Here in Britain, one Christmas present arrives a few days late each year: the declassification of Cabinet papers that are then made available to the National Archive under the ‘Thirty Year Rule‘. This year, the newly released documents are from 1978: the twilight period of Labour’s ill-fated Callaghan administration, famous for the ‘winter of discontent‘, when a torrent of industrial action meant that the rubbish went uncollected and the dead unburied.
You might suppose that it’s not the sort of anniversary that Gordon Brown will really want to be reminded of, not least given the obvious link back to Margaret Thatcher’s hugely successful election slogan of the time – ‘Labour isn’t working’ – and the fact that Callaghan’s administration had to go cap in hand to the IMF for a bailout.
But superficial similarities aside, the crucial difference between late 70s Britain and late 00s Britain is that during the former, the pendulum had swung all the way to the ‘state’ or ‘public’ end of the spectrum – whereas today, we find it right over at the ‘market’ or ‘private’ end. Robert Skidelsky, writing in Prospect this month, refers to Arthur Schlesinger Jr’s The Cycles of American History, which describes this cyclical dynamic in detail:
[Schlesinger] defined a political economy cycle as “a continuing shift in national involvement between public purpose and private interest.” The swing he identified was between “liberal” (what we would call social democratic) and “conservative” epochs. The idea of the “crisis” is central. Liberal periods succumb to the corruption of power, as idealists yield to time-servers, and conservative arguments against rent-seeking excesses win the day. But the conservative era then succumbs to a corruption of money, as financiers and businessmen use the freedom of de-regulation to rip off the public. A crisis of under-regulated markets presages the return to a liberal era.
As Skidelsky summarises, the 1870s saw the pendulum start to swing towards collectivism on the back of a global depression triggered by a collapse in food prices. Most industrialised countries began to raise tariffs; social protection systems were rapidly rolled out (although not in the US). The great depression of 1929-32 accelerated the process as Keynesian economics became orthodox. But by the 1970s, the pendulum was about to swing the other way, as governments pursued “free trade abroad and social democracy at home”:
The crisis of liberalism, or social democracy, unfolded with stagflation and ungovernability in the 1970s. It broadly fits Schlesinger’s notion of the “corruption of power.” The Keynesian/social democratic policymakers succumbed to hubris, an intellectual corruption which convinced them that they possessed the knowledge and the tools to manage and control the economy and society from the top. This was the malady against which Hayek inveighed in his classic The Road to Serfdom (1944). The attempt in the 1970s to control inflation by wage and price controls led directly to a “crisis of governability,” as trade unions, particularly in Britain, refused to accept them.
Large state subsidies to producer groups, both public and private, fed the typical corruptions of behaviour identified by the new right: rent-seeking, moral hazard, free-riding. Palpable evidence of government failure obliterated memories of market failure. The new generation of economists abandoned Keynes and, with the help of sophisticated mathematics, reinvented the classical economics of the self-correcting market. Battered by the crises of the 1970s, governments caved in to the “inevitability” of free market forces. The swing-back became worldwide with the collapse of communism.
But today, Skidelsky notes, the crisis is that of conservatism:
The financial crisis has brought to a head a growing dissatisfaction with the corruption of money. Neo-conservatism has sought to justify fabulous rewards to a financial plutocracy while median incomes stagnate or even fall; in the name of efficiency it has promoted the off-shoring of millions of jobs, the undermining of national communities, and the rape of nature. Such a system needs to be fabulously successful to command allegiance. Spectacular failure is bound to discredit it.
The situation we are in now thus puts into question the speed and direction of progress. Will there be a pause for thought, or will we continue much as before after a cascade of minor adjustments? The answer lies in the intellectual and moral sphere. Is economics capable of rethinking its core principles? What institutions, policies and rules are needed to make markets “well behaved”? Do we have the moral resources to challenge the dominance of money without reverting to the selfish nationalisms of the 1930s?
There’s no doubt that these are the right questions to be asking (David and I sketched out a first attempt to marshal some thoughts on this area in a paper we published just before the G20 summit in November). As Skidelsky notes, we could do worse than to aim for Keynes’s basic stance:
In terms of our pendulum analogy, he was someone who instinctively sought an equipoise: not in the timeless equilibrium of classical economics, but in a balance in political economy between freedom and control, national and international wellbeing, efficiency and morality. He was an Aristotelian, who believed that vices are virtues carried to excess. This is a good philosophy for today.
As Gideon Rachman notes, the fact that the G20 has now staged a summit at the level of leaders rather than finance ministers – which by my reckoning made it a de facto L20 – means that “the venerable old G8 has a real challenger on its hands”.
In addition to the advantages that Gideon counts off – the G20’s novelty, its inclusion of emerging economies, the fact that the G20 has the earlier summit (G20 in April vs. G8 in July), the Berlusconi factor – there’s also the fact that Gordon Brown (who’s chairing the April G20) is already gearing up for a big push to make a success of the G20 and get the ball rolling in earnest on a Bretton Woods II agenda (c.f. David and my paper on this if you missed it).
Even before you consider the G20, there are some big question marks over the G8. What has it really delivered over the past decade since it enlarged from G7 to G8? My count would go something like this: debt relief; the Proliferation Security Initiative; the Global Fund on AIDS, TB and Malaria; and the Financial Stability Forum. Four credible initiatives, yes – but not much of a tally for ten years’ worth of summits, and also notable that none of these areas really involved any serious domestic implementation commitments.
Part of the problem here is the limited bandwidth of the ‘sherpa’ system that prepares the summit agenda before heads meet in the summer. As I noted in a Guardian piece back in July, sherpas have pretty busy day jobs (like Permanent Secretary at the Foreign Office, or Private Secretary to the PM), which rather curtails their capacity to tee up major global deals as well. It’s a case in point of the problem with moving issues to the leaders’ level: yes, you get the big picture, but at the cost of moving issues to the most over-stretched parts of governments. Hardly surprising that you’re more likely to end up with a media-friendly ‘initiative’ rather than a comprehensive long-term framework.
And perhaps it’s here that we come to what may be the real ace up the G20’s sleeve: its roots in the world of finance ministers. Like leaders, finance ministers have the big picture. But unlike leaders, they also have big departments that already cover most of the global waterfront (apart from a few hard security areas like arms control) – and hence a great deal more analytical capacity for getting to grips with complex issues like climate change, trade and reform of the global financial system.
True, foreign ministries have big departments with lots of capacity too – but they have no way of forcing coherence on the rest of their governments when it comes to implementation. Finance ministries, on the other hand, have a decisive advantage: while herding cats may never be easy, it’s a whole lot more manageable if you control the catfood.
Admittedly, the G8 has a Finance Ministers’ variant too – which has arguably achieved more in recent years than the leaders’ G8. But co-ordination between the two G8 bodies hasn’t stood out as a strong point. With the G20, Gordon Brown has a chance to forge a different, more effective relationship between the finance ministers’ and leaders’ levels; indeed, it would be hard to imagine someone better qualified to do so, given that as well as spending a decade as Finance Minister, Brown was chair of the IMFC for so long.
In our paper on Bretton Woods II (pdf), Alex and I provide rather a gloomy assessment of financial crisis – which we suggest is going to last longer than many think…
Given that we now face what Gordon Brown has described as “the first truly global financial crisis of the modern world”, our bet would be that it takes as long as a decade to bring it fully under control.
Let’s unpack the assumptions behind our pessimism. We start from the premise that, six months back, experts were overly optimistic about how far-reaching the meltdown would be. This is based, in part, on April’s Progressive Governance summit, where heads of state were (a) clearly freaked out; (b) fairly sure they grasped the problem, if not the solutions; (c) not acting as if they expected any further big surprises.
Consider, too, what the IMF’s Dominique Strauss Kahn was saying at the time. He was as worried by inflation, as he was by economic slowdown. Although he was forecasting a “rather important, serious slowdown in economic growth” – the expected pain wasn’t really that bad:
Something around 0.5 percent as a rate of growth for the United States in 2008 and a slight recovery during 2009-an average of 0.6 percent for 2009, which is both linked to the financial turmoil, of course, but also the business cycle.
Next, we look at the lessons of earlier banking crises that, in developed countries, have tended to take four or five years to unravel, cost around 12% of GDP to resolve, and lead to a cumulative loss in output equal to almost a quarter of GDP. The figures are drawn from this useful chart prepared by PIMCO’s Michael Gomez:
Then add in what we know about the banking crisis that gripped Japan in the 1990s, which the IMF ascribes to “accelerated deregulation and deepening of capital markets without an appropriate adjustment in the regulatory framework”. Hiroshi Nakaso’s account is worth reading in full – seven years of crisis management and fire fighting as a senior manager at the Bank of Japan.
“When the bubble burst in the early 1990s, no one expected it was going to usher in such a prolonged period of weak growth in Japan,” he writes. Policy makers underestimated the seriousness of the problem, while banks lacked the ‘foresight and courage’ to confront their predicament head on.
At the time there was considerable schadenfreude in the West about Japan’s failure to get to grips with its crisis. It was eight years or so before its policy makers even found the levers that would begin to inch the crisis towards a solution. Are we right to assume that we’ll now do better? (more…)
– The summit is unlikely to be able to live up to its billing. Leaders do not yet understand the nature of the problem well enough to be able to implement viable solutions. However, the problem is more fundamental than a simple lack of shared awareness.
– History suggests that leaders will only think the unthinkable on institutional reform once the challenge they face has really hit rock bottom. But history also suggests that we are wrong to think that the worst of the crisis is now past, given that many past banking crises have taken five years or more to unravel.
– Bretton Woods 1 looked across the whole international economic waterfront in 1944, while this weekend’s summit will be much more narrowly focused. Leaders will make a big mistake if they try and tackle finance in isolation, given the growing impact of resource scarcity, and that 2009 is supposed to see another ambitious global deal – on climate.
– We need to recalibrate what we expect from globalization through a serious debate about subsidiarity. Where has globalization gone too far, too fast? Where do we need more integration at a global level? These were exactly the questions that preoccupied Keynes in 1933, when he weighed the relative benefits of global versus local across a range of variables. We need a similar debate today as a precursor to serious international economic reform.
– Leaders need to extend their horizons in (at least) five directions: onto longer time scales; beyond financial regulation into wider resource scarcity challenges; into other international processes, especially climate; towards grand bargains with emerging powers; and beyond government, to non-governmental networks.
Full version after the jump, or better yet here’s the pdf.
