Wednesday, 30 January 2013


It should be added that Ritschl was brave to make his Brüning comparison in Frankfurter Allgemeine Zeitung. Given the demographics of the paper's readership many readers probably still have fond memories of Brüning's government.

Brüning, Brüning and no end

Of course, Wolfgang Münchau was not the first to make the Brüning comparison. In fact, there have been lots lately. I don't want this blog to become 'Brüning central', but Albrecht Ritschl's Brüning comparison of last year merits a brief discussion. It's a good one with a detailed argument.

Ritschl's is a version of the 'Helbich Brüning': in order to meet the reparation obligations of the Young plan Brüning was obliged to impose budgetary discipline. The measures were unpopular because they were imposed by foreign powers and a result of the Versailles treaty. This played into the hands of radicals and, as Ritschl put it, 'we know how that ended'.

This is a valid point and in the current context it's certainly good to remind the German public of the political consequences that can result from financial diktats imposed by foreign powers. And also of the futility of such diktats from the creditors point of view. After much to-ing and fro-ing and much political damage done only very small amounts of reparation were ultimately paid.

However, I think we need to ask how important the reparations really were. Let's consider a counterfactual: what if all reparations had been cancelled before Brüning came to power? Would that have prevented his rise to power as an unelected chancellor and the implementation of his ill fated austerity programme? Probably not. There were strong pressures to implement austerity that were entirely independent from the reparation issue. The mainstream of contemporary economists believed that excessive wage increases were threatening capital accumulation (see this post) and employer lobbies were pushing hard for a non-parliamentary government with a deflationary agenda (see this post).

It is important to remember the extent to which the dynamics that led to Brüning's policies were home-made because it also sheds light on the current situation. At the moment the international dimension of Germany-plus-some-allies pushing austerity on the European periphery is important and results in critical political tensions. But the Montis of Europe are not only puppets of Angela Merkel. They usually genuinely believe in the policies they implement. This is similar to Brüning was by no means only following orders from Paris and London but whose own economic and political views led him to do 'the necessary'.

Austerity Italian style

Next available dentist's appointment is in January 2014. I think you call that 'limiting health care costs through rationing'.

Tuesday, 29 January 2013


No blogging today. Tooth cleaning appointment and other stuff. What?! They always tell you to add a personal touch to your blog.

Monday, 28 January 2013

At least the trains were running on time...

Berlusconi's comments about Mussolini were not mainly about economics so I will not discuss them in detail here. However, what he said certainly raises all sorts of questions about the ways in which we learn, or rather not learn, from history. And unfortunately, this is not about the twisted views of one individual. A substantial part of the Italian electorate either share his views or at least don't mind sufficiently to drop him.

Teachings from beyond the grave

Comments on Davos and current economics from Marx, Keynes and Friedman. Exclusively in the Guardian.

When the facts change, I change my mind. What do you do, sir?

Jim O'Neill, the chairman of Goldman Sachs Asset Management has asked George Osborne to do just that, change his mind on austerity:  "Based on my business experience, if what you thought was not delivering what you expect to be the outcome surely you have to change what you thought a little. At a minimum, a repositioning of the stance, if not a full change.' This goes right to the heart of one of the greatest puzzles facing anyone interested in the evolution of economic thinking in general and the processes by which we learn collectively in economic matters. 

There is now growing evidence that the austerity policies deployed in several European countries and elsewhere do not produce the desired results. In most countries where similar measures are deployed growth remains sluggish, unemployment increases and deficits and debt do not decrease. Austerity is failing by any economic measure that could be applied, including the objective of deficit and debt reduction for which they were primarily designed. 

Nonetheless, public and political support for the policy remain strong. This is striking since the proponents of austerity are often seen as hard-nosed economic experts who, thanks to rigorous analytical training and knowledge of the facts, possess a firm grasp of the workings on our economic system. They dislike inflicting harsh measures on pensioners and others as much as anyone else. Occasionally, they even shed a tears about it. Still, they know (because they're experts) that if expenditure is not reduced the inexorable logic of our economic system will punish us in the future. In contrast to this, critics of of austerity are often portrayed as bleeding-heart liberals who may occupy the moral high ground, but whose views are ultimately naive and irresponsible because they fail to consider the facts. 

The question is: how can we explain that experts fail to react in to empirical evidence? More than anyone, they should be able to react and incorporate new evidence into their models. This is a complex question and I will return to this in the future, but here is a tentative hypothesis: if you look at the notion of austerity, that is the idea that there are beneficial effects associated with abstaining from consumption, in the history of economic thought, you notice that it is often, indeed, mostly proposed for moral and political reasons. It is normally the opponents of austerity who use the language of economic efficiency and the defenders of abstinence who wheel out morality. This is most striking in the early modern period when enlightenment thinkers like Mandeville and Voltaire challenged the condemnations of luxury consumption that were based on religious and philosophical precepts. They challenged these views not by challenging the underlying morality but by ignoring it and focussing instead on the economic effects of consumption. They did not ask anymore 'how much should we consume' but 'what will happen if we consume more or less'. 

Today may not be entirely different. That austerity policies continue despite the fact that they don't work in a narrow economic terms may be because they rest on on normative statements that are not open to critical scrutiny based on empirical facts. If you advocate austerity because you believe that the state should be smaller or because you think that there needs to be a period of atonement after the excessive consumption in the recent past, or if you think that we need to consume less in order to save the planet then there is not set of economic data, no economic outcome that will lead you to to change your mind.

Friday, 25 January 2013

What we have all learned from history

Wolfgang Münchau seems to know his modern history and so does Tim Geithner. Or so he claims in his exit interview with Liaquat Ahamed. About his handling of the financial crisis he says: 'And I think what we have all learned from history, mostly from mistakes that we and others have made  is that ... monetary policy has to be very aggressive [and]  you need to make sure that fiscal policies are very supportive of growth so you’re compensating for the huge collapse in private sector demand.'

Geithner is probably right in claiming that his handling of the financial crisis compares favorably with that of the 1920s policy elite. (Whether we 'all' have learned from Brüning's mistakes remains questionable. See previous posts.) He is, rightly, proud of that and his choice of interviewer is clearly aimed at emphasizing this achievement: Ahamed's 'Lords of finance' is an impressive collective biography of the central bankers and politicians whose collective failure made the last great financial crisis much worse than necessary. Clearly, Geithner compares favorably to Brüning et al. (Whether we have 'all' learned from history is open to debate. See previous posts.)

However, Ahamed's book ends in 1929. And if we look at the economic recovery after the crisis rather than at the handling of the immediate consequences then it's not as clear anymore that he has learned from history. In the 1930s and 40s economic recovery was made possible by substantial government stimulus. First, it was Roosevelt's New Deal, then military expenditure. It is doubtful that the required volume of government expenditure would have been politically sustainable in the 1930s without the looming military confrontation. But still, government expenditure rose and effectively ended the economic crisis. Geithner acknowledges the need for 'compensating for ... the collapse in private sector demand', but in practice economic stimulus has been far too limited during his tenure. Ahamed rightly picks up on this: growth remains sluggish and unemployment stagnates at his levels in the US.

Geithner has clearly has done his homework about the 1929 crisis. And his plan for the aftermath beats the Monti-Schäuble-et-al plan. But hopefully his successor has a firmer grip of post-1929 economic history. 

Thursday, 24 January 2013

Monti and the 'Weisbrod-Brüning'

There is a third way in which historians look at Brüning, which is mainly based on the work of Bernd Weisbrod. Let's see how similar Monti is to the 'Weisbrod Brüning'.

In a nutshell, Weisbrod's argument goes like this: the socio-economic order of the Weimar Republic was founded on a historical compromise between economic elites and trade unions. In the middle of the revolutionary chaos of 1918, employer associations and unions signed the so called Stinnes-Legien agreement. Employers accepted the trade unions as legitimate representatives of workers, agreed to a system of collective bargaining about wages, accepted a system of elected representatives in companies and conceded that the eight hour day was to become the norm. This agreement marked an epochal change and was a huge success for the unions. However, it was not a love match. Employers signed because a the agreement seemed preferable to the nationalisation of their companies by gun-toting bolsheviks. As soon as the situation had calmed down, employers tried their best to get out of the agreement and/or water down its content. This often developed into an attack not only on specific provisions of the agreement, but on the political foundations of the state that was built on the foundations of the Stinnes-Legien agreement. Many on the employer side saw the Weimar Republic as a half-socialist  'trade union state' that needed to die if free enterprise was to live. Undermining the power of this state and specifically removing the social democrats (SPD) from government was therefore a main objective. Employers wanted a government formed of bourgeois parties that was willing and able to roll back the power of the unions and social legislation. However, even if they overcame internal division the bourgeois parties were never able to muster enough votes to form a government. The only way forward was therefore a government without parliamentary support that pushed through a reactionary economic agenda with the help of presidential decrees. The first government of this type was Brüning's. And although he duly did what he had been called for, he quickly fell out of favor with employer associations because he still relied on parliamentary toleration by the SPD. The rest is, well, history...

How does the 'Weisbrod Brüning' compare with Monti? There are some interesting parallels. The debt problem in Italy has a different history from that in most other GIPSIs (Greece, Italy, Portugal, Spain, Ireland). Public finances in the PSIs (Portugal, Spain, Ireland) were in good shape until recently, when they had to bail out their banks. But in Italy, as in Greece, public debt has been run up over decades in the post war period. In Italy mainly since the early 70s. In this period, expenditure for the welfare state increased rapidly, but taxation did not keep up. This was in large part due to the political context. Italy was the only western country--together with Chile--in which an election victory of the communist party was a real possibility. Left wing terrorism added to the political pressure. However, while the christian democratic governments of the time were forced to expand welfare provisions, they were not willing to go against the interests of their constituents and tax businesses and higher incomes according to expenditure. Like the Weimar Republic, post-war Italy was in part founded on a socio-economic compromise that one side the political spectrum only accepted out of fear. Ever since there have been attempts to wiggle out of this accord and the mountain of public debt is the most visible manifestation of these attempts.

However, since the early 1990s the communist party has unraveled in Italy and left-wing terrorism does not post a serious threat anymore. Direct attacks on the historical compromise on which the Italian welfare state was founded are now possible in a way that they were not before. In Weimar Germany, a non-parliamentary government, led by a liberal economist was rolled out to roll back the 'trade union state'. The parallels to the current situation in Italy are evident.

I think, looking at the Monti-Brüning comparison in this way is quite enlightening. But I doubt that Münchau had the 'Weisbrod Brüning' in mind when he wrote his piece.

Wednesday, 23 January 2013

Will the real Heinrich Brüning please stand up?

There's an other way of looking at Brüning's policies, based on Bernd Weisbrod's work on Weimar. I'll write something about the 'Weisbrod Brüning', Monti and Münchau tomorrow.

More on Monti=Brüning

As discussed in the last post, Monti evidently does not resemble the 'Helbich Brüning' very much. And neither did Brüning. There is a good argument that Brüning's policies were far less conditioned by reparation payments or the 1929 financial crisis, but rather by contemporary mainstream economics. Albrecht Ritschl has pointed out (paper in German) that Brüning carried out policies, that Joseph Schumpeter had already recommended in an article in 1928.  Schumpeter's argument was that strong unions and the power of left wing parties in the Weimar Republic had led to an excessive increase in wages and redistributive taxation. The resulting squeeze on profits prevented capital accumulation, investments and hence economic growth. For Schumpeter, Germany was already in recession in 1928, even if statistics did not show it, yet. What was needed, according to Schumpeter, was what he later called a 'cold douche for capitalism': wages and public expenditure had to come down in order to allow the private sector to accumulate and restart growth.
 These were not only Schumpeter's views. They were fairly reflective of the economic mainstream of the time and Brüning was familiar with this type of argument. After all, he had studied economics (at LSE among other places) and had even planned a career as an academic before entering politics. (He returned to this original plan by becoming a lecturer at Harvard,  after his political career had stalled in the early 30s) The actual economic development proved Schumpeter, Brüning and most of contemporary mainstream economics wrong: economic growth only picked up after states began to intervene. First in the form of civilian spending and then on a massive scale in the form of a massive expansion of military expenditure. 

How well does 'Brüning the Schumpeterian' fit Münchau's argument? Rather well. Münchau says that '[Brüning] ... was part of a prevailing establishment consensus that there was no alternative to austerity.' Brüning was sure of his policies because of the contemporary consensus of professional economists and many other members of the establishment that backed his views. He had spend year studying the type of economics that he then put into practice and felt in possession of a clear understanding of what was going on economically. In a similar way, Monti is sure of his convictions. As a professional economist he, too, sees himself as being in possession of expert knowledge and as a politician he can be sure of the support of most policy makers in Europe. As in the 1930s, there is today a 'prevailing establishment consensus' about what needs to be done economically. So, in this sense, Münchau got his comparison right. Good for him, good for the FT, good for the quality of public debate. But also quite depressing.

Tuesday, 22 January 2013

Is Monti the new Brüning?

So, in yesterday's 'Financial Times' Wolfgang Münchau had an op-ed entitled 'Monti is not the right man to lead Italy'. There is a lot about this in the Italian press today. Münchau's piece is quite embarrassing for Monti, who presents himself as an economic expert who is trusted by the markets and the financial establishment. A vote of no confidence from one of Europe's brightest economic commentators does not fit well with that image.

Interestingly, Münchau concludes his comments with a historical comparison: 'As for Mr Monti, my best guess is that history will accord him a role similar to that played by Heinrich Brüning, Germany's chancellor from 1930 to 1932. He, too, was part of a prevailing establishment consensus that there was no alternative to austerity.' Also, Brüning was the last chancellor of the Weimar Republic with a more or less firm commitment to democracy. After him came the deluge. Given the notoriously precarious situation of the Italian political system this comparison is devastating. But is it also good history?

Until today historians are still not quite sure what to make of Brüning and his austerity policies. Was he the last man standing of the Weimar Republic who did the necessary thing and failed 'a hundred meteres before the finish line' (as he saw it himself)? Or did his stubborn insistence on mistaken policies make a bad economic crisis worse, thus contributing to the collapse of democracy? Let's look at three of the most influential ways of looking at Brüning:

First, there is the 'Helbich' Brüning. Wolfgang Helbich and other historians have argued that Brüning's main objective was to demonstrate that it was impossible for Germany to pay the reparations that had been imposed after the First World War. To this end he took a gamble: he imposed cuts on public expenditure to make sure that reparation payment could be met. He also applied other deflationary measures to make Germany's economy more competitive. This was necessary because a positive balance of trade guaranteed a sufficient influx of foreign currency which was needed to pay the reparations. He hoped that the western powers, mainly France and Britain, would eventually see that these policies of austerity was unsustainable and that they would agree to renegotiate the reparations. Just how important this line of reasoning was at the time has been questioned by other historians, but it did most likely play an important role.

So, does Monti look anything like the 'Helbich Brüning'? Not very much. Today's equivalent of Brüning's gamble would be to engage in tough austerity measures to demonstrate to 'the powers that be' (this time in Berlin rather than in Paris and London) that these policies do not work economically and create substantial political risks. But this has not been part of Monti's agenda. For Monti austerity is not part of a political ruse. He truly beliefs in it. This can also be seen in his attitude to German economic policy. Rather than exercising whatever political power he wields within Europe--and by virtue of its size, Italy does have considerably more political clout that say Greece or Portugal--to push the German government to ease its pressure abroad and, above all, behave in a less austere manner at home in order  to reduce Germany's advantage in competitiveness and provide some economic stimulus for the Eurozone. But instead of doing that, Monti has used his visits to Germany to point to areas where the competitiveness of the German economy can be improved. Rather than challenging the idea of austerity, he is trying to 'out-austere' the German government and position him as the true champion of austerity in Europe. That's not a lot like Brüning. At least not in the Helbich version. Perhaps, the European politician who comes closest to the 'Helbich Brüning' is Spain's Rajoy: his enthusiasm for austerity has been limited from the start and, as Münchau points out, Rajoy is calling for Berlin to increase its own government spending rather than leading Europe in austerity.

More about the two remaining versions of Brüning later. Now busy with other things. 

This blog

Whenever there is a financial crisis there is a debate about how to solve it. And in these debates people almost inevitably cite evidence and experiences from past historical crises to bolster the credibility of their arguments. In theory, this should enable us to learn from the past and become increasingly good at handling financial crises. However, as the trajectory of the current crisis, and many before it, suggests, this does not always seem to be the case. In essence, the research project asks 'why are we so bad at learning from the past in economic and financial matters'?

In this blog, I will talk about the progress of my research but, more importantly, I want to comment on the use of historical evidence in debates about the current crisis. This is not primarily about 'fact checking' (although there will be a little bit of that). Mainly, my question will be, whether the historical analogies and examples cited by commentators make sense. And if so: what does the past have to tell us about our present crisis?

I will post more about the project and the blog soon. But now I want to start with the first post. Yesterday's 'Financial Times' had a great piece of historical comparison. Let's see how great it really was.