https://blogs.imf.org/2018/11/05/when-history-rhymes/
November 5, 2018
The graves of soldiers who died in World War I, near Verdun, France: on the 100th anniversary of the end of the Great War, leaders should listen closely to the echoes of history (photo: Mathieu Pattier/SIPA/Newscom)
Mark Twain once said that "History never repeats itself, but it does often rhyme." As heads of state gather in Paris this week to mark 100 years since the end of World War I, they should listen closely to the echoes of history and avoid replaying the discordant notes of the past.
For centuries, our global economic fortunes have been shaped by the twin forces of technological advancement and global integration. These forces have the prospect to drive prosperity across nations. But if mismanaged, they also have the potential to provoke calamity. World War I is a searing example of everything going wrong.
The 50 years leading up the to the Great War were a period of remarkable technological advances such as steamships, locomotion, electrification, and telecommunications. It was this period that shaped the contours of our modern world. It was also a period of previously unprecedented global integration—what many refer to as the first era of globalization, where goods, money, and people could move across borders with relatively minimal impediments. Between 1870 and 1913 we saw large gains in exports as a share of GDP in many economies—a sign of increasing openness.
All of this created great wealth. But it was not distributed evenly or fairly. This was the era of the dark and dangerous factories and the robber barons. It was an era of massively rising inequality. In 1910 in the United Kingdom the top 1% controlled nearly 70% of the nation's wealth—a disparity never reached before or after.
Today, we can find striking similarities with the period before the Great War.
Then, as now, rising inequality and the uneven gains from technological change and globalization contributed to a backlash. In the run-up to the war countries responded by scrambling for national advantage, forsaking the idea of mutual cooperation in favor of zero-sum dominance. The result was catastrophe—the full weight of modern technology deployed toward carnage and destruction.
And in 1918, when leaders surveyed the corpse-laden poppy fields, they failed to draw the correct lessons. They again put short-term advantage over long-term prosperity—retreating from trade, trying to recreate the gold standard, and eschewing the mechanisms of peaceful cooperation. As John Maynard Keynes—one of the IMF's founding fathers—wrote in response to the Versailles Treaty, the insistence on imposing financial ruin on Germany would eventually lead to disaster. He was entirely correct.
It took the horrors of another war for world leaders to find more durable solutions to our shared problems. The United Nations, the World Bank, and of course the institution I now lead, the IMF, are a proud part of this legacy.
And the system created after World War II was always meant to be able to adapt. From the move to flexible exchange rates in the 1970s to the creation of the World Trade Organization, our predecessors recognized that global cooperation must evolve to survive.
Today, we can find striking similarities with the period before the Great War—dizzying technological advances, deepening global integration, and growing prosperity, which has lifted vast numbers out of poverty, but unfortunately has also left many behind. Safety nets are better now and have helped, but in some places we are once again seeing rising anger and frustration combined with a backlash against globalization. And once again, we need to adapt.
That is why I have recently been calling for a new multilateralism, one that is more inclusive, more people-centered, and more accountable. This new multilateralism must reinvigorate the previous spirit of cooperation while also addressing a broader spectrum of challenges—from financial integration and fintech to the cost of corruption and climate change.
Our recent research on the macroeconomic benefits of empowering women and modernizing the global trading system provides new ideas on ways to create a better system.
Each of us—every leader and every citizen—has a responsibility to contribute to this rebuilding.
After all, what was true in 1918 is still true today: The peaceful coexistence of nations and the economic prospects of millions depends squarely on our ability to discover the rhymes within our shared history.
Related Links:
New Economic Landscape, New Multilateralism
Steering the World Toward More Cooperation, Not Less
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BERKELEY – Now that we are witnessing what looks like the historic decline of the West, it is worth asking what role economists might have played in the disasters of the past decade.
TRUMPONOMICS AND THE US MIDTERM ELECTIONS
Nov 2, 2018 PROJECT SYNDICATEinterviews ANGUS DEATON, et al.about the state of the US economy and its political implications.
6Add to BookmarksFrom the end of World War II until 2007, Western political leaders at least acted as if they were interested in achieving full employment, price stability, an acceptably fair distribution of income and wealth, and an open international order in which all countries would benefit from trade and finance. True, these goals were always in tension, such that we sometimes put growth incentives before income equality, and openness before the interests of specific workers or industries. Nevertheless, the general thrust of policymaking was toward all four objectives.
Then came 2008, when everything changed. The goal of full employment dropped off Western leaders' radar, even though there was neither a threat of inflation nor additional benefits to be gained from increased openness. Likewise, the goal of creating an international order that serves everyone was summarily abandoned. Both objectives were sacrificed in the interest of restoring the fortunes of the super-rich, perhaps with a distant hope that the wealth would "trickle down" someday.
At the macro level, the story of the post-2008 decade is almost always understood as a failure of economic analysis and communication. We economists supposedly failed to convey to politicians and bureaucrats what needed to be done, because we hadn't analyzed the situation fully and properly in real time.
Some economists, like Carmen M. Reinhart and Kenneth Rogoff of Harvard University, saw the dangers of the financial crisis, but greatly exaggerated the risks of public spending to boost employment in its aftermath. Others, like me, understood that expansionary monetary policies would not be enough; but, because we had looked at global imbalances the wrong way, we missed the principal source of risk – US financial mis-regulation.
Still others, like then-US Federal Reserve Chairman Ben Bernanke, understood the importance of keeping interest rates low, but overestimated the effectiveness of additional monetary-policy tools such as quantitative easing. The moral of the story is that if only we economists had spoken up sooner, been more convincing on the issues where we were right, and recognized where we were wrong, the situation today would be considerably better.
Specifically, in the years before the crisis, financial deregulation and tax cuts for the rich had been driving government deficits and debt ever higher, while further increasing inequality. Making matters worse, George W. Bush's administration decided to wage an ill-advised war against Iraq, effectively squandering America's credibility to lead the North Atlantic through the crisis years.The Columbia University historian Adam Tooze has little use for this narrative. In his new history of the post-2007 era, Crashed: How a Decade of Financial Crises Changed the World, he shows that the economic history of the past ten years has been driven more by deep historical currents than by technocrats' errors of analysis and communication.
It was also during this time that the Republican Party began to suffer a nervous breakdown. As if Bush's lack of qualifications and former Vice President Dick Cheney's war-mongering weren't bad enough, the party doubled down on its cynicism. In 2008, Republicans rallied behind the late Senator John McCain's running mate, Sarah Palin, a folksy demagogue who was even less suited for office than Bush or Cheney; and in 2010, the party was essentially hijacked by the populist Tea Party.
After the 2008 crash and the so-called Great Recession, years of tepid growth laid the groundwork for a political upheaval in 2016. While Republicans embraced a brutish, race-baiting reality-TV star, many Democrats swooned for a self-declared socialist senator with scarcely any legislative achievements to his name. "This denouement," Tooze writes, "might have seemed a little cartoonish," as if life was imitating the art of the HBO series "Veep."
Of course, we have yet to mention a key figure. Between the financial crisis of 2008 and the political crisis of 2016 came the presidency of Barack Obama. In 2004, when he was still a rising star in the Senate, Obama had warned that failing to build a "purple America" that supports the working and middle classes would lead to nativism and political breakdown.
Yet, after the crash, the Obama administration had little stomach for the medicine that former President Franklin D. Roosevelt had prescribed to address problems of such magnitude. "The country needs…bold persistent experimentation," Roosevelt said in 1932, at the height of the Great Depression. "It is common sense to take a method and try it; if it fails, admit it frankly and try another. But above all, try something."
The fact that Obama failed to take aggressive action, despite having recognized the need for it beforehand, is a testament to Tooze's central argument. Professional economists could not convince those in power of what needed to be done, because those in power were operating in a context of political breakdown and lost American credibility. With policymaking having been subjected to the malign influence of a rising plutocracy, economists calling for "bold persistent experimentation" were swimming against the tide – even though well-founded economic theories justified precisely that course of action.
Still, I do not find Tooze's arguments to be as strong as he thinks they are. We economists and our theories did make a big difference. With the exception of Greece, advanced economies experienced nothing like a rerun of the Great Depression, which was a very real possibility at the height of the crisis. Had we been smarter, more articulate, and less divided and distracted by red herrings, we might have made a bigger difference. But that doesn't mean we made no difference at all.