This summary of the global conjuncture by the Bank for International Settlements sounds all too familiar. But it was taken from the Annual Report released in May 1939 (here). Indeed, although we should not overdo the parallels with the 1930s, there are a number of worrying economic developments which investors ignore at their peril – and they are not the obvious ones which spring to mind when we talk about the concerns of that particular decade.
It is, however, difficult to overlook the fact that the problems today and in 1939 were triggered by a huge financial crash and compounded by policy errors. Fiscal policy was criticised for being too tight both in the wake of the 1929 crash and again today. In 1931, President Hoover’s State of the Union message noted that “even with increased taxation, the Government will reach the utmost safe limit of its borrowing capacity by the expenditures for which we are already obligated... To go further than these limits ... will destroy confidence.” Today it is European fiscal policy which is accused of not stepping up to the plate.
Ironically, one of the lessons of the 1930s, derived from the work of economists led by Keynes, was that government had a role to play in the economic cycle by stepping in to make up for any shortfall in aggregate demand. It has always struck me as bizarre that these insights, which prompted Keynes to write The General Theory, should be ignored at a time when the economic cycle shows some similarities with the macroeconomics of the Great Depression. There is also an irony in that both in the 1930s and again today, it is monetary policy which comes in for great criticism. Between 1930 and 1933 the Fed was accused of running an overly restrictive monetary stance. Today, the world’s major central banks are accused of being too lax.
Protectionist sentiment is also rising up the agenda once more. Donald Trump made “promises” on the campaign trail which were nothing short of protectionist (“I would tax China on products coming in … let me tell you what the tax should be … the tax should be 45 percent.”) Of course, this is a response to concerns that US jobs are being “exported” to lower cost economies in much the same way as occurred in the wake of the 1929 crash. Back then, this resulted in the signing into law of the US Tariff Act of 1930 which did a lot of damage to world trade volumes as other countries retaliated against the raising of US import tariffs. It is a sobering thought that in the last four years, the rate of global export growth has posted its slowest multi-year growth rate since the 1930s (see chart).
None of this means that current economic conditions will lead inexorably to the same outcomes as in the 1930s. But we should not ignore the role of fiscal policy in helping to promote recovery – as the OECD noted in the latest edition of its Economic Outlook, released this week. And as the discussions over Brexit continue, some British ministers appear to think that a world of tariffs (albeit low ones) is preferable to belonging to a system without any, so long as they can achieve their own version of economic nationalism. Most economists believe that this will result in a loss of British economic welfare, but just as the likes of US economist Irving Fisher were initially ignored for pointing out the same thing in 1930, so no-one in government appears willing to engage in a rational debate about the costs of Brexit.
Economists of my era were taught that the 1930s were a decade of collective madness and that we had learned the lessons of that benighted period, and would not repeat them again. But history has a habit of making fools of us all. However, we can only hope for rationality to begin to reassert itself before we make even bigger economic mistakes from which it becomes more difficult to recover.
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