Economic Ineptitude Reaching 1690s Levels

Board, Blackboard, Economy, Inflation, Money

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There is no question the quality of economic policymaking peaked under Robert Banks Jenkinson, 2nd Earl of Liverpool (1812-27), and has gone into sad decline ever since. But hills have two sides. So, the question is: how far back must you go to find an economic policy as bad as that in today’s the United States, to pick an example? I think the answer is: about 330 years, to the chaos of the doubtfully legitimate and suddenly war-torn Whig regime of the 1690s.

A policy as bad as today’s must-have three elements: (i) the state must be running a massive budget deficit, in excess of all those previously known; (ii) it is monetary policy must be a mess, causing all kinds of damaging innovations in the capital market and (iii) tax and spending policy must be set on a thoroughly political basis, ignoring the view of the large minority of the electorate who recently lost a battle for power that many still consider illegitimate, and imposing taxes and regulatory burdens unequally on those opposing forces.

That combination of hurdles is a difficult one to jump. Nevertheless, today’s policy manages it or seems likely to. Fiscal and monetary policy are far beyond all precedents, and indeed in themselves have no non-wartime match anywhere in U.S. or British history, although the budget policies of the French and Russian revolutionary governments came close. Capital market innovations proliferate, with numerous signals of unsoundness. Finally, it appears clear that tax is about to be set on a thoroughly political basis, although I grant you that is as yet the weakest of the three claims.

We can now look back in history for matches to the current policy mess. In the 20th century, the British and U.S. governments that led their countries through two World Wars ran larger budget deficits than those of recent years, and in the case of World War II, the U.S. Treasury also controlled the Fed, making monetary policy the feeble instrument of government bloat. However, the capital markets remained remarkably orthodox in both countries, and there were no politicized tax bills – in Britain, at least both World Wars were won by coalition governments. Thus, even under the stresses of world wars, U.S. and British economic policies did not become as extreme and damaging as they are today.

Other belligerents were less careful. In Germany after World War I monetary policy was allowed to run riot by Reichsbank president Rudolf von Havenstein, resulting in the hyperinflation and currency collapse of 1923. The Soviet Union, of course, was in World War II running its economy on entirely different principles — indeed, expropriating its political enemies had been a central principle of Soviet economic policy since the earliest days. However, it is less fashionable now than it was in 1950 to hold the Soviet Union up as a shining example of the policies we should follow.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

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