Political Costs of the Great Recession
Writing about web page http://www.ft.com/cms/s/0/5b1b5556-8d1d-11e1-9798-00144feab49a.html#axzz1styV0LMT
Monday's Financial Times recorded the dismal showing of Nicolas Sarkozy in the French Presidential first-round election, the record vote for France's far-right National Front, and the openings to the right of Sarkozy and François Hollande, who remain in the contest, as they compete to sweep up the votes of the eliminated candidates.
It reminded me of a recent NBER working paper by Alan de Bromhead, Barry Eichengreen, and Kevin O'Rourke on Right-wing Political Extremism in the Great Depression. (There's a non-technical summary on VOXeu.) What these authors show is that the rise of right wing extremism in the Great Depression was not just a German phenomenon. They define extremist parties as those that campaigned to change not just policy but the system of government. They look at 171 elections in 28 countries spread across Europe, the Americas, and Australasia between 1919 and 1939. They find that a swing to right-wing "anti-system" parties was more likely where the depression was more prolonged, where there was a shorter history of democracy, and where fascist parties were already represented in the national parliament. In short, de Bromhead and co-authors conclude, the Depression was "good for fascists."
I don't mean to imply that either Sarkozy or Hollande are fascists. They aren't. Neither of them wants to replace electoral democracy by authoritarian rule. But they are responding to the protest vote in their own country by proposing "solutions" to the problems of the already weakened French market economy that will weaken it further by increasing government entitlement spending, government regulation, and tax rates.
Where does the protest vote come from? There is anger and pessimism. There is a search for alternatives to free-market capitalism and representative democracy. The problem is that all the alternatives are worse. But none of the candidates (perhaps with the exception of François Bayrou, who did badly) has been willing to say this.
How do we know that all the alternatives are worse? We know it from history.
The chart below shows the total real GDPs of twelve major market economies from 1870 to 2008 (the countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Netherlands, New Zealand, Norway, Sweden, Switzerland, United Kingdom, and United States; data are by the late Angus Maddison at http://www.ggdc.net/maddison/). The vertical scale is logarithmic, so the slope of the line measures its rate of growth.
You can see two things. One is the steadiness of economic growth in the West over 140 years up to the recent financial crisis. The other is that two World Wars and the Great Depression were no more than temporary deviations. They are just blips in the data. For many people they were hell to live through (and sometimes these were the lucky ones), but in the long run the economic consequences went away. In fact, recent work by the economic historian Alexander J. Field has shown that the depressed 1930s were technologically the most dynamic period of American history.
One conclusion might be that the economic consequences of the current recession are not the ones that we should fear most. I don't mean that the economic losses arising from reduced incomes and unemployment are trivial; life today is unexpectedly hard for millions of people, young and old. Young people, even if they will not be a "lost" generation, will suffer and be scarred by the experience. If you're old enough, you could be dead before better times come round again. At the same time, the kind of pessimism that says that our children will be never be as well off as we were is groundless. The economic losses associated with the recession will eventually evaporate, just as the economic losses of the Great Depression went away in the long run.
We should be more afraid of the lasting political consequences. The effects of the Great Depression on politics were very deep and very persistent. World War I ended with the breakup of the German, Austro-Hungarian, Romanov, and Ottoman Empires. In the 1920s, most of the new countries that were formed became democracies. Then, we had the Great Depression. Across Europe there was anger, pessimism, and a search for alternatives to free-market capitalism and representative democracy. By the end of the 1930s Europe had recovered economically from the depression but most of the new democracies had fallen under dictators. That led to World War II, in which as many as 60 million people were killed. Fascism was defeated, but then Europe was divided by communism and that led to the Cold War.
It took until 1989 for the average of democracy scores of European countries (measured from the Polity IV database) to return to the previous high point, which was in 1919.
In short, the Great Depression stimulated a search for alternatives to liberal capitalism. This search was extremely costly and completely pointless. For a while in various quarters there was admiration for Hitler, Mussolini, or Stalin, their great public works, their capacity to inspire and to mobilize, and their rebuilding of the nation. But both fascism and communism turned out to be terrible mistakes.
Memories are short. Today's politicians want your vote. And many voters want to hear that some radical politician or authority figure has a quick fix for capitalism. It seems like we may have to learn from our mistakes all over again. Let's hope that the lesson is less costly this time round.