of suffering from "a problem of political will" that put the future of the single currency at risk. America's leaders succeeded in averting a default crisis when common sense finally prevailed (though the Democrats paid a higher price for reason than the Republicans).  Whether Europe's leaders can pull off their own great escape is much more open to doubt because in their case their sovereign debt problem is much graver than America's debt limitation problem and the solution to it is far less readily apparent.

Signifying the sense that there is a problem of political will, the current leaders of the single currency project - Angela Merkel and Nicolas Sarkozy - are widely compared unfavorably in the media with their predecessors who built the foundations of the European project in the 1950s - Konrad Adenauer and Charles de Gaulle.  Such yardsticks obscure understanding of the current crisis more than they enlighten.  There is really nothing in modern history that allows for appropriate comparison to judge today's  leaders with their forbears because the single-currency issue lends a unique dimension to Europe's debt crisis.

That said, the fetters of history still bind the most important actor in the unfolding debt crisis.  Germany has to decide whether to drop its visceral  opposition to the European Central Bank[ECB] throwing inflationary caution aside to act like a lender of last resort or risk being blamed for the destruction of the Euro.  This is a tough call for a nation whose thinking on political economy continues to be shaped by horror of the hyper-inflation it suffered under the Weimar regime in 1923. In private Angela Merkel is said to be in favor of allowing the ECB to print money to buy up enormous quantities of Italian and Spanish debt, but is unprepared to take the political risk of saying so in public.  As a result, the unity of Germany and France, which has been at the heart of the European project since its inception and through its evolution into the single currency, is now fraying.

If nothing else, the current crisis shows that unity in the face of economic and financial crisis is far more difficult for a 17-member club of nations than for a union of fifty states under one government.  Europe's pre-crisis hubris about its glorious economic future now looks sadly laughable.  Back in 1988, Paul Kennedy's The Rise and Decline of the Great Powers predicted that the US was about to enter a period of decline because the fiscal costs of Cold War victory would sap its economic vitality.  The best that may be said about that forecast was that it was very premature but best-selling sales at least provided the consolation of profit in doom.  Far less well known was another much more fanciful declinist tract by Jacques Attali, a key aide to President Mitterand of France and director of the new multilateral bank established to assist the post-communist economic reconstruction of Eastern Europe.  In Lignes d'Horizon (1990), he predicted that global economic predominance would soon pass from the United States to a European bloc and a Japanese-led Pacific bloc!  

Such inaccurate forecasts should counsel caution about predicting the outcome of the current crisis, but it is difficult to see the Eurozone surviving in its present form.  The problem of leadership is arguably less to do with ensuring the survival of the single currency as presently constituted and more to do with saving parts of the project.  If the Germans cannot bring themselves to agree to an ECB printing-press solution to bail out the worst national debtors, which anyway may just prove a sticking-plaster solution that temporarily stems the problem without actually resolving its deep-seated roots, then the only apparent alternative to save the euro is to create a smaller union of Northern European countries - about 8 of the current members - and leave the Southern European nations to form their own satellite zone.

Having invested so much political capital in creating the monetary union, the Northern members are unlikely to ditch it entirely.  However things will have to get much worse - as they probably will - before the European political class gears up for radical action.  In the meantime, doing something to stave off the current crisis is a short-term necessity and the imperative for action becomes daily more pressing.

The dimensions of the problem are huge.  France has now slumped to 13th place in a Eurozone league table of financial security, just one place above Italy and below two troubled debtors - Spain and Ireland.  Its government has huge debts, which pushed up yield on its 10-year government bonds to 3.69% - the highest level since the formation of the Eurozone, and its banks are massively exposed to bad debts in Italy, Spain, and Greece, in particular.  If one of the two nations at the heart of the Eurozone is sucked into the financial contagion, the resultant crisis will put the entire project at risk.     

The fact that Europe is now the epicenter of the crisis whose roots are traceable to the American financial crisis of 2007-08 can be no comfort to the United States and the rest of the world.  The uncertainty besetting the Eurozone is a drag on global economic recovery in an interdependent world.  The reality is that two-thirds of all lending in the Eurozone is between its 7,000 banks and institutions in the US, Asia, and the Middle East.  In total Eurozone banks hold 55 trillion euros in assets, much of them loans to sovereign countries and other banks, only some of which are in the Eurozone.  If the current crisis produces a string of bank failures in Europe, the effects will ripple outwards to every part of the world, not least the United States.    


Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/143043 https://historynewsnetwork.org/blog/143043 0
The UK's Deficit Dogma: The Lessons for the U.S. In the U.S., the failure of the congressional super-committee to reach agreement on deficit reduction looks set to trigger massive automatic spending cuts in both domestic and defense programs from 2013 onwards.  While debt reduction is unquestionably necessary in the medium to long-term, placing it ahead of building a strong economic recovery is likely to do more harm than good.  The United States should look no further than the United Kingdom for proof of the folly of prioritizing fiscal austerity over laying the foundations for post-recession economic growth.

On taking office in mid 2010 Britain's Conservative-Liberal Democrat (note to American readers -- Liberal Democrat in the UK does not mean the same as in the U.S.!) Coalition government committed to eliminate the huge UK deficit in the course of one five-year parliament.  Critics warned that such rapid retrenchment could only undermine recovery from the Great Recession of 2007-09 and make a double-dip recession very likely.  Some critics pointed out that Coalition policy flagrantly contradicted Keynes's dictum about recession and post-recession fiscal policy, "Look after unemployment and the budget will look after itself."  Most governments presently operate huge deficits mainly because their economies have shrunk, but the cyclical element of these deficits will decline automatically as recovery gains strength.  

Deficit reduction does not in itself produce post-recession economic growth.  Nor will it eliminate the deficit in a weak recovery.  A government is able cut its spending whatever the economic circumstances but it cannot control its revenue.  Without a strong recovery in place, retrenchment weakens growth so that government income falls.  The United States had clearer proof of this particular pudding in the shape of the 1937-38 depression.  FDR's party paid the price for his mistake in the 1938 midterms.  Later presidents who ignored this lesson also paid the price at the ballot box -- whether in the defeat of their putative successor as happened to Richard Nixon in 1960 after Dwight Eisenhower insisted on balancing the budget immediately after the sharp recession of 1958, or failure to win re-election, as in Jimmy Carter's case in 1980.  Determined to stick to his pledge to balance the budget by the end of his first term, Carter proposed an anti-inflation austerity budget in his final year in office.  In doing so, he ignored the warnings of his chief domestic adviser, Stuart Eizenstat, about impending economic downturn: "We are proposing a budget program which is unachievable as well as undesirable in the present recessionary climate."    

Britain's leaders would have done well to heed similar warnings about the folly of their fiscal course.  They have amply demonstrated that efforts to balance the budget in a weak economy are self-defeating.  When presented with proof that his balanced-budget projections were way off course, however, Chancellor of the Exchequer George Osborne came up with an extended version of the discredited Plan A rather than a new plan B. 

On November 29, Osborne told Parliament that weaker growth and higher borrowing means that the UK faces an unprecedented six years of austerity.  The ax will fall on public sector, which will lose 700,000 jobs, instead of 400,000 as previously projected (with additional austerity in the shape of a public-sector pay freeze for those who hold onto their posts), in order to cope with £111 billion in additional borrowing over the next five years.  This begs the question of what will happen to the 700,000 who lose their jobs and the over two million who are currently unemployed.  In Plan A, they were to be absorbed into an expanding private sector, but public retrenchment in combination with uncertainty over the euro crisis means that new private-sector jobs have not been created in anything like the number anticipated.   

The Coalition has now put back the target for eliminating the deficit to 2017 (originally 2015), but the additional cuts needed to achieve this could well tip the economy into recession next year, which will put back the budget-balancing schedule even further.  Osborne covered his embarrassment at missing his deficit target with the fig-leaf justification that Britain's dedication to austerity had found favor with the markets in the form of low interest for government bonds, which will make borrowing easier than it was for Eurozone countries, including Germany.  Of course this rather ignores the reality that less borrowing would be needed if the economy grew more quickly with the benefit of a short-term fiscal boost.  Once a sound recovery was in place, a program to eliminate the structural deficit would have good prospects of success. 

To date the United States has taken a different and more effective route to Britain's in operating short-term deficits to boost the economy.  The stimulus package of 2009 and the smaller program agreed at the end of 2010 have at least prevented the recession from being deeper than once looked likely.  With Britain now facing a possible double-dip recession, the parallel economic data in the United States looks relatively rosy, with a 3 percent annual rate of GDP growth forecast in the final quarter of 2011.  Meanwhile inflation is falling, thereby allowing the Federal Reserve more scope to operate on the unemployment side of its mandate.

However, the storm clouds of new recession may soon reappear if America resorts to premature retrenchment.  The failure of the super-committee points to probbale renewal of political battles over the federal government's finances.  This could mean failure to extend key stimulative measures agreed in late 2010, particularly the extension of unemployment benefits and the employment tax cut.  If the American right is serious about cutting the deficit rather than merely pursuing an anti-government agenda, this can better be done if the current burst of growth can be sustained.  Examination of developments across the Atlantic shows what happens when dogma trumps economic common sense in the pursuit of debt reduction. 

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/143338 https://historynewsnetwork.org/blog/143338 0
The Lost Generation? Youth and the Great Recession As the governments of the European Union countries and (possibly, but less likely) the United States peer ahead to the threat of a new recession in 2012, one common demographic group in these nations is still deeply mired in the effects of the Great Recession that supposedly ended in 2009.  Youth unemployment for the 16 to 24-year-old age group averaged 18.3 percent in the U.S. and 21 percent across the 27-member E.U. in 2010-2011.  In the E.U., the highest youth unemployment rates have been in Spain, with 45 percent, and Greece, with 42.9 percent, which offer a marked contrast to the relatively low levels in some economies—notably the Netherlands (7 percent), Austria (8.3 percent), and Germany (8.9 percent).  Unemployment is also above the E.U. average in Italy (27 percent) and France (23 percent), while in the U.K. it has been around 20 percent.  These figures are not far behind the 21.8 percent youth unemployment in the long stagnant MENA (Middle East and North Africa) countries.   

Although youth employment has been generally lower in the U.S., some groups in the population have been very hard hit.  Among African American youth, for example, the jobless rate for black teens hit 45 percent in 2010.  Moreover, unemployment in the 16-24 group had been growing steadily since 2000 before its acceleration in 2008.  In terms of unemployment to population ratio, which also takes account of those in full-time education, the majority of young people have not been in work in 2008-2011 for the first time in half a century. 

To some analysts, youth unemployment is the driving force behind the upsurge of anti-(finance) capitalist protest in the U.S., U.K., and Western Europe. Others also consider it a critical factor in the Arab Spring.  Significantly, youth unemployment across the MENA (Middle East and North Africa) countries, many of which have long-stagnant economies, is not far ahead of Western levels at 21.8 percent.

A forthcoming book by BBC economics editor Paul Mason, Why It's Kicking Off Everywhere: The New Global Revolutions (Verso, 2012), makes a strong case for the central role of economically disillusioned youth in the widespread incidence of protest.  In his analysis, the new sociological phenomenon of the graduate with no future is at the heart of this phenomenon.  The expectancy that a degree was a passport to a decent job and a middle-class lifestyle has given way in the West to a sense that many of those in the current generation of youth will be poorer than their parents.  

In consequence, in Mason's assessment, revolts sparked or led by educated youth, whether in New York, London, or Cairo, have had a number of common traits.  The quintessential venue of unrest is the global city, where reside the "three tribes of discontent"—youth, slum-dwellers, and the working class.  Second, members of the "graduates with no future" generation see themselves as part of an international sub-class with behaviors that cross borders.  The mass, transnational culture of being young and educated that emerged in the boom years has transmitted easily into a transnational culture of disillusionment.  Third, the sheer size of the recent and soon-to-be graduate population makes it a transmitter of unrest to a much wider section of the population.  It is significant in this regard that, since 2000, global participation rates in higher education has grown from 19 to 26 percent.  In contrast to middle-class student activists of the 1960s, who saw themselves as external detonators of the working class, today's generation of protesters are thoroughly entrenched in shared experience with low-income communities.  Throw into this mix the availability of social media and new technology, which discontented youth can use to share ideas, raise consciousness, and develop their own hierarchies, and the result, in Mason's view, is a new kind of revolution with massive potential to disrupt the patterns of social and political life.

Whether such an analysis is borne out remains to be seen, but it does suggest that the Great Recession and the jobless recovery may be bringing the social pot to the boil.  The main attention so far has been on how governments have responded to the economic crisis, but the streets show signs of being an increasingly important locus for understanding the significance of recent economic developments.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/143868 https://historynewsnetwork.org/blog/143868 0
Is the U.S. in Relative Decline? Sadly, the Answer is Yes.  The U.K. press is currently full of reports about the visit of China's leader-designate, Xi Jinping, to Washington this week. "The princeling and the professor" was one paper's editorial take on the Xi-Obama get together. Apart from personalities, however, what has consumed British interest is the accompanying debate about whether the U.S. is in decline.  We've been there a century before, so we're agog to discuss if this signals a historic moment in the process of principal power succession from the U.S. to China.

This blog is contribution to this debate. It focuses on the issue of America's relative economic decline.  I have to say -- with regret -- that I see this as already in process: it's no longer a question of whether -- but of pace and extent. 

It may appear contentious to suggest that America's economic pre-eminence is eroding when its has approximately a 25 percent share of nominal global GDP and its own gross domestic product was roughly twice as big as its nearest single-country rival, China, in 2011. However the U.S. GDP was eight times as large as China’s as recently as 2000. In the ensuing decade China’s economy grew on annual average by 10.5 percent in real terms compared to America’s 1.6 percent. On current trends, therefore, China’s GDP will eclipse America’s on a purchasing-power parity basis in 2016 and, far more importantly, in dollar terms converted at market-exchange rates in 2018.

Any one wishing to compare China and America as economic rivals should visit The Economist chinavusa website. That must-read journal for political and intellectual elites is in no doubt that the United States is in relative decline. Signifying this, in a recent edition it began a weekly section devoted entirely to China, the first time it has singled out any nation since it began detailed coverage of the U.S. in 1942 -– symbolically the very year that Henry Luce pronounced the arrival of the American Century.

The chinavusa indices make interesting reading. The U.S. still has 133 firms in the Fortune 500 global list of top companies, twice the number China has, but it has already fallen behind China on a whole set of other economic power indicators –- steel consumption (1999), exports (2007), fixed investment (2009), energy consumption (2010) and patents granted to residents (2011). The U.S. is still ahead -– if only just -– in retail sales, stock-market capitalization, and consumer spending, but current projections suggest the lead will change hands on all these indicators in the next ten years. Finally China will outstrip the U.S. on the ultimate index of hard power –- defense spending -- in 2025.

Of course these predictions might be selective and/or wrong. It is certainly true that Americans will remain richer on a per capita basis than the Chinese for many, many years to come. Moreover, U.S. economic strength was on an upward curve of sustained pre-eminence in the twentieth century. Why should the present century be any different? The Cassandras of economic decline have always been wrong in the past -- why should now be any different? The answer is that the U.S. has to grapple with a problem of economic re-balancing that China and other emergent economic powers do not face.

For the United States, recovery from the Great Recession is not the same as renewing the foundations of its economic pre-eminence. Cyclical bounce-back will not resolve the structural weaknesses that have been slowly eroding the foundations of America’s economic strength for a quarter of a century. In essence, the United States has relied too much on internal consumption and debt, both private and public, to drive its economic growth from the 1980s through the first decade of this century. The real renewal of its economic strength requires a re-balancing of its economy to focus more on saving, investment, and exports, but this will be difficult to pull off.

The U.S. is so far showing at best mixed signs of its capacity to re-balance. Household debt, which grew from $1.4 trillion in 1980 to $13.8 trillion in 2007, is now in decline thanks to the Great Recession, with the result that household saving is at its highest level in twenty years. But recession-swollen public deficits counterbalanced this to produce a negative rate of national saving in 2009-10. Meanwhile the trade gap, having narrowed in 2009 began to grow again in 2010, when America’s bilateral deficit with China reached a historic peak ($273 billion).

The United States still leads in key economic sectors, of course, particularly knowledge-intensive capital goods, but only about 4 percent of all American firms and 15 percent of manufacturing enterprises do any exporting at all and just 1 percent of firms account for 80 percent of America’s export trade. U.S. exports of goods and services made up just 10.9 percent of GDP in 2009. For economic re-balancing to occur, a goodly number of respected economists estimate that the export share of GDP will have to double within ten years, a very tall order.

Economic re-balancing also requires the state to play a constructive role in the process. In part this will be through greater public investment in all levels of education, in worker training, environmental safeguards, and infrastructure improvement to enhance competitiveness and productivity. Most significantly, economic re-balancing requires the national government to put its finances on a sustainable basis for the medium to long term so that credit is freed up for productive investment in the private sector.

A fiscal course correction will have to await stronger economic recovery lest it flatten the current expansion, of course. Sometime in the middle of this decade, however, the United States will have to begin taking action to control entitlement spending on Social Security, Medicare and Medicaid and to boost revenues through tax hikes. Without such a course correction, the Congressional Budget Office estimates that the U.S. public debt ratio to GDP will in 2023 surpass its previous peak of 109 percent, reached in 1946 when America was paying for WWII borrowing, and will hit 185 percent GDP around 2035. In those circumstances, legally required entitlement spending and interest repayment would increasingly squeeze out the availability of tax revenue for other programs. This would leave the U.S. government reliant on borrowing to fund defense, education, and infrastructure, but interest rates (long and short term) would become sky-high because of investor concern about the sustainability of the public debt, with severe consequences for economic growth.

The current state of intense political polarization inhibits America’s capacity to address its fiscal problems. Republicans insist on spending retrenchment on entitlements and domestic programs is the only route to fiscal salvation, while the Democrats want revenue enhancement to be part of the mix. Both are essential to achievement of fiscal sustainability. The Republican notion that tax increases for the rich will inhibit growth is not supported by the historical evidence from the 1990s (when economic growth and taxes rose) and the Bush era (when low taxes did not work any economic magic). Moreover, the current tax system underwrites the extreme inequality of income that is retarding America’s capacity to move from consumption and borrowing to savings and investment. In 1976 the richest 1 percent of households owned 9 percent of the nation's pre-tax income; in 2007 its share was 24 percent, with the richest 0.1 percent accounting for 12 percent. In essence, this income inequality leaves the rich with so much money that they binge on bubble-creating stock-market and real-estate speculation (and SuperPAC contributions), and leaves the middle classes without enough money to buy the things they think they deserve, which leads them to borrow and go into debt.

Without a fiscal course correction, America will not have the public investment funds to spend on programs that will keep it competitive in the future. Big education spending on schools and colleges is needed to upgrade the qualifications and skills of the immigrant population that is essential to America’s vibrancy. The states patently cannot sustain the public university system. California, which once had the greatest public universities in the world, is moving towards semi-privatisation through charging high fees that discourage low-income and lower-middle income applicants. As a result, a recent reported concluded, the Golden State will have a one-million graduate shortage by 2025 that will seriously threaten its knowledge-intensive industries.

Is America in relative economic decline? The simple answer is yes. Can it sustain the Number One spot? This is possible, but highly unlikely. But its strategy for doing so would be mistaken if this involved trying to block China’s rise, which benefits the global economy and that of the United States. Setting aside issues of national prestige, Americans might consider asking themselves whether it is better to be a vibrant and prosperous Number Two in a revitalized global economy rather than top dog in a stagnant Number One. As Britain found out, being economic Number One is a finite rather than infinite resource; however, America is highly unlikely to experience a twenty-first century decline of comparable dimensions to the Britain's in the second half of the twentieth century because it has too many advantages and assets -- but it still needs to safeguard its capacity to exploit these to best effect through taking prudent and timely fiscal actions.

To what extent relative economic decline translates into geopolitical decline is another matter. It is difficult to see China matching U.S. military power and global reach for many years to come, even if it does overtake the U.S. in defense spending in the 2020s. Nevertheless there is a link between economic power and geopolitical power. U.S. hegemony can no longer be relied on to keep the global peace and in regional terms China 's influence can only grow in Asia, arguably the continent that faces the greatest strategic challenges of anywhere in the world (such as a divided Korea, a disputed Taiwan Straits, and India-Pakistan nuclear rivalry). As such, the international community has to hope that the U.S. and China enter a debate about the type of international order that will emerge in the twenty-first century.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/144652 https://historynewsnetwork.org/blog/144652 0
BRIC by BRIC: The Changing Global Economic League China’s anticipated overtaking of the U.S. as the world’s biggest economy has become the focus of much comment of late. Equally important, however, are the changes already happening and likely to accelerate regarding the rising challenge of other BRIC nations in the world economic league. Earlier this month, Brazil replaced the U.K. as the sixth largest economy. This was a moment of some symbolism: Brazil used to be part of what historians have called Britain’s "informal empire," being under the sway of British trade, capital, and inward investment in the nineteenth century.

In the last decade, Brazil has consolidated its status as an agricultural and processed foodstuffs superpower, commodities that now account for a quarter of GDP and 36 percent of exports. It has become the world’s largest producer of sugarcane, coffee, tropical fruits, and commercial cattle (whose number is 50 percent larger than in the United States.). Brazil has also discovered massive oil reserves in the Atlantic, which have helped make it the world’s ninth-largest oil producer and raised the prospect of it eventually becoming the fifth-largest. The country is currently engaged in a massive program of infrastructure improvement to enhance growth, funded by the proceeds of its recent wealth creation.

Brazil’s dash for growth began in the mid-1990s, when a string of privatizations broke up some inefficient state monopolies, China became an increasingly important customer of its commodities -- notably iron ore, soya beans, and foodstuffs, and the U.S. began to invest heavily in the country.

Brazil still lacks a well-educated and well-qualified work force.  Testifying to this shortfall, university graduates currently earn on average 3.6 times more than high school graduates, a wider multiple than in any OECD country. The country needs something like twice as many as the 30,000 engineers Brazilian universities currently graduate each year. There are also doubts about the quality of the training that graduates receive at home. At present few Brazilians go abroad to obtain university degrees, but that may be a necessary solution. The U.S. is currently the most popular destination but only 9,000 Brazilians (excluding language students) presently study there, compared with 260,000 Chinese and Indians combined. A government investment program would do much to boost numbers and historical precedent suggests that the payoff will be very beneficial. In the 1960s the Brazilian government paid for PhDs abroad in oil exploration, agricultural research, and aircraft design, three fields in which Brazil is now a world leader.

Although it has overtaken the U.K. in the aggregate, per capita income in Brazil ($11,000) is still only one-third of Britain’s. Moreover, income inequality remains a serious problem -- one of the worst in the world according to the UN -- but it's showing signs of improvement. The GINI coefficient measure of this peaked at 0.61 in 1990 but reached a historic low of 0.53 in 2010.  According to the Getulio Vargas Foundation, the poorest 50 percent saw their incomes go up by 68 percent from 2000 to 2010.

Probably the softest spot in its new economic success story concerns Brazil’s current account deficit. Boosted by very high interest rates by international standards (particularly in the era of quantitative easing), the Brazilian real has appreciated 40 percent against a basket of leading currencies since the financial crisis of 2008. The effect is to suck in imports and make finished exports uncompetitive. At present, therefore, Brazil is over-dependent on the commodities boom for its growing national wealth. It still gets many industrialized products from abroad, notably China -- particularly Chinese rail tracks made from Brazilian iron -- to drive forward the country’s massive infrastructure development. If not quite a parallel with the U.S. economic situation, critics of Dilma Rousseff’s government (and of its Lula predecessor) claim that it is trying to achieve growth through consumption and credit to the detriment of its external balances.

Despite such concerns, the Centre for Economics and Business Research [CEBR], a highly regarded economic forecasting group, predicts that Brazil will hold onto sixth place in the global economic league over the second decade of the twenty-first century.  However it estimates that India will climb above it to fifth by 2020, thanks to its highly educated workforce and strengths in new technology and engineering. CEBR also predicts that Russia will rise even higher to fourth on the back of its oil and gas exporting power.

The declining powers displaced by the rise of these emergent BRICs will be those of Europe, which is expected to experience a "lost decade." Paying back debts resulting from the financial crisis and over a short time frame will likely hit output growth, even in the leading economies. Accordingly, CEBR estimates that Germany will fall from its current fourth place in the world economic league to seventh by 2020, Britain will slip one place to eighth, and France will fall from fifth to ninth.

Whatever happens, it seems certain that the distribution of economic power in the global community of the twenty-first century will look very different from its twentieth-century counterpart, just as that did from the nineteenth-century reality.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/145199 https://historynewsnetwork.org/blog/145199 0
Eurotrash Another week, another crisis for the euro -- and there's plenty of more crisis weeks to come! It's going to get a lot worse for the euro -- but can it ever get better? It's far more likely that the euro project is in terminal decline and that nothing can save it.

If the euro were a business, it would have been wound up by now. It has an awful business plan that only appeared to work in the benign economic conditions of  the first few years of this century and whose inadequacies were painfully exposed when it first experienced economic problems. Only the core business -- that is, Germany -- has been able to withstand the harsher economic conditions in existence since 2007. There is boardroom squabbling, the workforce is in rebellion, and no one has a viable Plan B for a sustainable way ahead.

Eurozone leaders claim to have a survival plan but the details are murky and appear largely to be more of the same: structural reform to make member economies more competitive; a new fiscal pact to ensure member states live within their means; and some new infrastructure spending to soften the impact of austerity that is making voters angry.

Anyone who thinks this is going to work is deluding themselves. Structural reforms are a euphemism for labor and financial market deregulation. Labor market reform usually entails neo-liberal retrenchment of workers' rights, which enhances the economic insecurity of ordinary people and makes them reluctant to consume. And financial market deregulation was what got the world economy into its current mess. Moreover, some eurozone economies currently regarded as basket cases are adequately competitive on any measure. Take the case of Ireland, one of the three members subject to very harsh bailout terms. Accounting for just 0.3 percent of world GDP, it has a 3 percent share of world trade in services and 6 percent in pharmaceuticals, and it has a better record on foreign direct investment than Germany!

Fiscal pact is a polite word for very tight budgets, but these are already making the current situation worse. So far as eurozone (and U.K.) government leaders are concerned, it's as if Keynes never lived to teach the world anything about economics. Instead of following his prescription that states should offset the decline of private demand in hard times, they have cut public spending in a vain effort to appease public debt-averse financial markets. The all-too-predictable outcome is to further depress demand and put recovery further away than ever. Adding insult to injury, retrenching governments then face financial market criticism for the absence of growth!

Instead of limited infrastructure stimulus, European countries need a substantial short-term boost to public investment and social program outlays to revive demand. Otherwise the continent will go through a Lost Decade and more that will heap unnecessary misery on millions of its people and result in huge problems for the global economy.

Stimulus of any scope does not address the fundamental problem of the eurozone, however. The project is simply unworkable. The basic flaw in the enterprise is that the conventional structural adjustment of currency devaluation is not available to its economically-troubled members.

There is a clear lesson in history about the virtues of currency flexibility. In 1925 Chancellor of the Exchequer Winston Churchill returned the U.K. to the gold standard in the belief this was a surefire method of restoring the nation's economy to its prewar vitality. Calling this initiative madness, Keynes rightly warned the Conservative government of the day that it would cripple exports, produce mass unemployment, and generate huge labor unrest. Amid deep financial crisis in 1931, however, a coalition government flew in the face of orthodoxy to take Britain off the gold standard.  Doom-sayers predicted financial chaos, but none ensued. Instead the abrupt devaluation of the pound from $4.85 to $3.40 resulted in a 25 percent increase in industrial production and a decline of unemployment from 3 million to 2 million within four years. 

The establishment of the eurozone in its original form will go down in history as a great mistake. The only sensible solution is to call the whole thing off. There may be scope to reconstitute a more limited venture comprising the Northern European countries with similar economic strengths. However, there are too many powerful interests in Berlin, Paris, Brussels, and elsewhere with an outdated devotion to a failed venture for that to happen any time soon.  

Accordingly the future for Europe is economically bleak -- and the political repercussions of that could be dangerous.  The far right is showing signs of revival in "civilized" Europe from Scandinavia to Greece. It's time to heed the economic and political lessons of the inter-war era because European leaders are currently repeating the mistakes of that past.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/146466 https://historynewsnetwork.org/blog/146466 0
The Romney Economic Plan's Misreading of History Ronald Reagan holding a staff meeting on his first day in office. Credit: Wikipedia

Last week, the Romney campaign responded to criticisms of its tax and economic proposals by issuing a new white paper, "The Romney Program for Economic Recovery, Growth and Jobs." Authored by Greg Mankiw of Harvard, Glenn Hubbard of Columbia, John Taylor of Stanford, and Kevin Hassett of the American Enterprise Institute, this makes three claims in trashing the Obama administration's record on recovery and virtually promising a re-run of morning-again-in-America if the GOP candidate is elected president in 2012.  First, recovery from the Great Recession has been terribly slow even by post-financial crisis downturn standards; second, the Obama administration made a grievous error in relying on spending stimulus to renew the economy; and third, the tax cuts, spending cuts and deregulatory initiatives proposed by Romney will usher in a period of rapid growth to revitalize employment and generate a bountiful harvest of budget revenues.

The paper contains an appendix referencing the work of independent economic analysts that apparently supports the claims of the Romney campaign. Nevertheless, a goodly number of those cited -- including Michael Bordo of Rutgers, Amir Sufi of Chicago, and Alan Auerbach of Berkeley -- have disputed the interpretation the paper offers of their scholarship. [For a full review, see Ezra Klein's recent article in the Washington Post.]

Matching the Romney paper's questionable economic analysis is its dubious reading of economic history. Much is made of the robust bounce-back from the deep recessions of 1974-75 and 1981-82 to support its contention that today's economy in the present phase of recovery should be creating 200,000-300,000 new jobs a month. "History shows," it avows, "that a recovery rooted in policies contained in the Romney plan will create about 12 million jobs in the first term of a Romney presidency." (p. 5) The report also paints a rosy scenario of the Reagan administration's effectiveness in not only overcoming the 1981-82 recession but also resolving the structural problems of the 1970s economy: "By reducing domestic discretionary spending, setting out a three-year program to reduce tax rates, and alleviating the regulatory burden, policymakers sought to make it profitable to invest in America again."

Perhaps a historical reality check would help at this juncture. While it is true that domestic discretionary spending fell by some 1.6 percent GDP over the course of the Reagan presidency, defense spending increases canceled out some 1.2 percent GDP of this. The three-year 1981 tax cuts were the largest in history but were followed by tax increases, especially the closure of business tax loopholes, in 1982, 1984 and 1986. Deregulation was far from perfect in its effect -- as the onset of the Savings and Loans crisis testified. Finally, it did become profitable to invest in America again, especially for foreigners. The need to finance the Reagan deficits necessitated the continuation of high real interest rates (the actual rate minus the rate of inflation) to attract foreign purchasers of U.S. Treasury Securities, with a consequence that America had metamorphosed from being the world's largest creditor in 1980 to its largest debtor by 1985.

It is worth reaffirming that the greatest economic achievement of the 1980s -- the conquest of inflation -- was the work of the Federal Reserve and not, at least directly, the Reagan administration. But this success was a costly one for many Americans. The 1981-82 recession, the deepest in the second half of the twentieth century, was a policy-induced recession precipitated by Federal Reserve money-stock restraint (instead of its usual interest-rate manipulation) to throttle the runaway inflation of 1979-80. The resultant recession devastated the old industrial heartland, parts of which would never fully recover. Far from being a boom time, the Reagan presidency did not see unemployment fall to its 1980 level until 1986, in part because the high post-recession interest rates, required for public-debt-servicing purposes, pumped up the dollar's value and helped to suck in cheap imports that underwrote a consumer boom. 

Recovery was certainly speedy after the 1981-82 downturn came to an end. But this was largely the result of the Fed's abandonment of the monetarist experiment that had caused the recession in mid-1982. Though interest rates continued thereafter to be high in comparison to the postwar norm, they were still appreciably lower than the unprecedented peaks associated with the money-stock restraint of 1981-82. Fiscal policy also helped in promoting economic growth, but mainly in terms of the aggregate demand generated by the huge budget deficits of the first half of the 1980s, something which tends to get overlooked by contemporary conservatives.

All this is not to deny that the 1980s were a critical period in America's modern economic development. In essence, however, the most important economic change of this decade was not the morning-in-America renewal dear to the present-day right but the rise of finance as the key sector of the U.S. economy, a precondition for which was the conquest of inflation. Real income remained stagnant for most American families in this apparently glittering economic era. The big-time economic winners of the period were those who derived their wealth from the FIRE sector (finance, insurance and real estate). And what, one might ask, were the ultimate consequences of that?

Each partisan camp makes questionable claims about the past in every presidential election, but present-day Republicans should not be allowed to get away with rewriting the 1980s in support of their economic proposals for the second decade of the twenty-first century.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/147713 https://historynewsnetwork.org/blog/147713 0
A Business Background is No Guarantee of Being a Successful Economic President, Mr. Romney! Credit: Wikimedia Commons/HNN staff.

Mitt Romney claims that his success in business qualifies him for election as president in order that he can put the national economy right just like he has previously succeeded in putting many a business enterprise back on its feet. According to him, "Americans need a conservative businessman to get this economy moving again, not career politicians. That is why I am running."

Critics have been quick to point out that his business success with Bain Capital in particular involved destroying jobs as well as creating them. However, his claims that entrepreneurial competence will translate into effective presidential leadership on the economy have resonated with public opinion, and appear to have gained increased legitimacy in the wake of a successful performance in the first presidential debate. 

Regardless of the shortcomings of Obama’s economic leadership, Romney’s argument that his business experience will make him a more successful economic manager than his Democratic rival is a spurious one if judged on the historical record. 

Of the last thirteen presidents, four had substantial experience in business before entering politics -- Herbert Hoover, Jimmy Carter, and the two Bushes.  George W. Bush was never a particularly successful oil man, of course, but avoided the failure of his businesses through merger or being taken over, and finally achieved business success as part of the syndicate that owned the Texas Rangers baseball team.  All this did not endow him with the foresight to understand that the financial system was heading towards near meltdown in 2007-08. His father, in contrast, had enjoyed success in both the oil business and banking before the problems of the economy made him a one-term president. Jimmy Carter was a successful agri-businessman before being overwhelmed as president by the stagflation crisis of the late 1970s. Probably the most successful businessman to become president was Herbert Hoover, who made a fortune in engineering but whose name would become synonymous with the Great Depression. In paradoxical contrast, one of the most successful economic presidents -- Harry S. Truman -- was a failed businessman, having had a brief spell as co-owner of a Kansas City haberdashery shop that went bust in the early 1920s.

An interesting recent book, Bob Deitrick and Lew Goldfarb, Bulls, Bears, and the Ballot Box: How the Performance of OUR Presidents Has Impacted on YOUR Wallet (Advantage Media Group, 2012), crunches a lot of economic data to reach a negative conclusion on the question of whether there is a positive correlation between a president’s previous success in business and his effectiveness in economic management.

Bulls, Bears, and the Ballot Box uses a customized ranking system, consisting of a diverse and objective cross section of 12 different economic indicators to assess presidential performance as economic managers. These were: stock market returns; GDP growth; debt accumulation; percentage of months in recession; income disparity; growth in average disposable income; average unemployment rate; average change in unemployment rate; percentage of years of acceptable inflation; growth in industrial production; average trade balance; and growth in corporate profits.

Previous scholarly assessments have tended to confirm this book’s findings that the White House economic champs -- Truman, Dwight Eisenhower, John F. Kennedy, Lyndon Johnson, Ronald Reagan and Bill Clinton -- were not the products of a business career (Truman’s spell as an entrepreneur was too brief to qualify as a career). The biggest economic chumps, by contrast, all had a previous background in business.

This lack of correlation between business experience and presidential economic leadership success is hardly surprising. The skills needed to be a successful businessman differ from those needed to be an effective manager of prosperity in the White House.

Business leadership is based on profit projections, and measures progress based upon profits or losses and rate of return to shareholders and investors, with dollars and cents as the fundamental index of wellbeing.

In contrast, presidential economic management requires advancement of policies that benefit the whole nation and are not measured for success in basic cash balances. In ideal terms, indices of such success should include: creating an economic climate in which private businesses prosper and the public sector has the resources to lay the public investment foundations for the nation's economic future; developing an economic policy that maximizes employment levels and purchasing power, promotes fair wages, and safeguards equal opportunity regardless of class, race, or gender; protecting the environment from the abuses of unrestrained economic activity; and ensuring an adequate safety net for the neediest in society. In reality no president has fully met these exacting standards, but some have come closer than others.

In essence, a president works in a more complex environment with more moving parts and more uncontrollable variables than any business leader. He must understand and contemplate the impact of his decisions on multiple stakeholders from different walks of life, not just a finite group of shareholders or investors. Most significantly, a president is not a CEO whose word is fiat for lesser members of the organization. Instead, he is one actor in a policy domain where power is dispersed and shared with other institutions -- notably Congress, which has considerable say in fiscal policy through its the power of the purse, and the Federal Reserve, which has power over monetary policy. The president’s main instruments of economic leadership are the capacity to set the national agenda, through such instruments as his budget plan and economic report, and the resources he possesses to persuade other policy actors to do his bidding. In his case, economic leadership requires not only vision but also the political skills to attain it.

Far more than any business leader, the prospects for presidential economic leadership success depend on the macro-economic conditions (national and global) in which he operates (and inherits on coming to office), the political and partisan contexts in which he holds office, and his persuasion skills of manipulation, bargaining, and compromise to advance his agenda in a pluralistic political system.

All this does not mean that a President Romney could not be a successful economic manager, but were he to be so, this would likely owe less to his business skills than to other factors. He would have a better economic inheritance from Obama than Obama had from Bush. He would need to have freed himself from fiscal commitments that do not add up. He would have had to ditch his adulation of market forces in recognition that government has a constructive role in economic management. He would need to have recognized that it was the FIRE sector of American business (Finance, Insurance, and Real Estate) that got the U.S. into its present economic mess in the first place and is in need of regulation to prevent a repeat performance. Most importantly he would need to have realized -- and to have acted upon that realization -- that he was president of all the people, including the 47 percent he apparently disdains, rather than just of rich people like himself.

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Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/148842 https://historynewsnetwork.org/blog/148842 0
The New Age of Austerity Thurman Arnold, assistant attorney general in the Roosevelt administration from 1938 to 1943.

The double-whammy of recession and sovereign debt crisis has made austerity the buzzword of politics in European Union nations in recent years. Now the A-word has become increasingly a part of political rhetoric in the United States. In his recent book Age of Austerity, journalist Thomas Byrne Edsall argues that America has already entered a new age of austerity that will remake its politics in the second decade of the twenty-first century. In his view the intensified polarization of Democrats and Republicans constitutes the first shots in a struggle over diminished national resources. Gone for good, he argues, are the days when the two parties could engage in a tacit compromise to fund their respective social-program expansion and low-tax agendas from the proceeds of economic growth.

In the United Kingdom, the Conservative/Liberal Democrat coalition government preaches the virtues of austerity as the castor-oil cure for the Blair-Brown Labour governments’ sin of living off public credit in the early years of this century. It promised to get the nation back onto the track of economic growth by putting the public finances right and eliminating the deficit in a single five-year Parliament (by 2015). But austerity has mainly worked in Britain to increase inequality, enhance social instability, and retard economic growth. A weak recovery led to new recession in 2012 and another weak recovery threatens a triple-dip recession in 2013.

The effect of all this for the UK public finances was predictable to any student of Economics 101 -- anemic growth means higher public borrowing and throws into disarray plans to balance the budget, now put back to 2018. The likelihood is that the revised schedule will itself fall by the wayside, but there is no sign of the U-turn to stimulus that would be the usual response from political leaders worried about the electoral consequences of economic pain without gain. Ironically, Obama’s re-election appears to have stiffened the resolve of the coalition government to carry on cutting. It was proof, Chancellor of the Exchequer George Osborne remarked, that incumbent governments can win re-election in hard times.

The austerity debate is also shaping up to dominate American politics in Obama’s second term and far beyond. The U.S. faces a series of short, medium and long term public debt challenges -- respectively the fiscal cliff of 2013, the need to reduce its trillion-dollar deficits of Fiscal Years 2009-2012 to manageable proportions by the early 2020s, and the need to avert the debt Everest created by entitlement spending growth and insufficient tax revenues that threatens fiscal unsustainability in the 2030s.

But austerity is not a global phenomenon, just a Western one. In late 2012 a new OECD report estimated that the world economy would grow by about 3 percent a year during the next fifty years. Most of that growth will be in Asia and so-called developing nations. Growth in Europe and the U.S. will be far less robust and punctuated by frequent periods of decline. In line with this, the Western share of global income will also diminish, with the big gainers -- no surprises here -- being China and India.

Without the salve of economic growth to heal their domestic economies, Western leaders will likely face a crisis of political legitimacy. In Europe, with the exception of Germany, this appears to be the new cycle of politics. Governments are rejected at the ballot box because they cannot fix the economy, but new leaders meet the same fate for the same reason. Obama’s re-election may seem to buck that trend in the U.S., but the reality of divided party control of government that was also the outcome of 2012 limits his political options for dealing with the economy.

Parties of the right are more comfortable with the politics of austerity because it legitimizes retrenchment of public spending and social programs. Yet austerity does not necessarily mean that parties of the center-left are doomed to become part of a new brutish consensus to safeguard their political relevance. There is an alternative to the relentless pain of fiscal consolidation. There are different austerity strategies. The challenge facing progressive parties is to redefine the terms on which the rich, the middle classes, and the poor coexist amid economic limits.

American history in the 1930s may offer a lesson of the possibilities of a progressive approach to the new scarcity. When the Roosevelt Recession of 1937-38 extinguished the promising signs of economic recovery from the Great Depression, some New Dealers grew fearful that the long era of American economic growth was now consigned to history and a new age of stagnation had set in. They saw a future of recurrent recessions interrupted by weak recoveries in a mature economy that lacked the growth dynamics of the nineteenth and early twentieth centuries. In response, they set about planning regulatory and fiscal policies to meet this reality and ensure a more equitable distribution of wealth and resources in an age of limits.

Few of these plans made it from blueprint to public policy. The political constraints of conservative revival in the midterm elections of 1938 meant that most of the late New Deal’s redistributive initiatives were stymied. Moreover, stagnationist economic fears proved misguided. The U.S. economy soon bounced back onto an expansionary track of unprecedented prosperity, one that would last into the 1970s. However, it took World War II to revive and consolidate growth.

Could an exogenous shock of this kind happen again? In an exchange back in 2010 liberal economist Paul Krugman and conservative economist Martin Feldstein found agreement in the belief that only a major crisis of this kind could speedily revitalize the nation’s economy and terminate the paralysis of the political class. However, they were also in agreement that the likelihood of such a cataclysm was slim and that the human costs of the kind of warfare now likely to be fought far outweighed any economic benefits.

Another possibility is that a new wave of technological change of the kind that fuelled the so-called new economy of the 1990s could revitalize growth. But there is nothing to suggest that this particular cavalry is going to ride over the hill any time soon. And even if it did, the benefits may well be felt more in China and India than the West.

Perhaps the time has come, therefore, to revisit stagnationist theory of the 1930s and look at how New Deal planners like Thurman Arnold and Leon Henderson conceived fiscal, regulatory and anti-monopoly initiatives that sought a more equal, efficient, and ethical redistribution of diminished resources.

If the age of growth is over in America and Europe, progressive parties should adjust to this reality. They need to find ways of ensuring that the lesser rewards produced by sputtering economies do not flow disproportionately to the wealthy minority. Otherwise they will be co-opted into the destruction of the welfare state that their twentieth century predecessors started to build but never wholly finished.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/149884 https://historynewsnetwork.org/blog/149884 0
Austerity Doesn't Work, and Neither Will You Image via Shutterstock.

In the over 250-year-old history of modern capitalism, the economic output of the West has consistently ticked upward, with just a few deviating blips from the dominant trend of growth. Even the greatest crisis of capitalism, the Great Depression of the 1930s, looks on paper to be no more than a brief interruption to the historic course of Western economic expansion. It is hardly surprising, therefore, that any sign of forward spurt from the Great Recession of 2007-09 and its economically anaemic aftermath is greeted with optimism that the historically proven resilience of capitalism is fuelling regeneration.

The trouble is that for every step forward, there is also a step backward. Even in the U.S., which has enjoyed the strongest recovery of the old industrial nations, economic growth only averaged 1.6 percent in 2012, thanks largely to a dismal fourth quarter, compared to 2.4 percent in 2010 and 2.0 percent in 2011. That only looks good in comparison with what's going on in Europe. Britain’s stuttering recovery is possibly slowing into a triple-dip recession, and things are just as bad -- or even worse -- in other large European economies like France, Spain, and Italy. All this suggests that cyclical bounce back is being hampered by deep structural problems in the Western economies.

Five preconditions enabled modern capitalism to be successful. The first was stability, which was necessary for entrepreneurs to engage in risk and found clearest expression in the steady returns delivered by a well-managed financial system. The second was the legitimacy derived from the broad distribution of the fruits of prosperity, whether achieved through unions and collective bargaining or the redistributive activism of the state. The third was sustainability, so that capital was not being used up faster than it was being replenished, debt -- whether on the part of business, consumers or governments -- was not excessive, and nations did not operate unsustainable trade surpluses or deficits. The fourth was creativity, whereby new industries rose as old ones declined. Lastly, new production systems underwrote profitability and represented the greatest contrast with the subsistence system that had generated very slow expansion of wealth in the previous millennium.

In many respects, the post-1945 quarter century was the golden age of capitalism in the West. Macroeconomic policy underwrote prosperity and financial stability. Welfare state expansion and full employment strengthened legitimacy. Consumers and governments funded their outlays out of rising income rather debt and the Bretton Woods system largely ironed out the problems of excessive trade surpluses/deficits among nations. The record on creativity and profitability was more ambiguous, however. For the likes of Friedrich Hayek and Milton Friedman, the emphasis on stability, legitimacy, and sustainability eroded the innovative strength of Western capitalism, thereby leaving it unprepared to face the end of the post-war boom and of cheap energy in the 1970s.

Accordingly, the late twentieth century was characterized by greater emphasis on creativity and profitability, but at cost of downgrading the other requirements for successful capitalism. Governments shifted emphasis from fiscal to monetary instruments for macroeconomic strategy to achieve inflation-free rather than full-employment-creating growth. The capacity of unions to protect workers’ rights and income was neutered by the combined assault of business and conservative governments in the U.S. and U.K. in particular. Creativity and profitability were aided by the rise of new technologies that especially benefited the financial sector, services, and high-end manufacturing.

The combined effect was a sharp reversal in the post-war trend towards greater economic equality. The very rich substantially increased their share of wealth and the rest of society increasingly relied on credit to finance their consumption. Meanwhile, the decline of manufacturing industries opened the way for cheap-labor nations in the main in Asia to build up huge trade surpluses, particularly with the United States.

All this poses a question as to what kind of recovery the West can hope for. If the U.S. is the most successful example of cyclical recovery, the country still hasn't dealt with the structural weaknesses that led to the crisis of 2007-09. Corporate profitability has improved, but mainly by shedding jobs and holding wages down rather than through creativity. Meanwhile, there is precious little sign of enhanced legitimacy and sustainability. The greatest success story has been the restoration of a degree of stability through macroeconomic policy. However, the austerity program currently being practiced in Britain -- and prosthelytized by Republicans in the United States -- does nothing to enhance the legitimacy of the economic system. Meanwhile, reliance on quantitative easing and low interest rates have seemingly become permanent fixtures to rescue capitalism, but they do little to produce the global rebalancing needed for sustainable recovery.

At least the U.S. private sector created 192,000 jobs in January 2013, higher than the consensus expectation among economists of 165,000. Such figures would be a cause for celebration in many E.U. countries. In Spain, for example, the unemployment rate is 26 percent, roughly akin the U.S. during the Great Depression, and there is little hope of a return to growth in the coming year as government austerity bites ever deeper. A lost generation of college-educated youth is increasingly looking abroad to make a living in emerging economies with skills shortages. U.K. expats used to consist largely of retirees looking to soak up the sun and cheaper real estate in France and Spain, However, of the 4.7 million Brits who currently live abroad, 93 percent are of working age (on a personal note, my 27-year-old son has worked in Vietnam for the last year).

A historical analysis of recovery prospects from the Great Recession offers little grounds for optimism that the West will soon turn the corner to revitalized prosperity. The structural weaknesses of their capitalist economies show no signs of being resolved and are being exacerbated by the excessive focus on debt control as the sole issue of reform. Being in the business of understanding the past, historians should be wary of predicting the future, but it seems safe to conclude that austerity has failed to generate economic renewal is failing.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/150730 https://historynewsnetwork.org/blog/150730 0
The Ten Biggest Economic Policy Mistakes from the Depression to the Recession Image via Shutterstock.

I have just finished teaching a graduate course on the management of the U.S. economy from the Great Depression to the Great Recession. Given that economic crises bookended the syllabus, student interest in the review session unsurprisingly focused on discussing macroeconomic policy errors more than successes.

This set me thinking as to what I would adjudge the ten greatest economic policy errors from the late 1920s to the present. My list and rationale appear below. But first some caveats.

Such a listing tends to focus on short-term rather than long-term consequences because the latter are more difficult to track and link to specific policies. It can also be difficult to separate policy effects from broader structural movements in the U.S. and world economies that would have produced similar outcomes anyway. Furthermore, judgements about whether policy outcomes are good or bad reflect the values of the assessor -- people with different political views to mine would likely produce a different list.

Finally, a list of failures has a pathological focus on economic sickness. It tends to overlook the reality that the American economy has been broadly healthy for a good many of the last eighty-plus years.

But maybe a list of policy successes that generated and sustained prosperity can be a subject for a future blog. In the meantime, here’s my take on policy failures in ascending order of magnitude:

10) Eisenhower’s drive for a balanced budget 1959-60

This is included to demonstrate that the Eisenhower economy was not as strong as historical opinion often makes it out to be. There were three recessions in eight years, the worst of them in 1957-58, but Eisenhower’s excessive concern about creeping inflation caused him to insist on balancing the Fiscal 1960 budget in the immediate wake of the large Fiscal 1959 deficit. Denied fiscal adrenaline, the economy slipped back into double-dip recession just before the 1960 election. The Eisenhower administration failed to recognize that chronic slack rather than creeping inflation was the main economic problem of the late 1950s.

9) LBJ’s refusal to raise taxes to fund the Vietnam War

Lyndon Johnson opted for guns and butter rather than risk conservative congressional retrenchment of the Great Society if he asked for a tax increase to pay for the Vietnam War in the Fiscal 1966 budget. The consequence was the overstimulation of a full-employment economy and the doubling of consumer price inflation from a 2 percent annual average in 1963-65 to 6 percent in 1969. The Great Inflation had been set in train. Why is this error not higher in the list? It’s mainly because other factors contingent to the 1970s had more effect in producing the runaway inflation of that decade.

8) Nixon’s economic mismanagement

Nixon was determined that the economy would not be his Achilles heel in the 1972 presidential election in the way it had been in 1960. Accordingly he threw a big-spending fiscal party to boost recovery from the 1970 recession, even going so far as to announce, ‘I am now a Keynesian in economics.” He achieved his political goal of a second term but at cost of greatly aggravating the price instability inherited from the Johnson political economy. Nixon implemented the first-ever peacetime wage-price controls to hold inflation in check while fiscal stimulus boosted employment. However their eventual removal released a stockpile of inflationary pressures just as the termination of the Bretton Woods agreement, which sent the dollar plummeting on the world money markets, made for dearer imports. Nixon’s economic mismanagement squandered the opportunity to choke off inflation before oil shocks, productivity decline, and currency fluctuation made matters much worse. In his defense, however, contemporary Democrats had no better idea of how to deal with the stagflation conundrum.

7) Stop-go economic policies of 1974-80

The Ford and Carter administrations and the Federal Reserve found it impossible to break the worsening cycle of stagflation. Economic policy oscillated between anti-inflation restraint and employment stimulus in this period before Jimmy Carter eventually settled on a politically disastrous and economically ineffective austerity program that did much to make him a one-term president. On Election Day 1980, he faced the voters with inflation at 13 percent and unemployment at 7 percent, making for a misery index of 20 percent. Policymakers of this era underestimated the inflationary significance of a decline in productivity, whose cause economists still dispute but which a futile quest for fiscal discipline could not cure.

6) Hoover’s drive for a balanced budget in 1932

Britain abandoned the gold standard and devalued sterling in response to the worsening international depression in 1931. Its actions provoked money-market concern that the United States would follow suit. The resultant run on America’s gold deposits posed a threat to its reserves. The Federal Reserve consequently raised interest rates in an effort to promote confidence in the dollar. Having tolerated sizeable deficits as the economy declined, Herbert Hoover now shifted fiscal course to seek a balanced budget so that government borrowing would not crowd out scarce credit needed by business. The Revenue Act of 1932, then the largest peacetime tax increase in American history, was his instrument for doing so. However, its main effects were to diminish purchasing power in an already devastated economy and thereby further hurt business confidence. The enhanced loss of tax revenue as economic decline accelerated served to increase rather than diminish the deficit. In defense of Hoover, he had acted in accordance with the monetary logic of the time rather than out of outdated anti-deficit dogma.

5) The fiscal-monetary mix of the early 1980s

Selecting this as a policy error will doubtless raise some hackles because the Reagan-Volcker economic policies are generally lauded for restoring economic growth and conquering inflation in the wake of 1970s economic misery. The Volcker Fed can be credited with winning the battle for price stability but at cost of the deep recession of 1981-82 that resulted in partial de-industrialization of the old industrial heartland. Another victim of the downturn was the Reagan administration’s "rosy scenario" that its massive 1981 tax cuts would generate economic growth that would in turn produce a harvest of budget-balancing revenue. Instead, the outcome was a string of record deficits that would eventually have to be funded through the maintenance of high real interest rates long after the recession ended in order to attract foreign purchasers for U.S. Treasury securities. This transformed America from the world’s largest creditor to the world’s largest debtor between 1980 and 1985, saddled it with a chronic trade gap, and made it dependent on foreign lenders to sustain its borrowing habit.

4) The Bush tax cuts of 2001 and 2003

George W. Bush promised that his tax cuts would deliver huge productivity gains, bumper employment growth, and a harvest of surplus-producing revenues. Instead, the main consequences of a tax program skewed towards the rich were widening income inequality, massively loss of government revenue, and anaemic job growth. With fiscal policy proving so ineffective, cheap credit had to bear the main burden for post-2001 recovery from the dot.com recession and the economic shocks of the 9/11 terrorist attacks. But that particular cure had dangerous side effects that would eventually lead to the financial crisis of 2007-08.

3) The Roosevelt Recession of 1937-38

In 1937 Franklin Roosevelt prematurely moved to balance the budget in the mistaken belief that full recovery from the Great Depression was nigh and that inflation would soon replace unemployment as the main economic threat. The Federal Reserve also tightened credit out of the same concern. At this juncture, too, the initial collection of the new Social Security taxes reduced purchasing power in the economy. The combined effect produced an abrupt termination of the economy’s steady post-1933 recovery and precipitated one of the sharpest recessions in American history. This prompted FDR to make a modest turn towards Keynesian policies that he had hitherto spurned, but he did not operate sufficiently large deficits in 1938-40 to bring about robust recovery. The New Deal never conquered the Great Depression. It was the stimulus of defense spending in World War II that finally restored the U.S. economy to full health.

2) The Greenspan bubbles

The monetary ‘Maestro’ of the 1990s boom eventually struck out -- twice! If only Alan Greenspan had ended his tenure as Federal Reserve chair in 1999 rather than in 2006, his reputation in history might have been so different. However, Greenspan’s faith in the rationality of the market proved his undoing. Having kept monetary policy relatively tight as an anti-inflation safeguard during recovery from the recession of 1990-91, he decided that the productivity improvements associated with the increasingly high-tech economy merited a reversal of course in 1995. Cheap credit led to a Wall Street boom as investors stocked up on debt to buy shares in the belief that their value would rise indefinitely. Greenspan’s rhetorical warnings of ‘irrational exuberance’ did nothing to prevent the boom turning into a bubble. The Fed’s eventual raising of interest rates in 1999-2000 precipitated the collapse of the dot.com share boom and a brief recession in early 2001. Greenspan then mitigated the effects of the downturn and the economic shocks from the 9/11 terrorist attacks with an even stronger dose of cheap credit. The result was another bubble, this time in real estate values. Greenspan’s reversal of monetary course to douse house price inflation in 2005 had more devastating consequences than his earlier U-turn. It proved the critical link in the chain of events that led to the implosion of the subprime mortgage market, the collapse of real estate values, and the financial crisis of 2007-08.

1) Converting a recession into the Great Depression, 1929-1933

The Wall Street Crash need not have precipitated the Great Depression. Bad monetary policy was to blame for the worst economic crisis in American history. The Federal Reserve System had been established to prevent what actually happened. It was set up in 1913 to avoid bank closures but its 1929-1933 policies produced the very opposite of this goal. Fed officials seemingly subscribed to Treasury Secretary Andrew Mellon’s ‘liquidationist’ theory that weeding out weak banks was a necessary response to the financial crisis precipitated by the stock market collapse of late 1929. Central bank policies accordingly resulted in a decline of one-third in the money quantity in the banking system between the Wall Street crash and the end of the Hoover presidency. During this period, a total of 5,750 banks failed with the loss of over nine million savings accounts. As Milton Friedman and Anna Schwarz later documented, this was an entirely avoidable economic tragedy. In 2002, then Federal Reserve Governor Ben Bernanke voiced agreement with their thesis: “You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.” It was a lesson that he put into practice as Federal Reserve chair during the Great Recession.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/152034 https://historynewsnetwork.org/blog/152034 0
It's Time for a Madam Chairman at the Federal Reserve Sometime soon, Barack Obama will nominate a new Federal Reserve chairman. The two leading candidates for the most powerful economic job in the world are Janet Yellen and Larry Summers. Comparing the records of the two candidates, the scales appear to weigh so heavily towards Yellen that it should seemingly be declared ‘no contest’ in favour of the appointment of the first woman to hold the post.

Summers made his name in international economic affairs and more recently in fiscal matters rather than monetary issues. He is very much a Washington insider who held various posts in the Department of the Treasury in the Clinton administration, including Deputy Secretary (1995-99) and Secretary (1999-2001), and was chair of the National Economic Council in Barack Obama’s first term. If the Fed chair’s greatest challenge is to anticipate and react to surprises, supporters point out that he had a key role in preventing the spread of the East Asian financial crisis in 1997-98, when Time magazine named him one of ‘the committee to save the world’ (along with Fed chair Alan Greenspan and Treasury Secretary Robert Rubin). However, his enthusiasm for derivatives and repeal of the Glass-Steagall Act has to be weighed against the positive features of his 1990s CV. Nor is he known for the kind of consensus-building that the Fed chair must routinely engage in to develop support for his/her monetary preferences from the Board of Governors and the all-important Open Market Committee.

Yellen, by contrast, has an almost unrivalled CV in the monetary sphere. She was a Fed governor from 1995 to 1997 (for many, the golden era of the Greenspan-led central bank), was president and CEO of the regional Federal Reserve Bank of San Francisco from 2004 to 2010, and has served as vice-chair of the central bank itself since 2010. She is a distinguished economist, who has taught at Harvard, LSE, and Berkeley. Her track record as a forecaster, based on meticulous crunching of the numbers, is outstanding. In 2009 she was one of the few within the Federal Reserve System to predict that the pace of recovery would be disappointingly slow. Moreover, a Wall Street Journal survey put her ahead of the entire field of Fed forecasters for 2009-2012. Lastly, Yellen has a proven record as a consensus-builder during her time with the San Francisco Fed.

The strongest supporters for Yellen’s appointment are her fellow economists, who admire her academic record, her methodical approach to forecasting, and her distinguished record as a policymaker to date.

But Yellen has powerful critics, too. The Fed chair conventionally requires the confidence of the financial markets to be effective but Wall Street apparently has doubts about her ‘gravitas,’ a coded way of saying she considers combating unemployment to be equally as important a Fed responsibility as combating inflation. Reflecting this, Senator Richard Shelby of Alabama, the senior Republican on the Senate Banking Committee, voted against her confirmation as Fed Vice-Chair in 2010 on grounds of her so-called inflationary bias.

The Obama White House occupies a middle ground in the Yellen debate. In its assessment, there is little to choose substantively between her and Summers, but it is more comfortable with the latter’s style according to press reports. Treasury Secretary Tim Geithner, in particular, apparently considers Yellen too independent-minded and methodical. Her recent role at the Fed supports such an assessment -- but whether this is a bad thing is another matter. Unlike her predecessors as vice-chair, Don Kohn and Roger Ferguson, who acted as Bernanke’s close deputies and confidantes, she has operated more as an intellectual force in her own right within the central bank. The Obama team also has a soft spot for Summers as a former colleague.

Whatever the outcome of the nomination process, Yellen’s CV makes her supremely well qualified for the job of Fed chair. The fact she is a woman is irrelevant to the case in her favor but would be significant if she were to be appointed. It would be one more crack in the glass ceiling -- and a big one. Women had to wait sixty-five years since the Fed’s creation in 1913 to get a seat on the Board of Governors. The honor of being the first went to Jimmy Carter nominee, Nancy Teeters, in 1978. A feisty liberal, she became a leading voice of opposition on the Board of Governors and the Open Market Committee to the continuation of the draconian monetarist strategy pursued by Paul Volcker to throttle inflation at cost of very severe recession in 1981-82. [For anyone interested in reading about her role in that particular debate, see the present author’s article, ‘Monetary Metamorphosis: The Volcker Fed and Inflation,’ Journal of Policy History, 24 (Oct. 2012).]

Some thirty years later, it would do no harm to have another female unemployment hawk on the Fed Board of Governors -- and this time in the top seat.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153150 https://historynewsnetwork.org/blog/153150 0
Of Shibboleths, Showdowns and Shutdowns… or Madison’s Nightmare Americans probably don’t want to read another piece on the shutdown. However it’s impossible to let the incredible events of this week go by without a comment from this UK blogger.

On one level, of course, it could be said that the current standoff is an expression of the checks and balances that constitute the bedrock of the Madisonian constitutional system. However, it is worth remembering that another great American political thinker, Alexander Hamilton, warned in Federalist No 22 that the theory of checks-and-balances should not justify obstructiveness that tended to ‘destroy the energy of government’ and ‘impose tedious delays; continual negotiation and intrigue; contemptible compromises of the public good.’ Such a situation, he warned, ‘must always savor of weakness, sometimes border on anarchy.’

Both Hamilton and Madison recognized the need for ‘energy,’ even activism, in government when called for. This was hardly surprising because it was anarchy not government that posed the greatest threat to individual rights and freedoms for the Federalist authors. They wanted a governing system capable of making hard choices for the long term.

However, the political theorists of the Enlightenment-influenced late-eighteenth century had not encountered the likes of today’s Republican right-wingers and their Tea Party allies, who are utterly loathe to accept the reality that a programme they hate has been constitutionally enacted by Congress and legitimized by the Supreme Court. The current US impasse is therefore a Madisonian nightmare as a minority uses the checks-and-balances in contravention of Hamiltonian energy to hold government to ransom in pursuit of its ends.

Of course Republicans of the Ted Cruz variety claim they are saving the nation from socialism by trying to hold up Obamacare, thereby arguing that the means justifies the ends. Their hatred and fear of this health-care reform is best understood by referencing the views of Ronald Reagan from fifty years ago.

In 1961, the future president cut a record entitled 'Ronald Reagan Speaks Out Against Socialized Medicine,' which was sponsored by the American Medical association as part of its campaign against the pre-Medicare Kerr-Mills bill. In this, he asserted that 'one of the traditional methods of imposing statism or Socialism on a people has been by way of medicine.'  Explaining away the absence of any reference to socialism in the actual bill, he wrote two friends, 'It comes through the rules and regulations the Department of Health Education, and Welfare puts into effect to administer the bill.'

Like Friedrich Hayek in The Road to Serfdom, Reagan held a ‘creeping socialism’ view of social welfare. He particularly feared that the introduction of popular reforms in the field of health-care would advance a socialist agenda that ultimately led to communism. Whether Reagan would have approved the methods of today’s right-wing Republicans is unlikely but immaterial. The more important point is that they are both part of the same conservative tradition.

The current impasse is not a battle over the budget in a way that the two shutdowns of 1995-96 were. The latter reflected the incapacity of the Clinton administration and the Contract with America Republicans to agree the taxation and expenditure details of the FY1996 federal budget. There is no fiscal reason why today’s Democrats and Republicans cannot agree a clean budget shorn of any reference to ‘Obamacare.’. The House GOP’s refusal to do so is an act of political blackmail to derail legislation that is already on the statute books.

The convoluted federal budget process is tailor-made to facilitate minority shenanigans. It is one of the mantras of good-government advocates that the American way of formulating a budget has to be changed to prevent such obstructiveness. However, they often forget that the present system was born of good-government intentions to reassert the congressional power of the purse over presidential usurpation in the early 1970s. Fixing the process of making a budget is not the answer. What’s needed is a fix for American politics so that a minority party no longer sees advantage in holding the budget system to ransom.

The only people who can sort out this mess are American voters. The Republicans have not yet suffered an electoral disaster on the scale of critical landslides like 1932, 1964, 1980 or 1994. Accordingly they can still find comfort in the belief that the conservative message will eventually restore them to power. Until the ballot returns make such a belief untenable, the budget and debt limitation will continue to be conservative Republicans’ weapons of choice in their political war on Obama and the Democrats.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153181 https://historynewsnetwork.org/blog/153181 0
The World Economic Forum of 2014: Trapped in the Past The mood at last week’s World Economic Forum, held annually in Davos, Switzerland, as reported in the media was one of cautious optimism about the prospects for international economic growth. ‘Cautious optimism’ can mean many things, including ‘We know what’s round the corner but we’re really in the dark about several corners away.’ The prospects for international economic upswing in the short-term look good, the prospects for the long-term are mired in uncertainty.

There appears to be consensus that it is too soon to reverse the recovery-boosting expansionary economic policies despite encouraging signs of growth in some economies, notably America’s but also - lower down the index of significance for the international economy, the United Kingdom’s (we’re still united but Scotland may change that happy state in the not too distant future!).

There are some worrying signs that economic growth is not yet a global phenomenon. There are indications of slowdown in emerging markets. In particular a peso crisis in Argentina revives memories of the emerging markets financial crises of 1997-2000. China’s growth has definitely slowed because of rising wages, a stronger renminbi, and the calculation elsewhere that all things considered it’s cheaper and better to produce at home. And France, supposedly a core nation of the Eurozone, is rapidly becoming its sick man. The European monetary union used to be allegorized as a French-made automobile with a German-made engine. The engine still works well, but the rust-covered body of the car has seen better days.

Nevertheless, these indicators will likely serve to keep economic policies looser for longer than otherwise would probably have been the case. The Federal Reserve appears likely to de-accelerate the withdrawal of its monetary stimulus in the USA. The Bank of Japan could very well enhance its quantitative easing programme – though the increasingly vituperative stand-off with China over off-shore islands is not good for Japanese business confidence. The European Central Bank has little option but to continue its anti-deflation policy. Germany is in reasonably good economic health, but France is not. Moreover, the periphery nations of the monetary union are still grappling with the fall-out from the financial crisis. There is far better news for the UK where growth forecasts have been revised upwards after a recent employment surge.

In the long-term, however, the entire global economic model looks wobbly. Growth still relies fundamentally on debt and leverage. Growing economic inequality in many advanced nations – the US and UK are prime examples, but not Germany – raises doubt whether the international economy can ever recover its pre-crisis bounce. Al Gore, present at Davos, warns that global warming is now a more pressing issue than before the financial crisis – the consequent slowdown has done nothing to reverse it. There appears to be no alternative in the thinking of economic leaders to an economic growth that produces higher CO2 emissions. The price of this could well be a rise in global temperatures by 4-5 degrees centigrade by the end of this century.

The economic glitterati at Davos showed no inclination to think seriously about such deeply embedded problems that have taken second-place to the immediate needs of recovery from the 2007-09 meltdown. The talk was of improving the current economic model with a view to recreating the kind of growth that it delivered in the quarter-century from 1982 to 2007. This is a path-dependency approach that ignores problems the old model helped to create and cannot cure. What’s needed is not a rebooting of the late-twentieth and early-twentyfirst century model in the optimistic hope of recreating the past but a new economic model that addresses the needs of the future. Demanding an immediate focus on ending the Great Depression rather than worrying about the possibly adverse consequences of stimulus in the future, John Maynard Keynes famously remarked, ‘In the long run we are all dead.’ This is not an aphorism applicable to the here and now of the early twenty-first century.      

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153289 https://historynewsnetwork.org/blog/153289 0
Piketty’s Charge Against the Ramparts of the Right

If it does nothing else, Thomas Piketty’s Capital in the Twenty-First Century has shaken up theright just as it looked to have escaped the shock of the Great Recession relatively unscathed. A bestselling economics tome by a French scholar (now available in English translation) is not so much a rarity as it is a unique phenomenon. No wonder the volume has elicited horror among conservative admirers of the free market and its accoutrements.

Piketty charges head-on against some of the dearest beliefs of the economic right. First he marshals evidence that persuasively measures the rise of economic inequality since the 1970s. In his scenario, the period from 1914 to 1970 was a historical anomaly in the sense that income inequality and the stock of wealth declined because of geopolitical and economic shocks like the World Wars and the Great Depression. But the reverse trend has become increasingly evident in the late twentieth and early twenty-first centuries, reaffirming historic patterns,

Secondly Piketty contends that the free market has a natural tendency to enhance the concentration of wealth because the rate of return on property and investments has been historically higher than the rate of economic growth. This notion challenges one of the bedrock beliefs of the economic right that the return on capital should fall as it accumulates, thereby rendering unnecessary any redistribution of wealth. However, Piketty calculates that wealth has globally enjoyed a pre-tax return of between 4-5 percent since 1700, well in excess of economic expansion. He also insists that the agency of inheritance perpetuates wealth regardless of whether the initial founder of the family fortune was a self-made man or woman. As a corollary to this he predicts that wealth concentration will increase as demographic factors in the form of an aging population slow down growth in the present century.

Thirdly, and this is what has really infuriated conservatives, he claims that the only solution to ever greater concentration of wealth is a progressive global tax on capital in the form of an annual levy that could start at 0.1 percent and rise to a 10 percent peak on the largest fortunes. He also suggests a punitive 80 percent tax rates on incomes above $500, 000. It is these ideas that have aroused conservative furor, causing Piketty to be dubbed the modern Marx – and worse. Many conservative economists rubbish his pessimism about the capacity for economic growth, pointing out that this underestimation also undermined Marx’s prophecy.

Quite what will become of all this is difficult to predict. The chances of ever enacting a global tax on wealth are effectively nil, something Piketty concedes. A punitive tax on high incomes is also unlikely to make it onto the statute books (although one did exist from the early days of World War II through the Eisenhower era without weakening growth, a charge that Piketty’s critics routinely level against his agenda). However this does not detract from the importance of his work.

Piketty’s is first serious intellectual challenge to the hegemony of conservative economic ideas since their rise to ascendancy in the 1970s. Far from being a proponent of New Democrat/New Labour weak tea, he is an unapologetic advocate of redistributive economic policies. Ideas are important but their timing is equally so, as the right proved in the 1970s and Keynes did in the 1930s. If progressive politicians on both sides of the Atlantic have the courage, they can use Piketty’s general arguments to justify more modest but still effective policies to challenge the concentration of wealth.

Almost every significant political change in modern times has been the product of political elites interacting with social movements – FDR and organized labor, LBJ and civil rights protesters, Ronald Reagan and the conservative movement. Perhaps Obama and Occupy are the first stirrings of a new twentyfirst century progressivism. If this takes off, Piketty’s work may yet achieve historical significance as marking its evolution from a reactive into a pro-active force that can draw on powerful ideas for its intellectual legitimacy.       

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153350 https://historynewsnetwork.org/blog/153350 0
The Great War and the Great Recession: The Frightening Parallels

As European nations prepare to mark the centenary of the outbreak of the Great War, historical memory is almost entirely focused on the military events and political impact of the conflict. However, today’s rich nations could also profit from considering whether the massive and long-lasting economic dislocations of World War I offer a warning about the time it will take to achieve economic renewal in the wake of the so-called Great Recession of 2007-09. (For an excellent assessment, see Larry Elliott, ‘Great war proves rebirth after crisis takes time,’ The Guardian, 7 July 2014.)

When news of the assassination of Austrian Archduke Franz Ferdinand in Sarajevo on 28 June 1914 reached European capitals, financial markets were unperturbed at what was considered a local Balkan fracas. Within six weeks, however, almost the whole of Europe was engaged in a general conflict that revealed the systemic weaknesses of an international economic order whose stability and security had been considered assured. In many regards the Great War marked the end of the first age of globalization that had London and the gold standard at its center. Over the next 30 years, the gold standard unravelled, global trade declined amid a new era of protectionism, and immigration flows reduced – with the culmination of the downward spiral being the worst depression the world had ever experienced. Annual growth rates per person in the 12 biggest countries of Western Europe fell from 1.33 percent in 1870-1913 to 0.83 percent in 1913-1950.

This decline is particularly remarkable in view of the technological innovations of the era that acted as a boost to productivity – notably better transport (including automobiles and aviation), electrical goods, and speedier communications (radio, telephones). But these developments could not be fully exploited until the proper physical and financial infrastructure was in place, which did not happen until after World War II. The mixture of domestic Keynesian full employment policies and international financial reforms (the International Monetary Fund and the Bretton Woods system) did much to boost GDP growth per head in the twelve biggest Western European economies by 3.93 percent on annual average in 1950-1973.

Fast forward to the aftermath of the 2007-09 crisis to find what may be a premature optimism that the worst is over, rather like many in Western Europe thought in the 1920s after the Great War was over. One of the most positive assertions of this viewpoint is former Treasury Secretary Timothy Geithner’s memoir, Stress Test: Reflections on Financial Crises (Crown, 2014). This is meant to be a story of successful policy that managed to avoid a replay of the Great Depression. Yet can we talk of success when millions of people in the US and Western Europe have lost jobs, youth unemployment is appallingly high, and trillions of dollars’ worth of goods and services that could have been produced in healthy economies have been lost? True, things could have been much worse, but they could and should have been much better if the likes of Paul Krugman and Joseph Stiglitz are to be believed.

The great success of the US public policy response to the 2007-09 financial crisis was the rapid rescue at relatively little cost of the financial system. Thanks to the speed of action by government, the direct costs of bailing out banks and other financial institutions were remarkably low. The clean-up of the 1980s Savings and Loans crisis, which had little impact on the overall economy, cost taxpayers an estimated 5 percent of GDP; the clean-up from the worst financial crisis since the 1930s cost about a tenth of that.

However the swift recovery of banks and markets was not matched by a similar upturn in the real economy, particularly in the labor market. The Great Recession ‘officially’ ended in June 2009, but most Americans seem not to know that. In mid-March 2014, 57 percent of respondents in a NBC News/Wall Street Journal poll considered the economy still in recession. According to Paul Krugman, the disjunction between financial market and real economy recovery can best be explained if the financial crisis is seen as one manifestation of a broader problem of excessive debt – what he terms a ‘balance sheet recession.’ Because so many families had taken on debt to finance home purchase and consumption before the crash, they are now cutting back on credit-driven economic behavior. In other words the overhang of personal debt has kept the economy depressed for a long time.

Unlike a financial recession, a balance sheet recession cannot be cured through simple restoration of confidence. For Krugman, it can only be offset through concrete action in the form of fiscal stimulus and debt relief. Despite the American Recovery and Reinvestment Act of 2009, he believes that the US did too little of the former and almost none of the latter. As a consequence, the US economy has barely managed 1 percent average annual growth since the crisis, with the consequence that annual national income is around $1.7 trillion less than would have been the case had growth averaged 2.5 percent.

In a broader transatlantic context, there is a comparable sense that the economic tempest has blown out – the financial system is repaired, public debts are being reduced, and the Eurozone is saved. As a result, there has been less evidence of fundamental rethinking of the prevailing economic model than was the case after the first oil shock of 1973. For some pessimists, however – among them former UK Prime Minister Gordon Brown – the lack of action to tackle broader problems increases the danger of another and far worst economic crisis.

Warning voices have also been raised in the US that the events of 2007-08 marked an economic watershed that signalled the end of a period of phoney growth based on debt, overexploitation of the planet, and excessive reliance on technologies approaching obsolescence. Former Treasury Secretary Larry Summers has raised the spectre of an era of secular stagnation. Similarly, economic historian Robert Gordon is skeptical that IT-driven innovations will be as significant as those of the late nineteenth and early twentieth centuries in powering the international economy into a new era of productive prosperity. In a highly pessimistic estimate, he believes that US growth will steadily decline over the course of the current century to a low of 0.2 percent by 2100.

Of course, there are plenty of optimistic voices contending that the global economy will manifest its oft-proven capacity to recover and achieve even greater success. They do not write off the benefits of new technology as readily as Gordon. They place much confidence in the coming of a new age of cheap energy. And they believe that the pessimists are too focused on the travails of America and Western Europe to recognize the potential of Asia, Latin America, and Africa to help power a new era of global growth. One of the best recent statements of this school of thought is Gerard Lyons, The Consolations of Economics (Faber & Faber, 2014)

Whoever has the best of the debate ultimately - optimists or pessimists - the 1914-1945 years can offer some guide as to what might happen. The lessons from this era are twofold: first, renewal from the most recent economic crisis will likely be a slow, painful process; and, second, it will only be possible if the fundamental weaknesses of the current economic model are addressed. We today are living the truth of the first of these lessons but we are still a long way from understanding the second one. 

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153453 https://historynewsnetwork.org/blog/153453 0
40 Years of Free Market Policies Is Long Enough for the Magic of the Market to Have Worked. So What Went Wrong?

Camden, NJ

Iwan Morgan is the author of "The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush" (University Press of Kansas).

In the final week of August 2014, American investors were in seventh heaven. The S&P 500 composite index reached a record high, briefly surpassing the once Everest-like 2,000 mark. For many on Wall Street that was almost as exciting as seeing the Dow Jones Industrial Average surpassing the once-unimaginable 10,000 mark in 1999. Now, of course, 10,000 looks like small potatoes with the Dow exceeding 17,000 this week. Corporate profits are soaring, with growth in excess of 9 percent for 2014 and 10 percent for 2015 predicted by many respected financial analysts.

Compare that with the less than stellar financial performance across the pond. The FTSE 100, London’s blue-chip share index has been stuck in the doldrums for most of 2014 – rather than passing its all-time high of 6930 (achieved in December 1999) as many experts had predicted. Money managers and financial editors in the UK and Western Europe are consequently casting envious eyes across the Atlantic. ‘The US has an uncanny knack for dealing swiftly with its problems,’ wrote London Evening Standard city editor James Ashton (‘Why isn’t the FTSE as bullish as Wall Street?’ 28 August 2014), ‘and its markets have reaped the benefit…. America teaches us that mending banks mends confidence, powers the wider economy and encourages spending.’

Such rose-tinted adulation of the US may be justified with regard to Wall Street, but whether it holds true for Main Street is far more questionable. Floyd Norris of the New York Times aptly summarized the condition of two Americas: ‘Corporate profits are at their highest level in at least 85 years. Employee compensation is at the lowest level in 65 years.’ Corporate profits reached a record-high 10 percent of GDP in 2013, while wages fell to a record-low 42.5 percent – down from 49 percent in 2001.

This reflects a trend that has been ongoing since the mid-1970s regardless of which party has held power in Washington. It partly reflects the structural changes in the US economy whereby the FIRE sector (finance, real estate, and insurance) has supplanted manufacturing as its principal driver. It further reflects the ascendancy of conservative ideas since the economic crisis of the late 1970s.

Whatever brick-bats conservative critics hurl at Thomas Picketty’s thesis about the maldistribution of wealth, it is evident that wages did keep pace with increases in productivity during the ‘long boom’ of the postwar era (1945-1973). The combination of manufacturing ascendancy and Keynesianism ensured a better (but still far from equitable) spread of prosperity in the US in these years.

Today’s troublingly-high unemployment in America reinforces the inequity of wage stagnation by reducing employer competition for workers. U.S. labor force participation is at historically low levels, prompting even the International Monetary Fund to advocate broader economic stimulus. Millions who want to work full time can only find part-time jobs or have quit looking for paid employment. Job creation is lagging far behind what is needed to recover fully from the Great Recession and keep pace with population growth. The jobless rate among non-college educated youth, especially in the African American community, has been for half-a-decade at the kind of crisis level that prompted federal intervention in the 1930s. The decline of unions in the manufacturing sector has further limited the possibility of collective bargaining addressing the relative decline of wages.

If all that was not bad enough, poverty levels reached their highest level during the Great Recession and its aftermath since the Great Society put the issue at the forefront of the national agenda in the 1960s. In 2012, three years after the downturn’s official ending, the Census Bureau reported that 16 percent of the U.S. population was impoverished, including nearly one child in five. In 2013, a UNICEF report fingered the United States as having the second-highest child poverty rate in the developed world, outperforming only Romania. The Democrats had gone ballistic when the numbers of Americans living in poverty hit 14.5 percent of the population in the early Reagan years and had kept up a steady drumbeat of criticism even as the poverty rate declined somewhat in Reagan’s second term. Today, by contrast, poverty does not figure strongly in the national agenda of either main political party.

Given these disparities, commentators like R.J. Eskrow (‘Stock Market Reaches Milestone, But Who Cares?’ LA Progressive, 22 August 2014) are right to talk of two American economies rather than one. The first is the domain of the corporations, the wealthy, and the investor class. The other is the domain of the hard-pressed middle-class and the even more hard-pressed low socio-economic status groups where life is less rosy.

The vast majority of Americans are not sharing in the unprecedented financial boom that benefits the wealthy minority. What’s remarkable is the lack of collective dissent about this situation. If the private economy is not distributing a sufficient share of wealth to the bulk of the population, only government can ensure greater equitability. Conservatives might contend that more statism can only stifle the tide of prosperity that will eventually lift all boats. Such an argument ignores how much the wealthy benefit from public policy in terms of spending restraint, taxation, and deregulation. If the magic of the market really worked, we would have seen the evidence long before now. America has been waiting nearly forty years to see something equivalent to the admittedly-inequitable but still-superior distributive benefits of prosperity of the postwar era.

The American political system currently serves the wealthy few at the expense of the many. That’s also true in the UK and many other places in the developed world. It was America’s apparent success in market liberalization that led to the broader triumph of this philosophy in the late twentieth century. If the United States reverted to a model akin to the mixed-economy approach of its postwar heyday, this would likely have ripple effects elsewhere as the benefits became evident.

It used to be said that Ronald Reagan was the Roosevelt of the right. There is no convenient alliteration for what America needs now in terms of political leadership - other than to hope for a protagonist of progressivism. However, the real change has to come within the broader society’s demand for such leadership, and that seems a long way off. The chances of the 2016 presidential and congressional elections being the present-day equivalent of 1912, 1932, and 1964 look slim to say the least.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153490 https://historynewsnetwork.org/blog/153490 0
The Joyless Recoveries in the UK and the USA

Iwan Morgan is the author of "The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush" (University Press of Kansas). 

Every reputable survey shows that the US and the UK are top of the league for strength of recovery from the Great Recession. By comparison most of Western Europe and Japan are still stuck in the doldrums. Despite this, the public mood in both countries is one of pessimism about the economic future.

In America, there is a distinct parallel between the popular outlook today and that of the late 1970s ‘malaise.’ A USA Today/Pew Research Center poll found that a massive 71 percent of respondents are dissatisfied with how things are going in the country and only 49 percent think things will be better in 2015 – the first time since 1990 that optimism for the coming year has dipped below 50 percent. Unemployment may have fallen to 5.8 percent but this masks the reality that many people have given up looking for work, many are underemployed, and many have stagnating wages. Another cause of pessimism is the overhang of debt taken out in better times. And those living with negative-equity mortgages cannot up and head for Texas – supposedly the new land of tomorrow – without taking a big financial hit in selling their homes at a much lower price than they paid for them at the height of the property boom.

In Britain, the situation is even bleaker despite declining unemployment and some evidence that wages have started to rise after years of stagnation. The extent of food and fuel poverty is scandalous. The prospects for large sections of youth are bleak. And growing wage inequality that offers irrefutable evidence in support of Thomas Piketty’s thesis shows every sign of getting worse rather than better. The bald truth is that wages as a share of UK GDP have fallen by around 10 percentage point since 1973. Low skilled wages are and will remain clustered just above the minimum-wage level. Only one in three persons will earn more than £30,000 a year (about $48,000) or its future equivalent in their lifetimes. Only 2 or 3 percent of the population will earn a six-figure salary measured in today’s value.

All this is surely a comment on the narrow reach of the Anglo-Saxon model of market economics and its concomitant principle of limited government that both countries have followed since the early 1980s. In reality, however, only a benign government that mitigates the market’s maldistribution of wealth can make things better. It is hardly surprising therefore that the public mood in both countries is anti-government – not in the Reaganite/Thatcherite sense but in disillusion with the failure of the political classes to deal effectively with the problems facing both nations.

US voters have shaken up the control of government in the midterms but opinion polls do not attest that this represented a positive embrace of Republicanism. Instead the dominant trend is low approval of the president, Congress, and both parties for failing to work together to address economic, fiscal and social problems.

In the UK polls show that voters trust Prime Minister David Cameron to manage the economy better than any other party leader, but his Conservative Party has less than 30 percent support in recent polls. Labour, the main opposition, is only a few points ahead. In contrast, support is increasing for the Greens, the Scottish Nationalists, and the United Kingdom Independence Party. UKIP, as the latter is known, simplistically blames immigration and the European Union for all Britain’s economic problems but no one can deny that it has tapped a rich vein of popular discontent. Polls now show that one in five voters identify with UKIP and that the party draws its support equally from disillusioned Conservative and Labour voters.

The UK holds national elections in 2015, the US in 2016. Labour may yet form the next government in Britain owing to the vagaries of our electoral system that can deliver a majority to parties winning less than 40 percent of the total vote. The Democrats have an even better chance of recovering from the 2014 debacle to win the presidency if they can mobilize their blue-state electoral base.

But these victories, if they come about, will mean little unless they are achieved through party change. I was recently asked by one of my British students what the Democrats currently stand for. I could not come up with a good answer. I realized that I would have had the same problem explaining what Labour now stands for to an American student.. Democratic and Labour politicians frequently complain that those in the lower half of the income distribution go against their own economic interests in not supporting them. They might more reasonably ask what have they done of late to earn the votes of their natural constituencies.

Unless Democrats and Labour can reconnect with their publics, historians of the future may well be puzzling how two parties with a historic mission to mitigate economic inequality underwent atrophy at the very moment that economic conditions appeared to favor their political ascendancy.

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153550 https://historynewsnetwork.org/blog/153550 0
Brexit Blues

Iwan Morgan is the author of "The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush" (University Press of Kansas). 

Related Link Brexit: What Historians Are Saying

Back in the 1960s British Prime Minister Harold Wilson remarked that “a week was a long time in politics.”  That was a gross understatement in light of the momentous events that have taken place in the seven days following the United Kingdom’s 52-48 percent referendum vote on June 23, 2016, to leave the European Union. Here is a brief but by no means complete outline of developments:

●  The morning after the vote David Cameron, who had called the referendum in the expectation of a Remain vote and led the campaign for one, announced his resignation as Prime Minister and Conservative Party leader.

●  Chief spokesman for Brexit, Boris Johnson, announced that he was not a candidate to succeed Cameron because his prospects had been undermined by the rival candidacy of another leading Brexiter, Michael Gove, who had hitherto declared himself unsuited to lead the country.

●  As something of a sideshow the vast majority of Labour Members of Parliament supported a vote of no confidence in the party’s left-wing leader, Jeremy Corbin, for failing to wage an energetic campaign to mobilize support for Remain among the party’s core constituency of lower-income, working-class voters.

●  More significantly, Scottish Nationalist Party leader Nicola Sturgeon announced that she would seek another independence referendum for exit from the United Kingdom in view of Scotland’s overwhelming support for Remain in the EU referendum.

To put it mildly, Britain is facing an uncertain future:  it has a lame-duck government; no-one in the Brexit camp seems to have a clear idea of the terms on which British exit from the European Union should be negotiated; the main opposition party is in turmoil; and there is a strong likelihood that the Brexit vote will precipitate the break-up of the United Kingdom as the odds look to favor Scotland leaving if (more likely when) there is another independence referendum.

As so often in the past – but this time with cataclysmic consequences – a dispute over EU membership has proved to be the principal fault-line in British politics.  It was responsible for Margaret Thatcher’s overthrow as Prime Minister by her own party in 1990, the controversies  among Conservatives that blighted the premiership of John Major (1990-97), and Cameron’s miscalculation in holding an in/out referendum in the hope of laying the issue to rest.

Americans may well ask what’s it all about.  If economic interest were the sole consideration, the case for the UK to remain in the EU was overwhelming – it gains access to a vast European single market, it is the fastest growing economy in the EU, and it has far lower levels of unemployment than virtually all the other 27 states of the EU.  UK angst about the EU is at root political rather than economic – and finds expression above all in the Brexit hope of regaining national sovereignty over laws and regulations. In this regard, the 23 June referendum vote may have some parallels with – and salutary warnings for – US politics.

There was a strong populist element to the Brexit vote, one that transcended class and to a large extent region.  As many Brexiters saw it, a vote against the EU was a vote to make Britain “Great”= again and to end control of their lives by a distant, self-interested bureaucratic elite in Brussels. In reality, the EU has been engaged far more than the UK national government of late in providing protections for worker rights, assistance for depressed areas, and general support for social welfare program*s. For many Brits, however, it has become the whipping boy for resentments sparked by the Great Recession of 2008-09 and the evidence of rising inequality of income and opportunity since then.  It is difficult to believe that a referendum taken before that downturn would have produced the same result. 

As a corollary to this, many Brexiters blame free movement of labour within the EU’s single market for their growing sense of economic insecurity.  Many raised the cry that London only voted Remain because its prosperous middle classes benefited from cheap services provided by EU immigrant labor from eastern Europe.  The fact that skills shortages in the UK are certain to require continued immigration in the future somehow did not register.  Evidence that EU migrants were net contributors in taxes to the UK Treasury also failed to dislodge popular images of them as welfare freeloaders.

Donald Trump, in Scotland to open his Turnberry golf resort the day after the result was announced, hailed the Brexit vote as “a great thing.”  This view doubtless reflects his own hopes of surfing popular/populist resentments to the White House in November.  Whether the vote was such a good thing as Trump imagines for the UK is very much open to question, but it surely counsels against writing him off in the presidential race.

In the meantime, the UK faces a black hole of uncertainty.  The London stock market and the pound plummeted in the wake of the vote, but then recovered somewhat as realization kicked in that Britain has yet to submit a formal request to leave the EU and negotiations over the divorce settlement will take some two years to work out. No one should be under any illusions that this calm before the storm will last for long. Nevertheless, hopes among Remain supporters for a second referendum once economic problems generate buyers’ remorse are fanciful. 

Britain is going to leave the EU at some point – the only question is over the terms of withdrawal.  Brexiters believe they can depart the political union while remaining in the single market, but the prospects of such a deal being struck are nil.  The choice facing the UK is to cut itself off from the benefits of the single market at considerable cost to its trade and general economy – or to stay in the single market on condition of allowing free movement of labor across its borders (just as currently happens). 

Option 1 is the route to likely economic decline; Option 2 violates the Brexit dream of national sovereignty and immigration control; and both options make more likely the break-up of the United Kingdom.  Britain is about to learn what the Chinese mean by the curse of living in interesting times.         

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153782 https://historynewsnetwork.org/blog/153782 0
No One Knows What Brexit Really Means

Iwan Morgan is the author of "The Age of Deficits: Presidents and Unbalanced Budgets from Jimmy Carter to George W. Bush" (University Press of Kansas). 

Britain’s new Prime Minister Theresa May has the most difficult inheritance of any new occupant of 10 Downing Street since 1945. She has signified determination to abide by the outcome of the EU referendum in her avowal that ‘Brexit means Brexit,’ but this statement obfuscates far more about the future than it illuminates. What Brexit means will remain unclear until the serious work of negotiating the terms of the United Kingdom’s divorce from the European Union [EU] is far advanced.  Britain is not engaged in a simple act of secession because it must define a new political and economic relationship with the body to which it still belongs until its government (as opposed to its electorate) formally declares the country’s intention to leave (some months hence in all likelihood) .

Theresa May is caught on the horns of a dilemma:  the longer it takes to negotiate Brexit, the greater will be the uncertainty that is bound to deter business investment plans in the United Kingdom [UK] economy; but a quick settlement of Brexit is likely to mean that the UK gets a much worse deal than would be  achieved through prolonged and patient negotiating.  A number of critical issues – most notably the terms on which Britain can have access to the EU single market – are not capable of quick solution.

Any deal that is reached at whatever point in time is anything but sacrosanct, however.  It would need approval by all EU members.  Accordingly, if any one of the smaller member-states (for example, Bulgaria, Latvia, or Malta) took exception to the terms, it could torpedo the settlement through use of its veto.  In that case, the only option facing the UK would be to negotiate bilateral agreements singly with the larger members of the European Union who are its main trading partners on the European mainland (for example, France, Germany, Italy, and Spain),  but this would be a very complex undertaking that would do little to alleviate business uncertainty about the future.

In an interview with a pro-Brexit newspaper, the Sunday Express, new British Foreign Secretary Boris Johnson, a leading light of the ‘Out’ campaign, declared his ‘absolute confidence’ that the remaining EU members would grant Britain everything it really wanted in the exit negotiations.  This is the kind of vacuous optimism that characterized the Brexit campaign and better should be expected from a man now with a key role to play in the diplomacy of withdrawal.  But it is indicative that neither side in the referendum debate had planned in any significant way for exit-strategy scenarios if the British people voted to leave.  The Brexit campaign appears not to have thought about the future beyond polling day.  The same is true of the over-confident Remain campaign, headed  by  Prime Minister David Cameron and Chancellor of the Exchequer George Osborne – both now departed to the backbenches (and supported, albeit tepidly, by then Home Secretary – and now P.M. – Theresa May).

Remarkably the UK government had no well-developed contingency plans in case of an ‘out’ vote.  It is now having to start almost from scratch to put a withdrawal strategy in place, but this is a daunting task.  Trade negotiations will be critical to determining exit terms but it has been calculated that Whitehall as yet has only about 20 percent of the number of skilled negotiators needed for such a task.  Meanwhile some 10,000 statutes enacted by Parliament in the 40 years since the UK joined the EU will need revision to take account of Britain’s withdrawal from that body.

It is difficult, arguably impossible, to find historical precedents that might throw light on how Britain will deal with the coming years of uncertainty because we are entering a ‘New World’ – one perhaps more akin to Roanoke than Jamestown!  

In the short-term, at least, the ‘experts’ – the group much despised  by Brexiteers for their doom-saying in the recent campaign – are predicting a recession later this year because the uncertainty over the economic future is harming business investment.  Sharing this concern, the new UK government has virtually committed itself to countering any decline with fiscal stimulus if needed.  So, after 6 painful years of  austerity under the Cameron-Osborne regime in vain pursuit of public debt-reducing balanced budgets, UK economic policy is set to change course dramatically because of Brexit.

This is the first  of many adjustments to the consequences of the referendum vote.  With uncertainty about the terms of  British withdrawal likely to be long-lasting, the UK economy seems in for a very bumpy ride over the next few years – thanks to a small but decisive majority of voters casting their ballots in favor of leaving the EU.  Democracy is a great thing, but there are times when  pragmatic decision-making in a smoke-filled room has a certain appeal!            

Wed, 08 Dec 2021 07:36:23 +0000 https://historynewsnetwork.org/blog/153792 https://historynewsnetwork.org/blog/153792 0
Trumped-up Reaganomics

Iwan Morgan is Professor of US Studies and Head of US Programmes at the Institute of the Americas, University College London, and the author of the forthcoming book, "Reagan: American Icon" , which will be published in the UK in October and in the US in January.

Ronald Reagan’s name has been invoked in every presidential election since he left office in 1989.  Both Hillary Clinton and Donald Trump have already done so in 2016.   Clinton used  a famous Reagan ad from the 1984 election to attack Trump’s dystopian view of the country’s future in her nomination acceptance address to the Democratic National Convention in Philadelphia on 29 July: “He's taken the Republican Party a long way, from morning in America to midnight in America.” Not to be outdone, Trump positioned himself as the 40th president’s legatee in his economic policy address, delivered in Detroit on 8 August, by avowing that his economic renewal program would have as its centerpiece “the biggest tax revolution since the Reagan tax reform, which unleashed years of continued economic growth and job creation.”

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