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Saturday, September 18, 2010

Kevin O'Rourke: Lessons from the Great Depression

Kevin O'Rourke describes how the emergence of extremism during the Great Depression led to the post WWII consensus that produced social democracies. As he notes, one reflection of this consensus was evident in the Atlantic Charter signed by Winston Churchill Franklin D. Roosevelt in 1941. The Charter was mostly a statement of war aims, but it included a provision stating that the two leaders desired "to bring about the fullest collaboration between all nations in the economic field, with the object of securing for all improved labor standards, economic advancement, and social security."

Have we forgotten the lessons that caused the democracies of the postwar period to transform themselves into the social democracies that provided security for citizens and protection against extremism?:

Lessons from the Great Depression, by Kevin O'Rourke: ...The 1920s had seen a gradual reconstruction of the international economy, and with it signs that Germany was being successfully reintegrated into the international community... The Nazis obtained just 2.6% of the vote in 1928.
Then, in late 1929, the Great Depression hit and everything fell apart. Thanks to Brüning’s deflationary policies, Germany’s national income fell by more than a quarter, and official unemployment rose to almost a third of the labor force. Optimism was replaced by a profound sense of insecurity. Inevitably, the extremist parties benefitted. In 1930 the Nazis increased their share of the vote to 18.3%, while in July 1932 they scored 37.8%..., and the Weimar Republic was doomed.
The lesson was clear: states needed to provide their citizens with the security which the gold standard and the market system, left to their own devices, had so conspicuously failed to do. The alternative was nationalism in all its guises: economic nationalism at best, but potentially something much uglier and far more dangerous. And so the democracies of the postwar period became social democracies...
Over the past thirty years, a backlash has swept away much of this postwar political consensus. The supposed competitive pressures of globalization were used as an excuse to undermine welfare protections, even as globalization increased the need for them...
Thankfully, the ... reflationary policies adopted in 2009 are the main reason we avoided a second Great Depression. However, their initial success has bred a dangerous complacency, while the right used the Greek crisis of 2010 far more effectively than the left used the disasters of 2008. The result is a variety of austerity packages which threaten the fragile Western recovery.
At this point, a reader might well object that the original purpose of post-1945 social democracy – to protect democracy from extremism, by protecting capitalism from itself – is no longer relevant. After all, Europe is no longer the cesspool of prejudice and nationalism that it was eighty years ago: the political consequences of recessions are no longer so dangerous.
I am not so sure. Anyone who believes that people are getting better has not been paying sufficiently close attention... The bestseller on amazon.de is Thilo Sarrazin’s anti-immigrant screed, which Amazon helpfully bundles with a book on young delinquents. In France, the government has been fishing in National Front waters, expelling Roma and linking immigrants with crime. The Nazi vote in 1928 is tiny compared with that of the Dansk Fokeparti in 2007 (13.9%), or Geert Wilders’ anti-Muslim party in 2006 (5.9%).
Our Great Recession has strengthened the political extremes. Wilders’ party received 15.5% of the vote in 2010, while Jobbik got 16.7% in the first round in Hungary. ...
To quote Tony Judt: “why have we been in such a hurry to tear down the dikes laboriously set in place by our predecessors? Are we so sure that there are no floods to come?”

With the success of the Tea Party lately, I've found myself wondering if we are headed toward a period of extremism and where that might lead us. This is one of the reasons (among others) I've been emphasizing the need for more social protections in the form of automatic stabilizers and a New and Improved New Deal.

Update: Just listen to the powers behind the movement try to use the Tea Party for their own gains (Kudlow evaluates the movement in terms of its ability to raise the price of stocks -- that is his national welfare function):

A Bullish Tea-Party Revolt, by Larry Kudlow: ...following the tea-party primary victories in Delaware, New York, and New Hampshire this week, I'm once again getting energized.
Free-market capitalism is on the comeback trail. That's one of the key tea-party messages. And make no mistake about it: The free-market power of the tea-party political revolt is totally bullish for stocks and the economy.
In short, this is a revolution.
The political elites in both parties don't get it. Nor do the mainstream media. But the tea-party movement is stopping Obamanomics dead in its tracks. And it will overturn the Keynesian big-government planning effort now in full force in our nation's capital. The tea parties are Reaganism reincarnate, and then some.
It's all there in the Contract from America: Limited government, individual liberty, economic freedom. Defund Obamacare. No tax-and-nationalize energy scheme. Stop the tax hikes and move to a flat-tax system. No special favors and subsidies. No crony capitalism. Oh, and let me underscore the tea-party revolt against runaway government spending and debt-creation. No TARP. No stimulus. No Obamacare. No Bailout Nation for GM, Fannie, Freddie, and AIG. ...
A few months ago I wrote about the emergence of a new free-market nucleus, motivated by tea-party ideals, in the Republican caucus of the Senate. That nucleus is set to grow. And that's exactly why I'm getting more optimistic. ...
This is a new transformational breed. This is a free-market revolution powered by the tea party. Along with a likely Republican takeover in the House, we could be looking at a free-market Congress, something I never dreamed possible. ... In other words, folks, tea-party economics are very bullish.

When members of the Tea Party realize that Social Security, Medicare, and other social protections have been tossed over the side to lighten the load and increase profit (well, there is the lifeboat in the captain's quarters paid for with the money saved on social insurance for the crew, but that's not for the common passengers), and they find themselves subsequently tossed into the bay themselves and left to tread water amidst the bales of tea -- when members of the "keep your government hands off my Medicare" crowd then find themselves unable to stay above water -- it will be too late (it's no accident that Kudlow fails to include Medicare and Social Security in his list of evil government programs). Once the foot soldiers behind this movement realize that the carpet has been pulled out from under them, and they look for scapegoats rather than acknowledging their own complicity in the outcome, it will be as much if not more dangerous than the movement itself.

    Posted by on Saturday, September 18, 2010 at 10:17 AM in Economics, Social Insurance | Permalink  Comments (35)


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