Sunday, May 20, 2012

The Difficulty of Political Labels

In theory, there is a simple progression from left to right or right to left on how to deal with an economic crisis.  At the far left, there is nationalization and central planning.  At the center-left are Keynesian calls for fiscal stimulus.  In the center are Friedmanite calls for monetary expansion.  Related (I think) are people influenced by Friedman’s warnings about the danger of fixed exchange rates, who believe the best path to recovery is to devalue one’s currency and experience an exports boom.   At the center-right are warnings that what are needed are long-term structural reforms, and that not much can be done in the short term.  At the far right are Austrian-style warnings that the crisis is necessary to shake out bad investments and that any attempt to counteract the downturn only prolongs the suffering.  The extremes themselves shade off into more and less extreme versions.  Hence nationalization and central planning can range from partial, temporary measures to calls for a complete government takeover of the economy (not being heard so far).  And beyond Austrian-style calls to let the crisis work its way out are the true Austrian school economists who call for a return to the gold standard.

This spectrum applies pretty well in the United States.  Here, center-left President Obama made an initial attempt at fiscal stimulus, is vainly proposing more, or at least avoiding too much austerity, and has appointed officials to the Federal Reserve who favor monetary expansion.  Center-right Republicans call for major fiscal austerity, possible monetary tightening, and warn that our problems are structural and that not much can be done in the short run.  Over on the far right, Ron Paul is calling for a gold standard, but is still generally regarded as crazy old uncle.  (No one is calling for central planning, and devaluation is a non-issue since we have a floating currency).

In Europe, by contrast, this spectrum does not hold up so well.  There all "respectable" opinion holds to the center-right view that what is needed are structural reforms, including austerity, with any sort of fiscal or monetary stimulus rejected as madness.  On the European center-left, we are seeing the earliest stirrings of not-quite-Keynesian views that austerity is doing more harm than good and should be ended, although "respectable" opinion still sees this as madness.  No one is calling for central planning, nor, so far as I can tell, for a gold standard.  But the only people calling for an end to the European equivalent of a gold standard, the euro, are on the far right.  The allegedly far left Syriza in Greece opposes any further austerity, but rejects Friedman's favored solution of devaluation.  In the Netherlands, it was the far-right Freedom Party of Geert Wilders that rejected further austerity.  In France, it is the far-right National Front that wants to abandon the euro.  In short, while the right wing view in the United States is to embrace austerity, fear falling currencies, and let the whole thing work itself out, in Europe the far right is that faction that most strongly rejects that view.

Much the same thing happened during the last great economic crisis of the 1930's.

In the United State, center-right Herbert Hoover maintained a currency peg to the gold standard and wavered between trying to balance the budget and fighting unemployment with public works.  He was unceremoniously voted out in 1932 and replaced by the center-left Franklin Delano Roosevelt, who abandoned the currency peg, launched a major fiscal stimulus, and experimented (not very successfully) with moderate forms of central planning.

Things were more complicated in Europe.

In Sweden, the center-left Social Democrats came to power, abandoned the gold standard, adopted a fiscal stimulus, and quickly recovered.  Elsewhere the picture is more muddled. 

In Britain, the Labour Party was in power for only the second time.  Faced with a major fiscal crisis, the Labour government struggled vainly to balance the budget and maintain the gold standard, raising interest rates in the middle of a depression in a desperate bid to stem the gold flight.  These polices cost them the next election.  The successor Conservative government devalued against gold and began to experience a modest recovery.  Recovery did not really take off, though, until Hitler began to menace and force a military buildup.

In Germany, the center-right government of Heinrich Bruning struggled to balance the budget as the economy sunk deeper and deeper.  The center-left Social Democrats did not question the need to balance the budget, but urged cuts in the military instead of unemployment insurance.  By late 1932, General Kurt von Schleicher, a right-wing militarist with ties to illegal paramilitaries, was beginning to grope his way toward something like a Keynesian theory of fiscal stimulus and desperately sought an unofficial accommodation with the Social Democrats to implement it.  The Social Democrats rejected this approach, simultaneously calling for a balanced budget and seeing the Depression as the final death throes of capitalism.  The result, as we know, was that Hitler came to power and turned out to be the greatest military Keynesian of them all.*  The Japanese government also turned out to be both far right and highly successful military Keynesians.

Depression came late to France and the Netherlands, but just as they thought they have escaped, it hit them as well.  Perhaps because they were the last to decline, these countries were also the last to leave the gold standard and the last to recover.  In France, too, conservative governments struggled to balance the budget, raise interest rates to keep the franc from falling, and manage a deflation that was considered necessary.  When the economy only sank more and more, the French, in desperation, elected the Popular Front (Communist/Socialist coalition) under Leon Blum that introduced pro-labor policies, but resisted devaluation until it became inevitable, and witnessed an ever-greater disintegration.  In the Netherlands, a conservative government remained non-interventionist and struggled to balance the budget, but did eventually leave the gold standard.

In short, in the the assumption that the left favors countering economic downturns with expansionary policies and the right opposes it has held good in the United States both in the 1930's and today.  In Europe, the correlation is much less clear.  (It should also be noted that if one defines a fascist party as one that favors economic expansion and nasty scapegoating of immigrants, as appears to be the case in Europe today, there is no equivalent in the present-day United States.  The party that favors expansion and the party that scapegoats immigrants are separate here).

My next post will address why this might be so.

*And I am well aware that many on the right classify Hitler as left wing on the grounds that he was the ultimate Keynesian.  By their logic, the far more classically conservative Schleicher would also have to be a leftist.

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