All 81 entries tagged Economics
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February 16, 2022
Writing about web page https://www.youtube.com/watch?v=BqfHEedYv2c
Lukas Smith of the Vienna-based International Center for Advanced and Comparative EU-Russia-NIS Research (ICEUR-Vienna) interviewed me the other day about the present tensions focused on Ukraine (12 minutes 40 seconds here). Part of the interview was focused on what economic sanctions -- or the threat of them -- can achieve in managing the confrontation. Afterwards I wrote up my notes as follows.
In the context of the present dispute between Russia and NATO over the status of Ukraine and the stationing of NATO forces in Eastern Europe, I am in favour of the use of further economic sanctions to limit Russia's aggression. Promised sanctions can act as a threat and a deterrent, and they can be a countermeasure in the event of conflict.
But . . . there's a large "but."
I'm concerned that the public, and maybe politicians too, often lack clarity about what sanctions can achieve and what are the risks. When we contemplate sanctions, the starting point should always be: What is the adversary’s best response?
Too often we think: Economic sanctions will impose an unaffordable burden. The adversary will be deterred – end of story. In practice economic sanctions take time to work and can often be predicted. The adversary always has ways to work around the sanctions or to neutralize them. It’s true that the countermeasures may be costly. But, all too often, the costs of the countermeasures turn out to be quite affordable.
One way to think about this is that sanctions have an immediate effect and an ultimate effect. And the ultimate impact of sanctions is never the immediate impact as it seems at first sight. The ultimate impact will be to force the adversary to pay the cost of countermeasures, and generally the ultimate costs will be smaller than the immediate costs appear.
Another factor is that the adversary might become more ready to pay the costs than appeared beforehand. The reason is that an attack on the adversary’s economy is still an attack, and it is usually experienced as warfare. In the short run, at least, warfare tends to stiffen national feeling and makes people more ready to pay the price of war, even if they were unready beforehand. You can see this today. Because Russia has threatened NATO, the NATO countries today are more unified and more ready for war than they were yesterday. The question is: is Russia also becoming more ready for war?
What are the countermeasures to Western sanctions available to Russia? Russia’s leaders can make the Russian economy less dependent on the West for markets, currencies, payment systems, and internet technologies. They can strengthen ties with China. They can also wage economic warfare against us. They can frighten foreign investors out of Ukraine. They can blockade Ukraine on land and sea, and they can throttle back gas supplies to the EU. Most of these things are already happening or beginning to happen.
But Russia’s countermeasures might not be confined to the economy. There is also a military response: to escalate violence. To escalate, not de-escalate. History suggests a number of examples, but the clearest case might well be found in 1940.
In 1940, the United States wanted to stop Japan’s war of aggression and conquest in China. America imposed oil sanctions on Japan, which were expected to be extremely costly to the Japanese economy. The Japanese response is instructive. Japan’s leaders did not say to each other: “We cannot afford this. We must either wait for our war capability to be ground down, or we must give up now.” Instead, they launched a surprise attack on the United States in 1941 at Pearl Harbor. They knew that this was an outrageous gamble, and in fact the gamble failed, because the United States went on to win the war in the Pacific. The point is that Japan’s leaders preferred the gamble to the alternative, which was certain defeat.
As I said before, in the present context, I favour economic sanctions against Russia, especially if a wider war is realized. But we should understand that economic sanctions are not a cheap way to avoid military conflict. They are not a substitute for military force. They are a phase of conflict, not an alternative to conflict.
In particular, economic sanctions can contribute to deterrence only if they are combined with a strong military defence. If we wish to achieve our foreign goals without violence, strong defences are also necessary.
If we signal to the adversary, which today is Russia, that they are strong militarily but we are strong economically, the signal can have an unfortunate effect. We might make Russia’s leaders more likely to turn to their strength, which is the capacity to escalate the confrontation by violent means.
In short, the threat of sanctions has to be complemented by strong defences. Without those strong defences, the effect of sanctions can be exactly opposite to what what we wanted in the first place.
May 07, 2020
In two world wars the Allies employed economic warfare against their principal adversaries – Germany in World War I, German and Japan in World War II. Economic warfare meant attacking the enemy not head on by a clash of military forces, but indirectly by attacking their supply chains. In World War I this meant a naval blockade of German ports and restrictions on Germany’s neutral trading partners. In World War II there was a novel dimension: bombing of the enemy’s industrial towns and ports.
What difference did economic warfare make? Its most resolute advocates saw it as a war-winning weapon, one that would avoid wasteful attrition on the battlefield. Sceptical observers saw it as a waste of lives and resources on a project that distracted from the main task, that of defeating the enemy’s armed forces on the battlefield. The truth lay somewhere in between, but where?
I’d taught this subject for twenty years, maybe more, but never written about it. Last year I wrote a short piece on economic warfare in World War II, for The Economics of the Second World War: Seventy-five Years on, edited by Stephen Broadberry and me, and published by CEPR earlier this week. I decided to write a longer paper that would wrap up the issues with others I had been thinking about and seeking to integrate into my thinking.
This was much more difficult than I anticipated. I hoped to write a short, zippy paper with a few bullet-point takeaways. That didn’t happen. My paper is a long read. Much of it is about one campaign – the Allied air offensive against Germany, the most comprehensive and controversial episode of economic warfare in two world wars. The answers to my questions depended. I knew, on the effects of economic warfare, which could be understood only after considering how the adversary’s economy and society responded to being attacked. There was no one answer to what happened next.
On the internet, “TL;DR” stands for “”Too long; didn’t read.” It’s a signal to stop droning on and cut to the finish. In that spirit I’ll paste in my conclusions, of which there are seven. If they make you want to read the paper, the full text is linked here.
This survey points to seven conclusions. (1) It was often hoped that economic warfare would act as a substitute for combat, but experience showed that this was largely an illusion. The complementarities between economic warfare and combat were much stronger.
(2) The most important effect of economic warfare was to raise the overall costs of the adversary’s war effort. This was a gradual process, one that gave the adversary ample opportunity for countermeasures.
(3) The main countermeasures were Olsonian substitution, nationalism, and the escalation of violence. Substitution and nationalism did not nullify the effects of economic warfare, but they redistributed them and postponed them. Heightened violence aimed to pre-empt the effects of economic warfare by breaking out. Whichever of the three routes was taken, the one thing that was certain was that economic warfare found its logic only in protracted wars of resources.
(4) Wars of resources evoked vast productive efforts, and it was easy to conclude from this that the objective of economic warfare should be to attack production. The example of the Allied air war against the German economy in World War II suggests that the most effective way to prevent production from taking place was not to attack production facilities directly, but to demolish the transport system, which provided the means of supply-chain cooperation and coordination. This had to be done at many points at once, which could not be done without air superiority. Thus, success in economic warfare relied on success in combat – another aspect of their complementarity.
(5) Wars of resources were also wars of attrition. Economic warfare was sometimes seen as a way to avoid the attrition of armed forces. Instead, economic warfare turned out to be a phase of the war of attrition. This too emphasizes the complementarity between economic warfare and combat, because the resources available to each side for attrition in deployment and combat were limited to those that survived the attrition arising from the other side’s economic warfare. From another perspective it suggests that economic warfare and combat were not so much separable elements of warfare as neighbouring bands on the continuum of warlike activities.
(6) The complementarity of economic warfare and combat is further illustrated by cases in which choosing one over the other carried high costs. It was inefficient to engage in combat without considering the possibility of striking at the enemy’s supply chain, as the Soviet Union did in 1941. It was reckless to embark on economic warfare without the readiness to engage in combat, as the United States did in 1940; this encouraged the adversary to respond by aggression.
(7) While the age of mass warfare is hopefully over, similar lessons may apply to the peacetime use of trade sanctions to resolve disputes. When an economy is sanctioned, losses to civilians are inevitable. A country under siege can exploit Olsonian substitution and nationalism to mitigate the effects. If sanctions raise the cost of resistance by enough, violence may become an attractive option. If trade sanctions heighten the risks of militarized conflict, strong defences or credible deterrents are required to manage them.
March 18, 2020
Writing about web page https://www.bbc.co.uk/news/topics/c8nq32jw8r1t/boris-johnson
Many people have likened the war on COVID-19 to World War II. Those I've noted range from US Senators Bernie Sanders and Lindsey Graham to the head of Britain's Office of Budget Responsibility Robert Chote. Our own Boris Johnson says it is as if we have a wartime government.
I have some sympathy with this view. The time we are going through will be seen as an historical watershed, like the two world wars. The reason is that it is changing the way of life of every family worldwide, in a way quite unlike 9/11 or a financial panic. Moreover its effect will be persistent, at least for several years. Our world after COVID-19 will be more nervous, more prepared, and less globalized and interlinked for some time to come.
When historical novels are written about our time, every author will have choose the setting: before, during, or after the coronovirus epidemic?
Yesterday I was interviewed on this subject for a radio programme. Understandably, I think, the interview was spiked in favour of more practical and pressing concerns. Beforehand I made some notes, based on questions I was given. Below, I'll share my notes.
Was there any similarity in the challenges facing governments now and at the start of World War 2?
There are several similarities, although not a perfect fit. As in WW2, we face a clear enemy: a disease.
It is a surprise attack – even more than in WW2. In 1941 the Soviet Union suffered a surprise attack by Germany and the USA suffered a surprise attack by Japan, but still most people had seen a war building since the 1930s, so just about all governments had incorporated war into their thinking. This is not the case today: we are at a standing start.
Resistance requires resources to be mobilized urgently into the medical sector: people, equipment, power supplies and provisions.
At the same time the enemy is striking at our supply chains – it attacks economic cooperation and the division of labour. It is forcing us into isolation and self-sufficiency and isolated, self-sufficient people are very unproductive, so our economic capacity is falling. This is what bombing and invasion did in WW2, but the coronavirus is doing it much more efficiently. It is already among us and it is unseen.
There is fear and anxiety. Before WW2 many people feared a bombing apocalypse, which did not actually happen until 1945. A similar fear is present today.
Were there bailouts and nationalisations of businesses and industries disrupted by WW2? What about coronavirus?
World War II brought an explosion of demand. Rather than people losing their jobs, they were called up to serve in the military or in war production. Schools, shops, and pubs did not close but their staff of working or fighting age did. The war economy still required films and entertainment. As for business, most businesses repurposed their production for the war effort. The government paid for the building or converting of factories to war production. There was very little nationalisation. There were very limited bailouts (money for nothing) because the government was primarily spending money to pay people to do something else.
It is true that some small businesses lost out, but most people understood the needs of the war and complaints were muted. I have a letter of 1942 from the wholesale cocoa distributors to the London Chamber of Commerce. They complain that the government has taken over the distribution of chocolate. They no longer have a business. Milk wholesalers have been compensated: what about us? Will we not be needed again after the war?
So some suffered financially. Wealthy people took a hit. But everyone had a role. The war killed, injured, and bereaved millions, but no one was cast into destitution because everyone had a role and could find a job. Old people (fewer than now) benefited from a widening social safety net. After the war, British society was a lot more equal than before.
How did governments manage shortages and supply chain disruptions?
The main tools were licensing and rationing. These converted our market economy into a command economy. There were still markets and money and prices, but for the most part you could not spend money on anything without a government license. The most important exception was bread: through the war you could always buy as much bread as you wanted, so no one went undernourished. This made Britain different from many other countries at war.
But to buy steel or components, a business needed a license. To import materials, you needed a license. To borrow for investment, you needed a licence. You got this licence only if you were on the government’s priority list: important for the war effort. In this way the government could protect the essential industries and the inessential parts of the economy withered.
The problem was inflation – not price inflation, but priority inflation. At first, a few things were seen as crucial – priority A1. As the economy became more and more stretched many other things competed for top priority. When everything was top priority, the priority system stopped working, and government committees had to set limits even on top priorities. You’d think you could never have enough soldiers in a war, but in 1942 the government had to cap the armed forces at 5 million in order to keep enough workers in the war factories and other essential industries.
How was production of munitions (then, medical equipment now) ramped up, and how were people recruited for the war effort (then, for intensive care units etc. now)?
I read today that the government is hoping to find British manufacturers of a basic ventilator – 30,000 in two weeks. Here the standing start is important. For years before WW2, the governments of all the major powers were ordering new weapon designs and thinking about the industrial capacities that the next war would require. Nearly all the major aircraft types of WW2 were designed before the war broke out. Here we are in the middle of our war with a blank sheet of paper.
War preparations made it possible to boost war production to peak levels within one or two years of the outbreak. One or two years, not two weeks.
Market economies do have great flexibility. If the government throws enough money at it, I am absolutely sure that something will be achieved, although not necessarily on the timescale that is demanded, because of our unpreparedness.
My guess is that ECMO machines will be the tip of the iceberg. We have a £2 trillion economy. If we pay the top rate for ventilators, which is £50k, and buy 100,000, they will cost us only a fraction of a percent of national income. BUT in addition to producing them, you have to build the new infrastructure.
Again, I read that a bed in intensive care costs £15k a day – that’s staffing, maintenance, paying off the building. Keeping 100,000 of these beds open for a year would be a big slice of Britains’s GDP, maybe a quarter. And we are a rich country. No doubt we could do it for less by makeshift building and cutting back on training and standards.
And at the same time, we will be having a big recession: output might fall by 10, 20, or 30 percent, so the burden could be even greater. That’s more like Russia in 1942 than Britain or America.
Uncertainty: Did governments have to make things up on the fly?
To some extent. But most governments had spent a long time thinking about how the next war would go, and this helped. It was only 20 years from WW1 and every government had tried to learn the lessons. WW1 was much more improvised than World War II. In WW1 it took years to learn how to get out of the trenches and move on the battlefield. It took years to learn about the public-private partnership and the public finance necessary to ramp up production. So, in WW2 governments generally made fewer mistakes than in WW1.
That’s also probably why Japan, Taiwan, and Hong Kong are having a better time today. They had the experience of SARS in 2003, and they were determined to learn from it.
What were long term effects on how the government ran the economy? And on society?
I think we are going to see a lot more compulsion in a short time. Certainly, compulsion in terms of quarantine. Everyone needs to understand there’s no such thing as a public health measure that doesn’t end up infringing on someone’s rights. The clue is in the name: public, not private health.
Compulsion in rationing basic supplies? Maybe. But my instinct is that we will soon all be making do with less.
Compulsion in service? Medical service, like military service in a war, is going to be dangerous. I hope there may soon be a pool of young, willing volunteers who have survived exposure and been immunized by it.
The persistence of these regulatory changes may be for years after, but not for decades after. The war gave Britain a much larger state and food rationing and food subsidies lasted for years after. The war essentially created the basic elements of a national health service, formalized after the war. But the war did not create nationalized industries. It was postwar socialism, not the war, that led to nationalization. If you look at the share of the state in economic activity in neutral Sweden over the long run, it follows a similar course as in Britain. There were deeper forces at work than the war. The war just brought things a forward a bit.
The same may be happening now. Before we were struck by the plague, things were already changing. Austerity was already ending, the government was already set to throw money at the police, the health service, infrastructure and the regions. That had already begun; maybe now it will be reinforced. There’s visible pressure in society for government to do the right thing and be accountable for it.
I would like to live in a free society and in most settings, it seems to me, free markets will do the best job. But in the present setting I would support a little more of the clarity that comes from compulsory rules. How do I reconcile these things? You can think about compulsion in two ways. One is the Chinese way: do as the unelected party tells you or fear the consequences. But there is also a British way, which is different: when the elected government tells you it’s your turn to do the right thing. It’s your turn to serve in a hospital, or stay at home, or go out to buy the goods you need. There’s a line: don’t step out of it.
That’s how it worked in Britain in WW2. There were lots of rules, which most people accepted, and the few that didn’t were vigorously pursued, with the support of most people. It did continue for too long after the war; that’s something we should aim to avoid.
March 13, 2020
Writing about web page https://www.thebritishacademy.ac.uk/fellows/maxine-berg-FBA
Recently I was asked to say a few words at a conference held to celebrate the career of Maxine Berg, who is one of the world’s best early modern economic historians. I was on a panel about the links between economics and economic history. A theme of Maxine’s recent research in economic history has been luxury in the seventeenth and eighteenth centuries, and especially the production and consumption of luxury objects. I thought of contributing to the occasion by saying a few words about luxury objects in another setting and in a much more recent period: the Soviet Union under communist rule.
A thing can be more than a thing
First, what should economists learn from Maxine’s writing about luxury objects? We learn, first, that a thing is much more than a thing. When we acquire a thing, we do not just acquire the thing itself, or the use of it. We also gain access to the feelings that go with owning it or using it and these feelings can be powerful factors in our choices and our behaviour.
Maxine has written about the many feelings associated with luxury objects. From one angle, they evoke “the vices of luxurious excess”: gluttony and greed. From another angle, they bring us “modern comfort and convenience, enjoyment and sociability, taste, aesthetics and refinement.” From a third angle, they raise questions about “individual and national virtue, the canons of taste, definitions of the self.”
In economics we often refer to concepts of self-interest and of stable preferences as drivers of human behaviour. Increasingly, modern economists also ask questions about the identity of the self that is self-interested; that is, self-interest may not be primitive, but may be formed in association with our feelings of identity. The idea of self implies individual difference, and this leads naturally to the question of how we differentiate ourselves from others in society through the things we consume. The evolution of style and fashion shows that our preferences are not as fixed or stable as economic theory would once have liked them to be, and economists increasingly ask questions about how preferences are formed and what economic and social pressures might cause them to change. In all of these respects, the study of luxury objects suggests fascinating lines of inquiry.
There is more. If we spend a few minutes thinking about luxury objects under communism, we’ll find that they take us in a nearly straight line to the dark heart of the Soviet system of power.
As an exchange student and later a young scholar in Moscow during the Cold War, I saw among my Russian friends a longing for luxury (the Russian words were roskosh’ or uyutnost’) that would have been immediately familiar to Maxine and her team of collaborators, working on luxury in a much earlier period. The people in my own circle showed a yearning for something more than the basic standardized means of life. They sought out small luxuries that would provide some kind of individual difference or distinction. They were fascinated especially by foreign objects of luxury, which were rarely encountered other than at second-hand through the censored media and were therefore novel and unfamiliar by definition.
I was a foreigner: what foreign goods did the Soviet people around me seem to aspire to? Denim jeans, leather goods, cosmetics, handbags, electronic goods, and also images of foreign life including Western-branded plastic carrier bags. Invited to dinner, more than once I bought a bottle of wine or vodka at the local liquor store and carried it to the apartment of my hosts in some plastic bag that had found its way from England into my luggage. When I arrived, the bottle would be accepted with a conventional thank you. The bag it came in would be snatched out of my hands, smoothed carefully, folded with precision, and placed to one side for future use on special occasions. Such things were so much more than "just things."
The Soviet social order was designed and managed by a power-building party elite who believed that power lay in the production of things – especially motors, planes, tanks, and guns. These were things, too, but, like luxury objects, they were also more than just things. Like luxury objects, rockets and tanks were also valued for their capacity to evoke feelings. Unlike luxury objects, however, the feelings were of national pride and power on one side, and fear and submission on the other.
This vision of society was not just for the elite. It was for the masses too. The masses were supposed to be included into this vision of a powerful modern nation through pride in the Soviet state and party, reinforced by gratitude to the ruling party for the provision of standardized, affordable, basic household goods and services.
Within that somewhat Spartan vision, luxury did play a role. More precisely, there were two kinds of luxury, one approved and permitted, the other censured and restricted to the greatest degree possible.
Approved luxuries were goods that would encourage hard-working families to aspire to a simple, healthy, educated way of life topped off with the elements of modernity: a cooker (later a fridge, washing machine, and vacuum cleaner), soap and basic cosmetics, books and a display bookcase, pictures and family photographs, a telephone, a radio (later TV), a samovar (later an electrovar), patterned china, patterned wallpaper, household ornaments, a bicycle (later a motor car) – all Soviet made, allowing limited scope for distinctions of taste and elegantnost’ – another Russian word but interestingly one with an obvious foreign origin.
Such things were not just things; they were supposed to make you feel proud, especially given that (as everyone knew from the novels of Dickens) working families in the capitalist West lived in poverty and children went barefoot.
These notions of luxury went back to the 1930s when the Stalin regime began to design the legitimate aspirations of young, skilled, highly productive workers – the Stakhanovites. You work hard and fulfil or overfulfil the quota, so you get a bonus – but what’s the point if there’s nothing to spend it on? The 1930s answer was: spend it on permitted luxury. That was then, but it was followed by the war and a 20-year pause of living standards, so permitted Soviet luxury was not remotely widespread until the 1960s.
The approved luxuries were priced to be within the budget of a skilled worker household, but from in the 1950s even through the 1980s they remained in chronically short supply. Worst in that regard were apartments, cars, and phones, for which waiting lists ran to years or decades; a second-hand car could cost you much more than a new one, regardless of condition.
The effect of chronic shortages was that, if you met your friend in the street and saw they had acquired something desirable or pretty or unusual, you did not ask: — Where did you buy that? That was not even a question, because you already knew it could not be bought. So instead you asked, with a lowered voice: — How did you get hold of that?
And the answer to that question was that your friend got hold it either through “special distribution,” which allowed them to exercise the privileges of party membership or key-worker status, or else they had worked their connections to some semi-legal or even criminal under-the-counter network.
From another world, there were also forbidden luxuries. Foreign literature, clothes, cosmetics, and electronic goods were available only to people with privileged access, or with private connections to foreigners, which were discouraged.
This might make you wonder how the forbidden luxuries were different from the permitted ones. The answer is that the permitted luxuries were on sale to domestic residents in government outlets – in principle. (Just not in practice, the shelves being bare for the ordinary shopper.) The forbidden luxuries were not available in that way, even in principle.
In rare cases a few forbidden luxuries could be found on sale in the so-called “currency stores.” These stores were not open to the public. Ordinary people could not see them and did not know they were there. Their street doors were unmarked and their windows were curtained. No one was admitted who could not show papers proving their right to hold foreign currency. On sale inside, along with caviar, cameras, furs, and the best vodka, could sometimes be found the works of Akhmatova, Pasternak, and other "edgy" authors, whose works were printed and published in the Soviet Union but sold only to the export market. Because I was a Westerner with foreign currency in my pociet, I could go in and buy them; occasionally my friends would ask me -- beg me -- to get hold of copies for them, which I did gladly.
Another way in which the forbidden luxuries were different from the approved ones is that you were not supposed to show interest in them or accept them, even if offered.
The forbidden luxuries were proscribed because they were so much more than just things. They too evoked feelings, but these were feelings that the party and state stigmatised as disruptive and dangerous: desire to escape the limitations of Soviet life, admiration of foreign technologies, and interest in Western ideas of free choice (which the Soviet press would call "so-called 'freedom'"). For this reason, the loyal citizen was expected to spurn them. When this did not happen, the KGB would regularly pull in people who praised Western consumer goods or the quality of foreign cars (not for a beating, but at least for a ticking off).
Everyone belonged to the mass
This was how the ruling party controlled Soviet identity: everyone could aspire to Soviet luxury, but only if it was the same luxury for all. In luxury, people could find distinctions, but only within the narrow limits permitted by the ruling party. Beneath that, everyone belonged to the mass.
In conversation with a female acquaintance, I once remarked: — Sitting on the Moscow subway, I like it that I can look around and not know who’s rich or poor. People dress the same. My friend replied, or rather she shouted back at me: — YOU DON’T UNDERSTAND! YOU COMPLETE IDIOT, DO YOU THINK WE ALL WANT TO LOOK THE SAME? THE UNIFORMITY THAT YOU LIKE IS FORCED UPON US. WE HAVE NO CHOICE.
From this I understood that beneath the surface of uniformity, there was a deep inequality that was hidden from the naïve observer. There was inequality of choice. Even more, there was inequality of power. The aspirations of millions were restricted by the self-interested decisions of a tiny, power-building elite. It’s something I think about when I come across complaints that today’s formerly communist societies used to be so much more equal than they are today.
Anyway, the point of this story is to confirm what Maxine Berg has already proved to us with such talent and energy, that the origins of modern luxury and the attributes of luxury objects are fascinating and well worthy of the attention of both economists and economic historians.
August 19, 2019
This column is about the short-term costs of a no-deal Brexit. Like many economists, I tend to think any disruption will prove temporary, even in the case of no deal. It’s in the nature of temporary costs that, in the long term, they disappear. It’s the long-term costs that we will be left with, and they will exceed the short-term costs by many orders of magnitude. Nonetheless, the only way to the long run is via the short run. As the short run looms before us, we are all understandably fixated on a single issue: what will happen next?
According to yesterday's leaked disclosures, the Cabinet Office’s Operation Yellowhammer report predicts the short-term consequences of a no-deal Brexit: a three-month paralysis of Britain’s maritime trade, a hard border in Ireland, shortages of fresh food and medicines, and many other things. This is the central estimate, not a worst-case scenario.
One side of what passes for Britain’s Brexit debate has seized on the findings as confirming what was claimed all along: Brexit is an act of national self-harm. The other side derides them as more “Project Fear.” The government itself now claims that the report is already out of date: the government has everything in hand.
Uncertainty over the likely short-term outcome of a no-deal Brexit (or any kind is often blamed on the idea that this has never happened before. Never before has a major trading nation deliberately disengaged from deep integration with its nearest and wealthiest neighbours. But this is not entirely true. There are two precedents: 1939 and 1914. The precedents are not recent, of course. Still, they might offer something to discover.
The outbreak of World War I was preceded by what some today might call an Edwardian version of “Project Fear.” Liberally minded commentators – best known were the banker Ivan Blokh and the journalist Norman Angell – warned that war among the industrial powers would lead inevitably to disaster. They offered two predictions, one, that industrialised war would be horrible; and two, that it would prove economically and socially intolerable.
On the first prediction, Angell and Blokh were correct. Total war was horrible. But their second prediction was wrong – at least in the short term.
The industrial powers, they argued, had become so economically integrated that they could no longer tolerate the interruption of trade by war. Within a few months they would run out food – first Britain, then France and Germany. After that, they would starve and surrender. Russia might survive, based on its food surplus. But this is not what happened.
When Germany went to war in 1914, the direction of their attack was against their main trading partners. Britain alone accounted for more German trade than all Germany's allies. Russia was a major source of German food and fodder. Yet as the war dragged on the German economy did not collapse. Like Britain and France, which were even more exposed to the global economy, Germany mobilized its resources for four years of total war.
In every country the war imposed wrenching adjustments and sacrifices on soldiers and civilians alike. But the results were not intolerable, for the people tolerated them. Two forces were at work that Angell and Blokh had neglected, that prevented collapse or at least staved it off for several years. One was the basic flexibility of market economies, which enabled the industrial powers to adapt much more easily to the loss of trade and the demands of war than anyone predicted. The other was the arousal of national feeling among the peoples now at war, which led them to hate the enemy and to tolerate readily the changes and sacrifices necessary for war mobilisation to proceed.
It is true that after several years of total war the populations of Russia, Germany and Austria-Hungary gave up the struggle. But it was Russia, most self-sufficient in food, with the least industrialised economy, that dropped out of the war first. So Blokh and Angell were wrong about that too.
If the Second World War was different, it was that the great powers entered it knowing what had happened in the First. They prepared accordingly. From September 1939, the British blockaded Germany at sea and German submarines waged war on British shipping. Britain, importing 70 per cent of calories for human consumption, was as vulnerable to blockade in 1939 as in 1914. The volume of food imports into Britain halved between 1939 and 1942. Yet the economy and the people adjusted. Domestic farming expanded and prices and rationing shifted diets from meat to cereals and potatoes. The calories available for human consumption barely changed from year to year through the war.
What should we take from such experiences?
- First, market economies were generally more adaptable than government and public opinion expected. When particular goods were suddenly in short supply, it was natural for those who needed them to find substitutes and work around the shortages. As a result, shortages were usually temporary and rarely, if ever, endangered the economy.
- But second, in some countries, survival was endangered eventually, after years of war. In Germany, for example, this was much more because of war mobilization than because of the loss of trade. Still, trade had been lost, and substitutes and workarounds for missing supplies were never costless. Such costs accumulated and were added to the costs of the war. It took time for the overall costs to become evident to the point where they might drag down the war effort itself. The costs of lost trade were hidden from sight at first, partly, because the processes of market adjustment redistributed them around the economy, so that they were rarely salient and were lost in the general step-by-step erosion of everyone’s standards of living.
- Third, in the process, governments took over more and more responsibility for the basic functions of economic life. The methods of command economies were invented during World War I and were widely used from the outset in World War II. While these were usually effective in directing resources into the war effort, the consequences for ordinary people varied. In Britain, food rationing was limited to luxury foods, and was generally effective, so the nutrition of poorer households was levelled up. But where clean government and non-corrupt administration failed, food was diverted into black markets and inequality grew.
- Fourth, while the war continued, most people were motivated to accept the resulting sacrifices by leadership that provided the sense of a shared national struggle, that focused their anger at the enemy who imposed these losses on them. War leaders created an atmosphere of national unity and solidarity in which the overwhelming majority became willing to “keep calm and carry on” through years of hardship.
Since 1945 the nature of economic life and the structure of international trade have changed nearly beyond measure. Despite this, all four lessons are deeply relevant as we contemplate what will happen on 1 November, the day after Brexit.
- First, don’t underestimate the flexibility of the market economy. Any real disruption is likely to be short lived. (Unless the government makes shortages worse by adopting price controls, say.) Whatever is suddenly missing from our lives, we will adapt, find substitutes, or work around what is missing. Our lives will certainly change, but we will probably get by. If Russia and Iran can survive trade sanctions, we will survive Brexit.
- Second, adaptation and substitution will incur many minor costs, and the costs will cumulate and may well grow over time as Britain decouples from the European economy. The sharper the shock, the more trust will be broken. Since trust underpins all long-term relationships, the more our long-term relationship with Europe will be damaged.
- Third, demands for the government to “do something” about disruption and shortages will push the government to intervene more and more in our economic life. For a time at least, scarcity pricing will be regulated by public pressure if not by law. Supplies will be prioritised. Failing firms will be bailed out. Once in place, these controls will take on a life of their own. Don’t forget that food rationing, which began in Britain in 1939, did not end in 1945; the last controls were not relaxed until 1954.
- Fourth, our willingness to “keep calm and carry on” will be much less than was the case in 1939 or 1914. We are not at war. We are divided among ourselves. Our government is representative of an extreme, not of a broad national coalition. Half the country expects Brexit to be painless or quickly beneficial. The other half sees it as a self-inflicted wound. Neither of these constituencies seems likely to put up with much pain for the good of the cause.
This can change, only if the government is successful in persuading the majority that we are in fact at war, that Europe is the enemy, that pro-Europeans are the “enemy within,” and that departure from the European Union is worth any sacrifice.
June 06, 2019
Writing about web page https://soundcloud.com/980cjme_650ckom/bls-mharrison-june6
Here's my 75th anniversary tribute to D-Day. Some 15,000 Canadian troops went ashore on D-Day, around 10 per cent of the Allied total. To mark the day I was interviewed on The Brent Loucks Show on 650 CKOM in Saskatchewan, Canada. There's a disappointingly muffled recording. Alternatively, these are the notes I made beforehand, most of which we got through, although not in the same order.
- What led up to the decision to invade in June of 1944?
In the spring of 1944, three things. Britain and America were bombing Germany from the air with rising intensity. British American forces were advancing through Italy. The main action was still on the Eastern front where 90 per cent of German ground were being driven back towards Germany by the Red Army. In essence Germany was already being defeated but was still fighting hard. Final victory looked years away. The main beneficiary on the ground looked like Stalin, because his was the main action on the ground. The western Allies by now had a huge material advantage over Germany. But unless they turned that advantage into fighting on the ground in France and then in Germany, it would not be reflected in the postwar control of territory.
D-Day was hugely important. It did not cause Hitler’s defeat, because that was already under way. It did two things: immensely speed up the end of the war; and ensure that Western Europe fell into the hands of the Western Allies not the Soviet Union. For which we should be immensely grateful.
- What kind of logistics were involved behind the scenes of the invasion?
The planning took two years and was on an immense and comprehensive scale. The SHAEF headquarters tried to plan every last nut and bolt, from the choice of the beaches to the order of creation of port facilities to the rate of advance across France towards Germany to the order and priority of deliveries over time.
All these plans failed. Some landings were in the wrong places. At first the advance away from the beaches was much too slow, so there was an abundance of fuel and not enough ammunition. Then there were unexpected advances so fuel became short while ammunition piled up. But the advantage of the Allies was so great that, once established in France, they could afford a few mistakes. The mistakes also slowed down the Allied victory, but could hardly turn it into Allied defeat.
- How might the war have played out if D-Day failed?
The war would have dragged on. While it went on, probably every country – those fighting and those occupied – would have suffered more casualties than was the case. Germany would still have lost in the end, but the balance of power in Europe would have shifted away from Britain and North America towards Stalin and the Soviet Union. For that reason, postwar recovery would probably have been much more painful.
- What would Europe look like now if the war had dragged on?
Much more of Europe would have ended up under Soviet domination – Germany and Austria for sure. Italy and France might well have elected communist governments. After that, who knows?
- Would atomic bombs have been used on Germany?
What shortened the war in the Pacific was the atomic bomb, which was ready by July 1945. Used against Japan, it shortened the war and forestalled any Soviet attempt to occupy the Japanese islands. Would the atomic bomb have been used against Germany with the same intention? Who knows, but it’s clearly possible. Even as things worked out there were strong pressures to destroy German industries and reduce Germany to a country of farmers and artisans.
August 06, 2018
A great new paper by my CAGE colleague Thiemo Fetzer was in the news last week. It asks: Did Austerity Cause Brexit? Thiemo is one of those that know how to write a good abstract so, rather than try to summarize the paper in my own words, I’ll use his:
Did austerity cause Brexit? This paper shows that the rise of popular support for the UK Independence Party (UKIP), as the single most important correlate of the subsequent Leave vote in the 2016 European Union (EU) referendum, along with broader measures of political dissatisfaction, are strongly and causally associated with an individual’s or an area’s exposure to austerity since 2010. In addition to exploiting data from the population of all electoral contests in the UK since 2000, I leverage detailed individual level panel data allowing me to exploit within-individual variation in exposure to specific rules-based welfare reforms as well as broader measures of political preferences. The results suggest that the EU referendum could have resulted in a Remain victory had it not been for a range of austerity-induced welfare reforms. These reforms activated existing economic grievances. Further, auxiliary results suggest that the underlying economic grievances have broader origins than what the current literature on Brexit suggests. Up until 2010, the UK’s welfare state evened out growing income differences across the skill divide through transfer payments. This pattern markedly stops from 2010 onwards as austerity started to bite.
Thiemo’s paper has already been widely reported (e.g. hereand here). The reports have tended to sustain a simple political narrative: In 2010, as Chancellor of the new coalition government, George Osborne set the course towards austerity. Austerity provoked the rise of UKIP and anti-EU sentiment. By implication, austerity was a mistake for which we are paying now with Brexit.
Not so fast.
Thiemo’s findings should be considered in the context of another story in last week’s news. In the Financial Times on 2 August, Chris Giles reported on the latest fiscal sustainability report of the Office of Budget Responsibility The report showed that, if the economy grows and if we continue to tax and spend on pensions, long-term care, health, education, and welfare at current rates, by 2050 there will be no funding for anything else. The government will be unable to pay anything towards defence, police, transport, arts and museums, business, and local authority services such as bins, libraries, and parks.
Driving this conclusion is two problems. One, the British population is ageing. Two, the economy is growing more slowly than in the past. Spending on old age will necessarily encroach more and more on a pool of resources that is finite and will fail to keep up.
In an era of low-interest rates it is tempting to suppose that the government can simply borrow more to pay for these things. Certainly, it can do this for a while. But that can only kick the fiscal can down the road. As deficits rise and once more accelerate the growth of the public debt, the burden of debt interest payments will also grow more rapidly, tightening the screws ever more harshly.
What does this have to do with Thiemo’s paper? It affects the implications that may be drawn.
First, when slow growth makes deficits unsustainable, austerity is inevitable at some point. Certainly, this does not deprive us of all choice. For example, we can choose to have austerity now or later. But for every unit of austerity that we postpone now, we will have more than one unit down the road; that's in the nature of the accumulation of debt. As Chris Giles points out, the government’s relaxation of fiscal targets in 2016, and its more recent boost to health spending, have brought forward the point at which the government will run out of money for “other” spending by six years. We can also choose who will bear austerity’s burdens. Are welfare benefits too generous? Should graduates pay higher contributions? Should companies pay higher taxes, or their shareholders, who include both relatively wealthy households and the pension funds responsible for the retirement incomes of the middle and lower classes?
These are all choices that could have been made differently, and that we can still make. But, as growth prospects diminish, what we cannot do is choose not to have austerity at all, ever.
Second, if you’re thinking that the government should not have imposed austerity in 2010 because that policy induced people to turn to UKIP and Brexit, think again. Rightly or wrongly, George Osborne was trying to return the UK economy to fiscal sustainability by following transparent targets and rules. The purpose of such rules has been to try to bind governments, so that they do not exploit their discretionary powers to time taxing and spending decisions in order to reward supporters, win their votes, and so manipulate elections.
Which is a good thing—right?
If your present thinking is that Thiemo’s paper shows that austerity was a bad policy, ask yourself what you thought of austerity before you knew his findings. If you already had reasons to believe that austerity was a bad policy, then stick to them, whatever they were. Thiemo’s findings have not added to them.
If, perhaps, Thiemo has changed your mind—previously, you thought austerity was necessary, and now you have turned against it—then be careful. The risk you face is that you may soon get what you now wish for: a government that systematically manipulates its electoral base with fiscal generosity that must be paid for later.
October 28, 2017
Writing about web page https://www.elindependiente.com/opinion/2017/10/28/por-que-colapso-la-economia-sovietica/
This column appeared (in Spanish) on 28 October on the website of El Independiente.
Soviet economic institutions were inspired by two western economic models of the early twentieth century. One was the German war economy of the Great War, which Lenin observed and admired for its government priorities, the control of supply chains by committees of industrialists, the rationing of commodities at fixed prices, and obligatory labour mobilization. The other was the American system of mass production of standardized products in great factories under centralized management.
Combined with an authoritarian single-party dictatorship, these two models made the Soviet economy as it emerged under Stalin and persisted until 1991. Everything was designed for mobilization, production, accumulation, and expansion. To ensure this, the state owned nearly everything and directed nearly everything from the centre, either by decree or by pressure to conform, backed up by the secret police. The citizens were motivated to comply with authority by a mixture of patriotic appeals, fear, and meagre rewards. The economy could supply basic consumer goods and services, but its special advantage lay in supplying the means of national power in the world, especially a mass army with vast quantities of standardized weapons. By the outbreak of World War II, Stalin’s Soviet Union had become one the world’s two leading producers of armaments, the other being Hitler’s Germany.
The Soviet economy was capable of growth, but it never proved capable of catching up with the innovative market economies of the time. Moreover, the growth rate of the Soviet economy steadily deteriorated through the postwar period. From the mid-1970s, the Soviet Union was falling further behind the United States in productivity and prosperity. While its economy began to stagnate, the Soviet Union faced additional challenges of the time. One challenge arose from the U.S. rearmament under Presidents Carter and Reagan. Another arose from the self-imposed burden of the Soviet Union’s entanglement in Afghanistan. In the international economy the Soviet Union was reliant on the oil market, where prices collapsed.
The Soviet leaders made repeated efforts to overcome economic constraints through reforms. The reforms sought to raise productivity by decentralizing management and improving incentives for efficient behaviour, while retaining the framework of state ownership and the party monopoly of power. All such reforms failed, as the economy reverted to its basic type. Later, the Chinese leader Deng Xiaoping would say that the last Soviet leader, Mikhail Gorbachev, was a fool for abandoning the party monopoly of power without reforming the economy. But this was unfair. Gorbachev did so only after all economic reforms had been tried, including most of the reforms that had been tried out successfully in China. Why they failed in the Soviet Union is an important story, but one for another time.
The end of the Soviet economy cannot be explained by economic factors alone. This should be clear from the example of countries like Cuba and North Korea, where ruling parties are facing vastly greater economic problems and threats than the Soviet Union ever faced, yet regimes have not collapsed. In the case of the Soviet Union, politics was decisive. The conservative generation of leaders such as Leonid Brezhnev, born in the early twentieth century, died out. A new generation took command, led by Mikhail Gorbachev. The new generation was more open-minded, and their open minds had been influenced by the ideas of the dissident movement – nationalist, liberal, or social-democratic. Gorbachev was decisively influenced by ideas about social democracy and rule by consent. He did not want to rule at any price, or to rule by fear. Once it became widely understood that resistance to power would not be punished, people stopped being afraid. The Soviet Union became ungovernable and fell apart.
Politics was decisive in the moment, but at the same time we should not ignore the deeper economic forces. The Soviet economy was designed for a world of mass production and mass armies. That is no longer the world in which we live. In the 1970s, the information revolution gave rise to flexible production and a services economy based on information sharing. In the same decade, precision guidance and miniaturized nuclear weapons put an end to the idea that the future of Europe could be decided by a great battle fought by thousands of tanks and planes and hundreds of thousands of soldiers in the central European plain. The world for which the Soviet economy had been designed was disappearing. The Soviet Union had no future. No one should want to see it return.
June 02, 2016
Writing about web page https://drive.google.com/file/d/0B7VJ1wykdp_YdXBiT3ZCT3FKNGM/view
Last week I spent a few days in Regensburg, a pretty town in Bavaria. The subject of our conference was the economic history of central, eastern, and southeastern Europe since 1800. The meeting was convened by the excellent Matthias Morys of the University of York; Matthias is editing a book on this theme for Routledge. The general standard of the chapters is going to be exceptional. (I’m not an author; I went along to hear and discuss.)
An important theme of the book will be how central and eastern Europe lagged behind western Europe in productivity and social well-being, and the varying successes and (mostly) failures of the region in closing the gap. This raised a question: Should central and eastern Europe always be judged against western European countries, as though we (the West) set the only standards that count? Shouldn’t everyone try to understand that region in its own terms, without negative preconceptions?
We had reached the interwar period of 1918 to 1939 when a commentator raised this question sharply. It’s a good question, and it brings us in a surprising direction. Think about it: what were the standards that the nation states and regimes of Central and Eastern Europe set themselves, whether in the interwar period or over the last two centuries? Often enough, the answer turns out to be, the goal that they set was to catch up with Western Europe.
At first sight this takes us back to where we started, to the standards of productivity and social well-being set in Western Europe. But this would not be strictly accurate. When the states and rulers of central and eastern Europe set out to catch up, it was not so much in average incomes or welfare, which were not even measured systematically until the middle of the twentieth century. The dimension in which they aimed to catch up was that of national power.
As it turns out, the first decades of the twentieth century were a time of great success for two of the countries of central and eastern Europe in the race to catch up and overtake western Europe in national power. These countries were Germany and the Soviet Union.
National power can be measured, although imperfectly. The scholars of the Correlates of War project set out to measure the global distribution of national power with a “composite index of national capability” (CINC) designed to capture “the ability of a nation to exercise and resist influence.” A country’s CINC score combines six indicators of its relative weight in the international system, year by year: total population, urban population, iron and steel production, energy consumption, military personnel, and military expenditure. On this measure, in 1871, the Russian and German Empires together accounted for one fifth of the total of power in the world (12 percent for Germany and 8 percent for Russia). By 1914, through industrialization and rearmament, they had pushed up their combined weight to more than one quarter (14 percent to Germany, 12 percent to Russia). And by 1940, after more expansion and more rearmament, when Hitler’s and Stalin’s regimes were temporarily in alliance, their share had risen to nearly one third (17 percent to Germany, 14 percent to the Soviet Union).
Within 70 years, in summary, the two great powers of central and eastern Europe transferred more than one tenth of global power into their own hands. This was a dramatic shift in the balance of power, and a stunning achievement.
Thinking about this, I said in the conference: You want us to celebrate the aspects in which the countries of eentral and eastern Europe led the world at the time? OK, let’s hear it for autocracy, aggression, and mass killing. I was trying to be ironic, but I wasn’t sure if something got lost in translation.
Of course, you could be central or east European and be happy. Anywhere in the region, most of the time, you could live, love, carry on a trade, make a family, make art, make science, teach, and build. You could try to lead a good life, a life no worse than the lives led by anyone to the West. Bad things might happen to interrupt these efforts anywhere in Europe, west or east. For centuries, however, if you lived to the east of the Rhine, the probability that your efforts would be cruelly ended by young men in uniform under orders from above was much, much greater.
To understand why is the challenge for Matthias and his co-authors..
March 21, 2016
Writing about web page http://www.bbc.co.uk/news/uk-england-35697546
On 5 March we marked the eightieth anniversary of the 1936 maiden flight of the Supermarine Spitfire, a fighter airplane that played a decisive role in Britain's air defence in World War II. The British affection for the Spitfire is partly for its role in our history, and partly for its elegant design. Like thousands of other boys of the 1950s (and no doubt a few girls, but this was the 1950s), I made up model aircraft from plastic construction kits. I think my first was the even more beautiful Hawker Hunter. The Spitfire was perhaps my second, and always my favourite.
A few days ago the BBC journalist Greig Watson wrote some engaging pieces on the Spitfire's anniversary, here and here. The second of these describes the Spitfire Fighter Fund, through which the public was invited to contribute to their cost. While he was preparing this piece, Greig wrote to me:
Clearly pilots were not sat around waiting for a cheque to arrive so they could purchase a new plane – so could it be argued the funds were just a publicity stunt which made no difference to the number of Spitfire in the air? Or were they in fact effective?
In his article Greig quotes me briefly – right at the bottom, if you struggle to find the place. Here's the full reply that I sent him.
From 1940 onwards, Britain had a command economy. The market economy was restricted to the sidelines: those foodstuffs that were unrationed, and the black market. For most things the government set targets and priorities, decided how money would be spent, and on what, and how much of nearly everything would be produced. That included Spitfires. Only after ensuring the supply of Spitfires did the government worry about how to pay for them. Quite right, too, that’s what you do in an existential struggle. That’s not to say they did not care how it was paid for. They did care. But still, it was a secondary care, one that came after working out how many ships and planes we should make.
From this perspective, Spitfire funds were like today’s “sponsor a panda” and “buy a metre of rainforest” appeals. In any immediate sense these make no difference to the number of pandas or the amount of rainforest. They do put money into the hands of campaigning organizations and charities. We trust them to make a difference, and we get some small satisfaction from the cloak of sponsorship.
What difference did Spitfire funds make? They did not make any difference to the number of Spitfires, because for most of the war Spitfires were a top government priority (along with ships and other planes). If you run out of money, it’s not the top priority that is at risk. It’s the bottom priority that is most likely to be neglected.
What would have happened without Spitfire funds? Two scenarios.
- Scenario 1: with less money coming in, the government might have economized on the bottom priority, which could have been, say, the rehousing of bomb victims. So more civilians would have been homeless and morale on the home front might have been that bit lower.
- Scenario 2: the government might have spent the money on the war anyway, by printing it, so more money would have been in circulation in the economy. Since most goods were rationed, the extra money might have found its way into the black market, raising prices for under-the-counter food. Because of this, some army battalion quartermaster would have been tempted to sell army rations on the black market, so more soldiers would have gone hungry and morale on the fighting front would have been that bit lower.
Thus, Spitfire funds did not pay for Spitfires, but they were still an essential part of the war effort. Without them the war would eventually have gone less well in one aspect or another. There would have been a cost.
According to Greig Watson, the total subscribed by the public was £13m. This would have covered only a small fraction of the Spitfires produced in wartime. (The total number of Spitfires produced up to 1948 was just over 20,000. Their average unit cost lay somewhere between the £13,000 of an early batch sold to Estonia in 1939 and the notional £5,000 set by the Spitfire funds appeal.) The rest was paid out of general taxation and government borrowing, both of which reached large fractions of national income.