THE BEAR'S
LAIR The
discrediting of reason By
Martin Hutchinson
In times of economic
prosperity, good economic policies produce good
results, so that in the likes of the United States
or the United Kingdom eventually both major
political parties become committed to their
continuance, as with Bill Clinton in 1992 or Tony
Blair in 1997. Only in resource economies, where
good policies can become disjointed from good
results, can the electorate become confused
between what works and what doesn't; thus
democracy is a more fragile flower in Argentina,
Brazil or Peru than in Western Europe or Asia.
However, if recession becomes prolonged,
the voters can lose faith in rational economics
and become corrupted by radical
nostrums of left or
right. In today's economy, we are in increasing
danger of this.
In the United States, only
two severe recessions have occurred since the
electorate believed government economic policy
could affect their living standards (the Panic of
1837, severe though it was, produced no major
outbreak of populism). In 1893-96, the country got
lucky. The depression coincided with an admirably
economically orthodox president, Grover Cleveland,
and even at the bottom of the slump orthodox
policy in the form of William McKinley was able to
win fairly easily over William Jennings Bryan's
forces of economic chaos.
In 1929-33, the
country was economically unlucky, in that the
depression was substantially worsened by the
actions of the ineptly interventionist Herbert
Hoover, but politically fortunate in that in 1932
an apparently attractive solution was available in
the form of the economically unsound but only
moderately radical Franklin Roosevelt. His actions
prolonged the Great Depression just as Hoover's
had exacerbated it, but following the 1938
mid-term elections, orthodoxy was restored and
prosperity returned even before the lift of
wartime armaments orders.
Other countries
in the Great Depression had different fates.
Britain was exceptionally lucky, in that its
advent coincided with a minority Labor government,
constrained to orthodoxy by its lack of a working
majority. Thus when the economy worsened and the
government fell, a National Government under the
economic management of the admirably orthodox
Neville Chamberlain was available, which was able
to alleviate Britain's Depression sufficiently to
make the 1930s a time of considerable economic
advance. Other countries were less lucky -
Argentina, relatively democratic and very
prosperous in 1929, rigged elections for the
conservatives when the crisis hit, which got them
blamed for a miserable 1930s "Infamous Decade"
that condemned capitalism forever in the minds of
the Argentine electorate.
In Germany,
notoriously, economic misfortune led to political
disaster. After the crisis hit, the economically
admirable Heinrich Bruning was elected chancellor
in March 1930 and proceeded to institute austerity
policies of public spending cuts and salary
reductions very similar to those of Neville
Chamberlain in Britain a year later or Latvia in
2008-09. However, unlike Chamberlain, Bruning had
neither the full support of president Paul von
Hindenburg nor a stable majority in the Reichstag.
Foolishly, he called an election before his
austerity policies had produced any benefits and
allowed Hitler's NSDAP to become a major Reichstag
force.
With international forces against
Bruning (the major banking crisis of 1931 forced
the Darmstadter bank into bankruptcy), the Nazis
were able to use Keynesian economic arguments
against him in the series of elections in 1932,
forcing him out in May 1932 and maneuvering into
power in January 1933.
The German
electorate was not helped in its decision-making
by the weak Weimar constitution (Konrad Adenauer,
already a major figure as mayor of Cologne, turned
down the chancellorship twice, "not wanting a
temporary job"). Bruning's mistaken political
tactics were also damaging. But the key factor in
Germany's collapse into totalitarianism where
other countries survived was its memory of truly
catastrophic policies less than a decade before,
with the Weimar Republic inflation. Thus even
though Bruning's economic policies were sound, the
German middle class was enfeebled by the loss of
its savings in 1923 and was seduced by economic
charlatanism in the service of pure evil.
This time around, the recession's initial
advent has already damaged the cause of economic
sanity. The crazed caterwauling for "stimulus" in
early 2009, almost universal in the Western world,
pushed the world economy off its normal recovery
course. Those countries - the United States,
Britain, France, China, Brazil, Japan and southern
Europe - which were enthusiastic about stimulus
are today struggling with overwhelming budget
problems and recessions of unexpected length and
persistence. Only Germany, whose Social Democrat
Finance Minister Peer Steinbruck in December 2008
denounced "crass Keynesianism", has enjoyed a
reasonably robust economic recovery - provided
Chancellor Merkel does not destroy it by handouts
to its profligate European Union partners.
With the recession persisting, the
temptation to make economic policy jump the tracks
is increasing once again. Needless to say, further
"unorthodox" policies will produce further poor
results, which will be used to justify yet further
departures from economic orthodoxy.
In a
democratic system, politics can get pulled further
and further from sanity, beyond a Cristina
Kirchner and a Hugo Chavez to a Fidel Castro. The
danger does not arise only from the left; one can
equally imagine the advent of a
hyper-protectionist right, using Smoot-Hawleyite
tariff policies and economic nationalism to
destroy international trade and perpetuate poverty
by a different means.
In the United
States, the upcoming elections are critical but
may not be determinative. A reelected President
Barack Obama will continue to grow government and
will keep the destructive soft-money policies of
Federal Reserve chairman Ben Bernanke, thus
furthering the US slide into economic decline. At
worst, a friendly congress will encourage him in
this effort, producing further deadweight
legislation, most likely on global warming. More
likely, a mixed congress will frustrate the worst
instincts of the Obama presidency but will fail to
make any progress against trillion-dollar deficits
or "funny money".
That may not be the
worst possible outcome. If the United States
avoids complete economic collapse, an election in
2016 could still reverse the tide. On the other
hand, if Mitt Romney is elected, and then chooses
to keep Bernanke and do little or nothing about
the deficit, US economic performance will continue
to deteriorate, but when 2016 comes around
(assuming Romney seeks re-election), the
electorate will be in the same position as in
2008, with no viable alternative offering better
policies. At that point, after eight years of
economic malaise, the possibility of a truly scary
political outcome becomes only too plausible.
In other countries, the position is
similar. France has already elected an
economically scary leader in Francois Hollande.
His plans to increase the top rate of income tax
to 75% as well as increasing France's wealth tax
to punitive levels will almost certainly cause the
kind of wealth exodus that will implode France's
economy and endanger its position in the euro.
Given the eccentric French electoral
system, it is also by no means certain that a
swing of the pendulum in five years will bring
back a center-right figure like Nicolas Sarkozy -
it is equally likely that the French electorate
will swing far-left or nationalist, though Marine
Le Pen is much less frightening than most
non-mainstream political figures.
In
Japan, the two main parties, the Democratic Party
of Japan and the Liberal Democratic Party, have
combined to force a major increase in the
country's sales tax. While this will alleviate the
country's frightening debt problem, it will also
be highly deflationary and is no substitute for
the draconian public spending cuts that the
country needs.
An election is due by
August 2013 and may be held earlier. Since both
main parties are currently highly unpopular and
largely discredited, an outside force may well win
it. In an ideal world, that force would be
represented by small-government free marketers
loyal to Junichiro Koizumi, prime minister
2001-06, the only successful Japanese prime
minister since the 1980s. In the world and economy
of today's Japan, that ideal solution is very
unlikely.
In Britain, the 2010 Coalition
took office on a program primarily of spending
cuts, which were much needed and few of which have
eventuated. Instead, increases in taxes and loose
monetary policy have caused a return to recession
accompanied by substantial inflation, part of
which is suppressed in official figures. It now
appears that the Coalition may be breaking apart.
That would probably bring a return to a Labor
government, which under Ed Miliband would be much
more economically foolish than that of 1997-2010.
Britain was close to political instability in
1974-75; it could easily get there again.
Finally, in Germany, villain and victim in
the 1930s, the current outlook for 2013's election
is for either a reelection of Angela Merkel or a
switch to the moderate and unthreatening Social
Democrats. That's the huge political advantage the
country has gained by avoiding "stimulus".
There's only one fly in the ointment; if
the EU succeeds in getting the kind of massive
German-funded bailout of southern Europe its more
enthusiastic devotees want, then even Germany may
slide into recession and its political stability
be correspondingly endangered. That didn't lead to
a good outcome last time, to put it mildly - yet
another excellent reason for resisting EU bailouts
with the utmost vehemence.
In emerging
markets, the outlook is grim. None of the BRIC
group of countries (Brazil, Russia, India, China)
is decently run, and their governments' failings
are becoming increasingly apparent. In Brazil,
excessive spending is leading once again to the
Latin populism that has kept the country poor.
Russia already has a truly scary government,
likely if hardship hits to become more so.
In India, the Congress party is close to
both economic and political bankruptcy, and there
is no longer the clear pro-market alternative once
represented by the admirable Atal Bihari Vajpayee.
Finally, China's bad-debt problem may at last be
catching up with it; the most likely political
response to an economic collapse would be a
descent into either hyper-nationalism or Maoism.
That country-by-country analysis does not
take account of the most frightening possibility
of all: that an upsurge in protectionism and
foolish policy in a number of the world's major
economies pushes the global economy into a
death-spiral from which it will find it very
difficult to emerge. One would hope that the
world's leaders would have the sense to avoid this
- but given the poisonous interaction between
economic failure and political foolishness, that
hope could prove folly.
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found on the website
www.greatconservatives.com - and co-author with
Professor Kevin Dowd of Alchemists of Loss
(Wiley, 2010). Both are now available on
Amazon.com, Great Conservatives only in a
Kindle edition, Alchemists of Loss in both
Kindle and print editions.
(Republished
with permission from PrudentBear.com.
Copyright 2005-12 David W Tice &
Associates.)
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