Читать книгу Rediscovering Growth - Andrew Sentance - Страница 7

Chapter 2

Lessons from the past

Before 2008, there were only two previous years in modern peacetime history which saw such a dramatic turning point in the world economy: 1930 and 1974. Both years ushered in a prolonged period of disappointing economic growth, high unemployment and turbulence across the major economies of the Western world. What lessons can we draw from these previous episodes?

In responding to the recent financial crisis, policymakers and commentators have tended to draw more heavily on the experience of the 1930s than the 1970s. Ben Bernanke, the outgoing Chairman of the US Federal Reserve, studied the 1930s’ experience as an academic. In a speech in April 2010,11 he highlighted four key lessons from that period:

First, economic prosperity depends on financial stability; second, policymakers must respond forcefully, creatively, and decisively to severe financial crises; third, crises that are international in scope require an international response; and fourth, unfortunately, history is never a perfect guide.

The former Governor of the Bank of England, Mervyn King, was an academic colleague of Bernanke’s in the United States in the early 1980s. In a speech thirty years later,12 he referred back to that experience in highlighting the lessons he drew from the experience of the 1930s:

Thirty years ago Ben Bernanke and I had adjoining offices at MIT. We never imagined that thirty years later we would be colleagues as central bank governors, and even if we had, we would never have believed that the industrialised world would have faced an economic and financial crisis on a par with the problems seen in the 1930s… The worst problems of the 1930s were avoided this time around because of the stimulatory policies injected into the world economy by central banks and governments around the world although it is fair to say that a recovery of a durable kind is proving elusive.

Lessons from the 1930s

The analysis of the Great Depression by Bernanke and others – building on earlier research by Milton Friedman and Anna Schwartz13 – highlighted the importance of a large monetary contraction as a key factor triggering the depression of the 1930s. This monetary squeeze was aggravated by the efforts of countries to stay on the Gold Standard, which locked them into a deflationary downward spiral. In 1931, Britain and a number of other countries abandoned the link to gold, but it was not until the beginning of 1934 that the United States devalued the dollar relative to the gold price. By that time its unemployment rate had already risen to over 20%. Meanwhile US GDP fell by nearly 30% in real terms between 1929 and 1933, and the level of prices dropped by around a quarter over the same period. The rise in unemployment and the fall in output and prices were much less pronounced in countries like the United Kingdom which had abandoned the Gold Standard more quickly.

The key driving force behind the policy measures taken around the world in late 2008 and 2009 was to avoid a repeat of this dismal record of economic failure. And this was successfully achieved. Although GDP fell and unemployment rose, the very severe distress of the 1930s was avoided. As Figure 2.1 shows, the levels of unemployment experienced in the United States, United Kingdom and Europe were much closer to the experience of previous post-war recessions – in the 1980s and 1990s – than they were to the 1930s.

Figure 2.1. Post-recession unemployment rates. Source: IMF from 1980; various historical studies for 1930s.

Other problems which had contributed to the severity of the depression in the 1930s were also avoided following the recent financial crisis. Deflation has not emerged as a serious phenomenon. As we noted in Chapter 1, inflation has been a bigger problem since the financial crisis than falling prices – particularly in emerging market economies. Fiscal policies have also been more flexible. When the recession hit in 2008–9, governments were prepared to allow their deficits to rise for a while and incur extra borrowing to support demand – heeding the policy advice from John Maynard Keynes in the 1930s. It is only as growth has resumed that Western governments have focused more actively on deficit and debt reduction.

Another important difference from the 1930s is that we have seen a stronger focus on international economic policy cooperation, which was particularly noticeable in the depths of the crisis in 2008 and 2009. The G20 – which includes leading emerging markets and developing economies as well as the major Western powers – has become an important forum for discussion of international economic policy issues. The G20 Summit in London in April 2009 provided a strong commitment to use expansionary monetary policies across the world to support demand and to avoid protectionism, even though there were differences of view and emphasis between governments on how far extra public spending and borrowing should be used to support demand.

Perhaps most important of all, the world has avoided a serious lapse into protectionism, which greatly aggravated the length and depth of the Great Depression. The US Tariff Act, which was signed into law in June 1930, prompted a worldwide surge in protectionist measures as other countries retaliated to restrictions on their exports. World trade fell between 1929 and 1933 by nearly 30% and trade volumes did not recover their pre-recession level until after World War II.14

By contrast, though world trade was hit by recession in 2008–9, it soon bounced back. Trade volumes dropped by more than 10% in 2009, but that decline was more than recouped in 2010 and world trade in 2013 is, at the time of writing, estimated to be 13% above its pre-recession peak in 2008. There have been occasional bouts of sabre rattling on trade issues – like the spat in 2013 between the European Union and China over the alleged dumping of solar panels. There have also been periodic concerns about so-called currency wars – worries that competitive devaluations would spur a round of protectionist responses with new trade barriers being imposed. But the open rule-based trade system policed by the World Trade Organization (WTO) has been kept intact. Indeed, more countries and people are actively participating in the world trading system than at any previous time in the history of the world. The WTO currently has 159 member countries which account for over 98% of global trade and GDP and around 94% of the world’s population.

So if the lessons of the 1930s have been heeded and have had a major influence on policymaking, what about the lessons of the 1970s? The economic turmoil we saw then has been a less obvious point of reference for policymakers and economic analysts recently – perhaps because that decade is remembered, particularly in Britain, as a time of rip-roaring inflation. Even though inflation has been higher than expected in many countries in recent years, it has not become the dominant economic problem that it was for major economies like the United Kingdom and the United States in the 1970s. But this important difference has deflected attention away from other parallels between our current position and the 1970s. Economically, we have gone back to the 70s in four significant ways.

Back to the 70s: Financial crisis

As in 2008, an international financial crisis – with its roots in the policies pursued by the United States – paved the way for the economic turmoil of the mid 1970s and beyond. Unlike our recent crisis, the financial turbulence of the early 1970s did not originate from instability in banks and other private sector financial institutions. It stemmed from the unravelling of the official framework underpinning financial stability – the system of fixed exchange rates which had been in place for a quarter of a century after World War II. This set of arrangements – known as the Bretton Woods system – provided a vital anchor for the long post-war expansion which dominated the 1950s and 1960s in Europe and North America.

The Bretton Woods system derives its name from a town in New Hampshire in the United States where the Allied nations met in 1944 to plan for the post-war economic future, amid growing confidence that they would be victorious in World War II. The objective was to put in place a more cooperative system of international finance and economic policymaking to avoid the problems which had plagued the world’s major economies in the 1930s. The great economist John Maynard Keynes played a major role in the conference – though not all his ideas were adopted.