Blogging for me is a way to express some thoughts and reactions to things I read or learn about. As I’ve note before one doesn’t have to know something to blog, one only has to have an opinion which one is willing to express. So I’m going to venture off onto economic issues because I recently read about them, first in the WILSON QUARTERLY 2012 article “Revisiting the Great Depression” by Robert J. Samuelson. I found interesting his thesis that
“The role of the welfare state in today’s economic crisis recalls the part played by the gold standard in the calamitous 1930s.”
“Just as the gold standard amplified and transmitted the effects of the Depression, so the modern welfare state is magnifying the effects of the recession.”
I’ve read different comparisons between the 20th Century’s Great Depression and the recent Great Recession of the 21st Century, but Samuelson is the first I’ve seen indicate that the current “welfare state” may have the same drag on the economy that the gold standard had in the 1930’s. The gold standard is thought by some to have hamstrung the economy in the 1920’s and 30’s limiting growth by limiting the amount of capital available to be invested in the economy. Samuelson defends comparing the effects of the gold standard on the economy of the 1920’s with the effects of the modern welfare state on the modern economy:
“Casting the welfare state in this role will strike many as outrageous. After all, the welfare state—what Americans blandly call ‘social spending’—didn’t cause the 2007–09 financial crisis. This dubious distinction belongs to the huge credit bubble that formed in the United States and elsewhere, symbolized by inflated real estate prices and large losses on mortgage-related securities. But neither did the gold standard directly cause the 1929 stock market crash. Wall Street’s collapse stemmed, most simply, from speculative excesses. Stock prices were too high for an economy that was already (we now know) entering recession. But once the slump started, the gold standard spread and perpetuated it. Today, the weakened welfare state is perpetuating and spreading the slump.
What has brought the welfare state to grief is not an excess of compassion, but an excess of debt.”
Samuelson goes on to describe how the US pulled out of the depression because of certain demographic truths. But he also notes what factors today are not exactly the same as in the time after the Great Depression. Our climb out of the Great Depression had some factors in its favor which are not true today.
“But this system required favorable economics and demographics—and both have moved adversely. A younger population was needed to lighten the burden of supporting the old, the largest claimants of benefits. Rapid economic growth was needed to generate the tax revenues to pay for benefits. Indeed, the great expansion of benefits started in the 1950s and ’60s, when annual economic growth in Europe and the United States averaged about four percent or more, and the expectation was that this would continue indefinitely. Long-term economic growth is now reckoned closer to two percent a year…”
But the unfavorable demographics in Europe and the US during the current economic crisis are not those of the post-Great Depression times. So modern governments have tried a different set of solutions to the economic crisis:
“The means of escape from these unhappy trends was to borrow. Some countries with extensive welfare systems that didn’t borrow heavily (examples: Sweden and Finland) have fared well. But most governments became dependent on bond markets.”
The results of government efforts have to date not been totally successful, though some would argue a point harder to prove: what was done prevented an even worse economic disaster. Samuelson offers a moral to the story:
“The mistake, popularized largely by economists, was to believe that regulation of the economy could be derived from theory and converted into practical precepts for policy. The reality is that economic life is not solely described or dictated by rhythms suggested by economic models. It moves in response to institutions, technologies, beliefs, and cultures that follow their own logic, sometimes with completely unexpected, mystifying, and terrifying consequences.”
The world’s economy has proven to be more difficult to push into recovery than many had hoped. President Hoover in the 20th Century was criticized for not doing enough to stimulate the economy because of his conservatism; President Obama has been criticized for doing too much because of his being liberal. But the two crises represent different times with efforts made having results that cannot exactly be compared to each other. As in chaos theory, there are so many factors, and so many unpredictable factors that shape the world’s economy that trying to predict the exact effects of certain “stimulus” efforts may not be possible.
In the next blog I will look at another WILSON QUARTERLY article, “The Debt Bomb”, which analyzes the causes of the ongoing Great Recession.