At Vox , Peter Termin and David Vines argue that policymakers need to spend a little time on economic history for guidance on how to best manage the global economic challenges they now face. The lessons to take from global economic growth over the last 200 years, they say, are that international cooperation is key, and that it is best to deal with unemployment first and deficits second. But the most important step seems to be to recognize that we are going through a period of transition. In our recent book (Temin and Vines 2013), we argue that the transition from British to American hegemony was not made quickly or easily. Britain was exhausted by the war, Germany was burdened by reparations. Even though the US intervention was critical to Allied success in World War I, the US abandoned its European interests after the war. War debts led to hyperinflations in the early 1920s and this was followed by an interim period of lending to Germany in the mid 1920s and some consequent recovery. But the reparations problem had not been solved. The departure of Germany from the gold standard in the currency crisis of 1931, followed by Britain’s exit, and then by tight policies in the US, ultimately led to the Great Depression in the 1930s. The absence of a hegemon to restore cooperation and prosperity was all too evident. Massive unemployment persisted, only ending with the beginning of World War II. We are now in a similar transition. The US squandered its leadership with two elective wars and massive tax cuts, and with low interest rates and a property boom. Countries normally raise taxes to fight wars, although seldom far enough to avoid inflation. The US went in the opposite direction, under the idea that ‘deficits don’t matter’, at the same time as tolerating a property boom, simply because inflation did not rise. Since the boom collapsed, Americans have been left wondering how to deal with their resulting fiscal debts. Europeans started this century not with new wars, but a new currency. As a result, Germany has squandered its leadership within Europe, because the architecture of the new currency union was flawed. The idea was that international capital flows would become internal capital flows and, because of this, would cease to be an object of worry. We now know that this was wrong. The money which northern European banks lent to southern peripheral countries in Europe led to a boom there, as well as rising costs. And the money was not well used; it supported speculative property booms and consumption, rather than investment in productive tradable good industries. All went well during the ‘Great Moderation’ – the reduction in the volatility of business cycle fluctuations starting in the mid-1980s – but the system broke down during the Global Crisis. The money which banks lent to countries in the European periphery ended up as fiscal debts (once the banks had been rescued), and some of these fiscal debts have since became the obligations of the ECB. It is not clear within the Eurozone which countries will end up being responsible for resolving these fiscal debts. Read The leaderless economy: Can economic history suggest lessons here .
Filed under: jobs, vox, global business, unemployment, global economic crisis, global economy, VoxEU, economic history, deficits, great recession, tax cuts, hyperinflation, competitiveness, U.S., WWII, David Vines, Peter Temin