The Price of Everything - Eduardo Porter [115]
I am somewhat skeptical that China could provide a model for countries that are not accustomed to totalitarian rule. But it seems inevitable that the rules of the economic order will change as we incorporate the lessons of the crash. Crashes like the one we just experienced affect people’s attitudes deeply. Opinion surveys in the United States over the past few decades suggest that Americans who experienced a deep recession between the ages of eighteen and twenty-five were more likely to grow up to believe that success is achieved through luck rather than effort and were more likely to support redistributing income from the lucky rich to the unlucky poor. Paradoxically, the shock also diminished their trust in public institutions, like the presidency and Congress, so even as they demanded more of government, they doubted government’s ability to deliver necessary services.
History has many examples of crises causing deep changes in economic and political governance. At the beginning of the twentieth century, France was a highly evolved capitalist economy. The market capitalization of companies listed on the Parisian bourse reached 78 percent of French GDP, more than the value of the firms on the New York Stock Exchange as a share of the American economy. But the Great Depression and the German occupation delivered a shock to the faith of the French in the Third Republic. And their faith in laissez-faire capitalism suffered a permanent blow too.
The history of capitalism is punctuated by changes of direction in response to crises. In the 1930s, even as most major economies were mired in what would come to be known as the Great Depression, economic orthodoxy had it that government had no role to play in economic management. After the stock-market crisis of 1929 Secretary of the Treasury Andrew Mellon argued that government should stay out. According to the memoirs of President Herbert Hoover, Mellon’s formula was “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate . . . It will purge the rottenness out of the system.” Keynes, who proposed vigorous government spending to replace collapsing private demand, had a hard time being heard. There is a document in the archive of the British Treasury that shows the reaction of the permanent secretary of the Treasury to Keynes’s proposal for government spending to boost Britain’s economy, scribbled in three words: “Extravagance, Inflation, Bankruptcy.” By the end of the decade, however, Keynes’s work had become the basis for a new economic orthodoxy that persisted until the 1970s, based on the view that governments had a substantial role to play in economic management. And Keynes was the hero who saved the world.
THE STAGFLATION OF the 1970s and early 1980s provided a similar shock to the world’s economic organization, but in the opposite direction. Sparked by a combination of skyrocketing oil prices and bad economic management by overconfident governments willing to print money at will to meet their spending requirements, a combination of high inflation and high unemployment that the world had never seen before fatally undermined people’s trust in the state. This laid the stage for a three-decade-long period of government withdrawal. Starting with the election of Margaret Thatcher in Britain in 1979 and of Ronald Reagan in the United States a year later, governments around the world cut taxes, privatized state enterprises, and deregulated economies. Even in France, where President François Mitterrand nationalized the banking system, increased government employment, and raised public-sector pay, soon after being elected in 1981, the new orthodoxy ultimately prevailed. In 1983, President Mitterrand did a complete U-turn, froze the budget, and put in place a policy regime he called “La Rigueur”: The Austerity.
The financial crisis of 2008-9 has all the markings of such a momentous watershed