Friday, 1 February 2013

Being Brüning. But in a good way.

I am sensing Brüning-fatigue setting in, but here's one more. Most commentators use the Brüning comparison as a way to criticize today's austerity policies. But this seems to be true mainly of the English speaking commentariat. A reader alerts me to the fact that there are more positive views of 'Brüning-esque' crisis management out there. Perhaps unsurprisingly, similar views still seem to have some currency among German professors. (Or is it professors doctors?)

There is, of course, the classical (late 1970s) argument by Prof. Borchardt according to which Brüning essentially had no choice and was ultimately right in doing what he did. Brüning got the economics right and if the political and social framework could not take the pressure, well, tough luck. Without mentioning Brüning by name, Prof. Plumpe now seems to be putting forward a rather similar view of the current economic crisis and economic crises in general. I could not find a transcript of his recent talk about the current crisis, but there is this short article here (in German) and, of course, his book.

Prof. Plumpe's main point is that economic crises are necessary processes of structural adjustment that are about as old as capitalism. Such adjustments are ultimately salutary because they are necessary for economic development. Whether or not these transformation processes turn into a crisis largely depends on the reaction of contemporaries. The problem is not falling output and increasing unemployment, but the inability of contemporaries to see all of this as economically necessary and beneficial. Instead of revolting in the streets, Greeks should be at home, patiently waiting for the benefits that economic transformation has in store for them. So far, so Schumpeterian. The great Austrian was apparently fond of referring to economic crises as a 'cold douche for capitalism': a necessary cyclical process of reinvigoration.

Two points about this:

Schumpeter might be forgiven for focussing on economic benefits and ignoring political and social risks. He was no historian and much of his writings pre-date World War II. But we cannot cut anyone writing today similar slack. In particular, if they are historians. Anyone considering today's crisis must look at the complete package, including the possibility of political collapse in the European periphery and the implications of this for European peace and stability. Political instability on a 1920s and 30s scale still seems a rather unlikely scenario. But political risks need to be part of the picture when we think about the right response to the current economic crisis. Simply telling off the masses for their ignorance about economic history won't do.

The other problem is that the masses may actually be right. There is little evidence that the current crisis is anything to do with a structural transformations. If this were the case, one would expect lots of job openings in some sectors (the new emerging ones) and unemployment in others (the old, dying ones). But this is not the case. Unemployment is across the board. An other way of thinking about this as a structural crisis would be to say un-competitive economies in the European periphery are in the process of adjusting to the cost level of Germany and other leading countries. Once this process is completed, the Euro will be out of trouble and growth will pick up. But that's wrong, too. At least partly. The Euro would be out of trouble, but increased competitiveness does not necessarily lead to growth. It does in Germany because it makes high export surpluses possible. So despite stagnating or falling real wages and hence weak domestic demand, Germany can export its way to growth. But this model cannot work for everyone. It's not more possible that all countries run export surpluses because that would require someone to have an enormous trade deficit. There is no such place at the moment. Instead, deflationary policies in the periphery are depressing local economies and will eventually lead to slowing growth in the European core. Germany's economy is already slowing down.

So if we take the 'cold douche' approach to economics we will probably have a crisis that drags out for a decade or so. See Japan. Now, if you look at this from Prof. Plumpe's olympian perspective and look at these matters in terms of graphs spanning centuries, then there is no need worry. But a ten year economic crisis is enough to produce a lost generation. That is certainly a social problem. It might also become a political one. And it's most certainly an economic one. Long periods of high unemployment mean that people loose skills or never acquire them and today, more than ever before, a skilled workforce is an important element of economic progress. Economies, like people, never recover fully from prolonged periods of crises.

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