False lessons from history

Economic crises are clearly all different – they can be triggered by many types of shock, and occur in many different contexts. Yet we hope to bring to bear on each new crisis lessons learned in dealing with earlier ones. Thus Ben Bernanke’s deep study of the Great Depression was generally seen as a plus in his presence as Fed Chair in the 2008 Great Financial Crisis. Similarly, Reinhardt and Rogoff argued, with the ironic choice of title for their book This Time Is Different, that there are in fact commonalities in all debt crises due to the arithmetic of debt dynamics.

A very enjoyable new book by Harold James, Seven Crashes: The Economic Crises That Shaped Globalization, applies the lens of whether each the seven advanced or set back the process of globalization to crises ranging from famines and blights in the 1840s via wars and depressions, commodity price hikes in the 1970s, the GFC and the Covid lockdowns and Russian invasion of Ukraine.

Very broadly speaking, he suggests that supply shocks tended to advance globalization as economic activity reorganised itself around the shocks to find new sources of supply. These shocks always reveal narrow bottlenecks. Never mind Ukrainian sunflower oil and grain; who knew that the country also produced 90% of the neon gas needed to manufacture semi-conductor chips? Demand shocks tended to do the opposite, and lead to a retreat from global markets, tending to be deflationary. This is not a hard and fast rule, not least because demand and supply soon interact.

However, that’s as far as the generalization goes. The author – a very eminent economic historian – sets out a key argument early on: “The turning points of globalization in a world that is industrialized and interconnected do not resemble each other. Each moment of crisis challenges individuals, businesses and governments in new and unprecedented ways, and leads to a redrawing of the mental map.” Each time is different. He argues, furthermore, that it is a mistake to try to learn lessons from the past – new problems need new solutions, rather than policymakers who are focused on fighting the previous (metaphorical) war.

The bulk of the book consists of chapters giving an account of the context and specifics of each of the selected crises. These are masterly concise essays, covering the economic events but also weaving in the influential economic ideas in each case, often through a chosen examplar such as Keynes. The book also resists the temptation of offering a final ten bullet point recommendations for tackling the next crisis. Because it will be different.



Modern macro

Although I don’t teach or practice macroeconomics, if I did I’d certainly be thinking of using the new textbook from Wendy Carlin and David Soskice, [amazon_link id=”0199655790″ target=”_blank” ]Macroeconomics: Institutions, Instability and the Financial System[/amazon_link]. As the subtitle so clearly indicates, this book does absolutely engage with the messiness of the post-crisis real world. Its aim is to stay simple enough for undergraduate use while also realistic enough to empower its readers to understand the why and how of the financial crisis and to evaluate macroeconomic policy. For graduate students or practising economists wanting a reference book, this offers a tractable, intuitive model that combines the standard 3-equation approach with the insights of Hyman Minsky (mentioned in the Preface) and institutional realism.

[amazon_image id=”0199655790″ link=”true” target=”_blank” size=”medium” ]Macroeconomics: Institutions, Instability, and the Financial System[/amazon_image]

The first chapters set out the standard 3-equation model, and chapters on expectations and money & banking follow. The latter includes a description of how a modern banking system works (no whiff of a money multiplier!). Two chapters on the financial sector and the crisis follow – including topics like balance sheet recessions, QE, and a discussion of austerity policies. There is a chapter on innovation, growth and fluctuations – Solow, endogenous growth and Schumpeterian growth. Next comes a section on the open economy, with separate chapters on oil shocks/commodity prices and  the Eurozone.

The final chapters cover monetary and fiscal policies, supply side policies and the labour market, and a final chapter on real business cycles and the New Keynesian approach.

This is certainly the first textbook I’ve spotted to have incorporated the lessons of the crisis, and it does so very elegantly, keeping the modelling framework reasonably simple. The book also weaves in the events of recent economic history, and applies the models it develops to actual events, so students do not have the dispiriting experience of being taught an economics in the classroom divorced from the kind of economics they hear about in the news.

I’m a big fan of Wendy’s already, having had the pleasure of working with her on the CORE curriculum and e-book; and this new textbook confirms my opinion. I’ve dipped in to specific chapters that I can evaluate properly, such as the one on growth and the supply side and labour market sections  – perhaps if I read the whole book properly it will cure me of my ingrained macro-scepticism……

Stories of the crisis

This week I’ve spent two enjoyable days at the OECD Forum and among other sessions listened to Faisal Islam talk about his book [amazon_link id=”1781854106″ target=”_blank” ]The Default Line[/amazon_link].

[amazon_image id=”1781854106″ link=”true” target=”_blank” size=”medium” ]The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge[/amazon_image]

He started by asking what should journalists – along with policy makers and economists – have asked or said before the crisis, when the good times were rolling? And have we learned the lessons since? He wanted to tell the human stories of the crisis as a way of shedding light on these questions. For example, the experience of one man in China to work in a factory in Guandong is a microcosm of the development of the global imbalances that grew so large in the mid-2000s – or so Faisal thought. But the man they chose by the time they got there had quit his factory job and become a punk hairdresser. So the story was also one of the nascent consumerism of China, and also the vulnerability of mobile labourers with their wheelie suitcases and hukou cards, and the downturn in factory employment in 2009 and 2010. The story of the crisis is one of a complex and interlocking series of currents around the world, he said. The stories help us understand them.

The book visits Greece too – the book opens with a cargo plane chartered to fly euro notes into Greece at the peak of its crisis because the share of bank notes in GDP rose from 6 to 25 per cent. People were taking cash out of their accounts. (I don’t blame them – I did the same on 2008.) meeting the demand was an amazing logistical exercise by the Bank of Greece – the country had only had the plates to print 10 euro notes in Greece; apparently only German-speaking countries have the plates for higher denomination notes.

Cyprus was on the itinerary too. It had its own plane full of notes flown in from Germany too. In contrast to the Greeks! who tried to keep it secret! the Cypriot authorities made it very public. Perhaps as a result, people didn’t feel the same need to take out cash because they knew there was enough there.

There’s Britain too, and the mortgage boom that had people buying houses on loans they couldn’t really afford, funded by wholesale money the banks and building societies had raised to fuel the bubble. Northern Rock was raising funds in Africa to fund 125% mortgages in the North of England. The book also takes in a Czech mathematician who dropped out of finance to become a Californian hippy. Iceland. The ECB and its focus on pizza prices.

All this and more. It sounds a rattling good read, which I have now bought.

The OECD forum had several Meet the Author sessions:
[amazon_link id=”1452603685″ target=”_blank” ]Average is Over[/amazon_link] by Tyler Cowen
[amazon_link id=”0241953898″ target=”_blank” ]How Much is Enough[/amazon_link] by Robert Skidelsky
[amazon_link id=”B00GOH7YZ2″ target=”_blank” ]The Entrepreneurial State[/amazon_link] by Mariana Mazzucato
[amazon_link id=”0399159967″ target=”_blank” ]Hacking Your Education[/amazon_link] by Dale Stephens
[amazon_link id=”1846142245″ target=”_blank” ]Exodus[/amazon_link]by Paul Collier
[amazon_link id=”1610395050″ target=”_blank” ]Frugal Innovation [/amazon_link] by Navi Radjou
[amazon_link id=”1846146895″ target=”_blank” ]The Last Vote [/amazon_link]by Philip Coggan

And last but not least

[amazon_link id=”B00GMSUUWM” target=”_blank” ]GDP: A Brief but Affectionate History [/amazon_link] by Diane Coyle

Can the Unwinding be unwound?

George Packer’s [amazon_link id=”B00C4GT040″ target=”_blank” ]The Unwinding: thirty years of American decline[/amazon_link] is out in paperback so I’ve caught up with it at last on my travels this week. It’s an absolutely wonderful book, evoking that widespread sense – everywhere in fact, not just in the US – that the system has gone awry, things are misaligned, and no individual can do anything about it.

[amazon_image id=”B00C4GT040″ link=”true” target=”_blank” size=”medium” ]The Unwinding[/amazon_image]

The book traces the 30 years through a braid of several individuals’ stories, recounting their ups and downs through the Clinton years, the Bush years and into the Obama years. Some of the characters are well-known – Newt Gingrich features, as does Peter Thiel. The main threads, though, are unknowns whose stories encapsulate important parts of the nation’s story during its ‘unwinding’ – the unwinding of “the coil that held America together in its secure and sometimes stifling grip.”

Although this is not a technocratic analysis, Packer has an ability to drop in sentences that crisply capture a sharp point. The views of a new (and I turned out, one term) Democratic congressman, Tom Perriello, are summed up thus: “the elites in America didn’t have answers for the problems of the working and middle class any more. Elites thought that everyone needed to become a computer programmer or a financial engineer, that there would be no jobs between eight dollars an hour and six figures. Perriello believed that the new ideas for making things in America again would come from unknown people in obscure places.”

One of his other characters, a longtime Democrat functionary who crosses over into lobbying, is enticed back to work for a senator during the Obama administration. Seeing Rubin, Summers, Geithner getting their posts, and all attempts to bring finance to heel failing, he reflects: “The establishment could fail and fail and still survive, even thrive. It was rigged to win, like a casino, and once you were on the inside you had to do something dramatic to lose your standing, like write a scathing op-ed.” A short chapter about Bob Rubin in the book is absolutely devastating.

A lot of this, we know. But this book rekindles one’s outrage by attaching people and their emotions and stories to a clear X-ray vision of the underlying economic and social changes. I thought it was a terrific read. But also depressing. Can the Unwinding be unwound? Obviously not. In optimistic moods, I’m with congressman Perriello in holding out hope for the obscure people weaving a new social fabric. It’s just not always easy to stay optimistic.

A hawk’s eye perspective on growth

The UK economy seems to be continuing its slow recovery – today brought figures showing a modest rise in investment in Q3 after the previous quarter’s decline, although consumer spending is a bigger contributor to GDP growth, and the housing market seems – as ever – to be one of the main engines of growth. However, the Bank of England cast doubt on the quality of the investment figures, which have been volatile, and it would be good to see it expanding more consistently.

The uncertainties about the outlook make this a good time for us to have published in the Perspectives series Andrew Sentance’s Rediscovering Growth: After the Crisis.*

[amazon_image id=”1907994157″ link=”true” target=”_blank” size=”medium” ]Rediscovering Growth: After the Crisis (Perspectives)[/amazon_image]

Andrew has blogged about the book himself – here at The Hawk Talks and here on some of the implications of the ‘new normal’ of slow growth for airports at (pdf) PWC. So I won’t try to sum up his views myself. Here’s what he says are not the reasons for a lacklustre outlook – read the book to discover his explanation!

There are many misunderstandings about the reasons for disappointing growth. It is not due to a deflationary global economy, as in the 1930s. Emerging market economies have not had difficulty finding growth opportunities – and their performance has been strong both before and since the crisis. Inflation has been a bigger problem than deflation for many economies around the world since the financial crisis – including the UK. Nor is weak growth the product of restrictive economic policies – fiscal austerity or a lack of monetary stimulus. Across most western economies, government spending restraint and tax increases have not been severe, and monetary policy remains extremely loose.

*Amazon has sold out currently and the e-book will be out around the end of this week – meanwhile, order direct with free UK P&P from the LPP website, http://londonpublishingpartnership.co.uk/rediscovering-growth-after-the-crisis/