Is economic winter coming, again? By Publius
Is economic winter coming – again?
No doubt many have uttered, as their last words, a variant of ‘Phew, that was close!’ Reading the news in the last couple of days tempts me, however, to say the same. It looks for the moment as if common sense and cool heads may just be prevailing in the world’s chancelleries. If true, this is marvellous news, because a few days ago some very dark clouds were gathering.
One of the more puzzling features of politicians is the small weight they appear to place on having a successful economy, and their willingness to inflict substantial economic damage on the countries they lead (as well as on other countries, of course). Vladimir Putin is an outstanding example of a leader whose recent actions have shredded Russia’s economy and currency, but also whose policies over the past twelve years have stunted economic growth.
But Putin is not alone and has at least the bad excuse of economic sanctions for some of the damage inflicted on Russia during his rule. Boris Johnson can almost certainly be blamed for a seemingly permanent fall in the value of the pound of about 10-15% (depending on the precise window chosen) against the dollar since 2015. That’s right: Johnson’s greatest feat in his career so far has been to make the UK 10-15% worse off in dollar terms. Very little else he can plausibly achieve is likely to match that in practical terms.
China’s leaders too have recently shown a puzzling willingness to inflict substantial damage on their domestic economy and domestic businesses through draconian lockdown policies, hostile regulation of certain business sectors and assertive foreign policy, among others, with politics trumping economics. This is particularly puzzling since it has been China’s extraordinary economic growth over the past four decades which has propelled it to superpower status. But all political leaders need to care about their economies: These economies are the source of all long-term political power as well as prosperity. Countries that consistently trash their economies end up like North Korea. Of the many adjectives that could be applied to North Korea, ‘powerful’ is not one.
So it’s been with a limp sense of relief, for now, that two recent developments have been greeted by people who do care about economies. First, the US appears to have decided it has done enough, for now, to respond to Russia’s invasion of the Ukraine, and in particular will not attempt further pressure on China to fall into line. Second, the Chinese authorities issued a statement saying, in effect, ‘Don’t worry boys and girls, we do actually care about our economy and about our stock market, and we’ll be taking measures accordingly.’ To say the markets acted positively to these two developments would be a massive understatement: Days of 9% upward moves in major stock market indices such as Hong Kong’s are extremely rare.
We can discuss why politicians, both democrat and autocrat, are so apparently indifferent to the economic impact of their policies in a future column. In today’s article I want to describe the magnitude of what appears to be at stake today for the world’ economy.
Why are we all so worried? Because global realignments of the kind China and America appear to have been contemplating until a few days ago come at gigantic economic cost; economics cannot always be the ugly stepsister to a country’s politics. If America and the EU, on one side, and China, on the other, were to start seriously sanctioning each other, in my view the only comparable event in economic terms in recent history would be the outbreak of the first world war.
World War 1 was a catastrophe not just because of the death and destruction involved, but also because of the new world order to which it gave birth, leading in due course World War 2 and then the Cold War. While most educated people are aware that the economic winter that followed 1914 lasted in most places until the late 1970s, far fewer people appear to appreciate how golden, in economic terms, were the four to five decades that preceded 1914.
The period between about 1870 and 1914 was the first era of globalization. Goods and capital flowed seamlessly across the entire world, and economic growth followed pretty much everywhere. One man who did appreciate how good things were was John Maynard Keynes. He wrote that a middle-class person in London, ‘while sipping his morning tea in bed’ could order almost anything from anywhere ‘and reasonably expect their early delivery upon his doorstep’. He could also ‘adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages’ and even travel anywhere, without a passport or any local knowledge. Most importantly, he saw this ‘happy state of affairs’ as ‘normal, certain and permanent’. ‘The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise,… appeared to exercise almost no influence at all on the ordinary course of social and economic life.’ In my history class at school, much of this period was skipped on the odd ground that nothing important happened…anywhere. After the lamps went out in 1914, this ‘happy state of affairs’ never prevailed again, although the years since the 1990s have been close.
Of course the decades before 1914 were also the age of European empires, and of absolute monarchies in many other countries. Therefore many human beings were not so happy as Keynes’ man in London. The distribution of benefits was hugely inequitable even in the richer countries, as it was after 1914 and is today. But the massive breakdown in trade and in investment that followed 1914 affected those less fortunate in former colonies and absolute monarchies far worse than even they affected the previous winners of the pre-1914 system. Economic growth continued in the United States and, after 1945, in Western Europe and Japan, but often with a distinctly military flavour.
Above all ‘the projects and politics of militarism and imperialism etc..’ eventually came to dominate even the US during the Cold War. Politics superseded economics, and the consequence was economic winter for most of humanity for seven decades. Economic winter proved a hard state to escape, because the agendas of so many important players became more political. Although human economic progress has blessedly never stopped since the industrial revolution began in England in the early 1700s, it really only became widespread again after China’s change of course in December 1978 and the fall of the Berlin Wall in 1989.
Is economic winter coming back? That depends on whether powerful politicians, present and future, are willing to sacrifice domestic economic prosperity for the sake of achieving their military and nationalist (or imperialist) goals. Vladimir Putin clearly is, as is Recep Tayyip Erdogan of Turkey and the rulers of Iran. But these countries don’t matter much, compared to the economic superpowers. The encouraging signs of the last couple of days may prove to be an illusion, but if America and China can exercise restraint in the damage they seek to inflict on each other in pursuit of their political goals, then we may yet postpone economic winter for a while. To put it mildly, that would be to the benefit of all.