Incessant crises show old economic model is running on empty
First it was a financial crisis. Then a decade of slow growth that bred political anger. After that came a pandemic. Just as the threat of Covid-19 appeared to be receding, along came a European war. Welcome to the era of incessant crises.
Comparisons are often made between today and the 1970s, and in some respects they are appropriate. A global economy already exhibiting plenty of inflationary pressure has been hit by an oil price shock, just as it was in late 1973.
Almost half a century ago, the Opec oil cartel ratcheted up the price of crude during the Yom Kippur war. The sanctions imposed on Russia’s energy exports are having a similar – albeit so far less dramatic – impact. The cost of crude climbed to almost $140 (£107) a barrel at one point last week but it would need to rise a lot further – to $180 a barrel – to beat the 2008 record, once allowance is made for inflation.
Even so, higher energy prices are something western governments could do without. US inflation has already hit 7.9% and will rise further in the coming months. Pretty much each month since last summer, UK inflation has been higher than expected, and it would be no real surprise to see it rise above 10% this spring. That’s still some way short of the peak in 1975, when inflation climbed above 25%.
The first oil shock marked a turning point in postwar economic history because what followed was the transition from an approach based on demand management and full employment to one focused on liberalised markets and control of inflation. This took time; it was not really until the early 1990s – two inflationary shocks later – that the new system was fully established and seemingly all conquering. It was a period in which crises were punctuated by brief periods of stability.
An even better example of the same phenomenon is the three decades between the start of the first world war in 1914 and the end of the second in 1945 – a period that also included a pandemic, a legendary stock market crash, a period of mass unemployment and the rise of totalitarianism.
By this reading of events, the long boom of the 1990s and the American hegemony ushered in by the end of the cold war was the equivalent of the pre-1914 Edwardian summer, with the subprime mortgage crisis starting small in August 2007 but having profound ramifications.
Attempts were made in the 1920s to restore the prewar status quo, but none of them worked, at least not permanently. There was a period in the late 1920s – after Germany’s hyperinflation – when it looked as if stability was returning, but it improved impossible to turn the clock back to the world as it was pre-1914. Eventually, a new model was established, with reflation, higher welfare spending, progressive taxation and capital controls at its heart. But once again, it took time. More than three decades elapsed between the demise of globalisation mark 1 dominated by Britain and the arrival of globalisation mark 2, dominated by the US.
The current crisis has now lasted almost 15 years. It has included the near collapse of the global banking system, the avoidance of a second Great Depression by the printing of large
quantities of electronic money through quantitative easing, barely rising living standards, populist insurgencies, the retreat from globalisation and a pandemic.
Two years ago this week, the UK was approaching its first Covid-19 lockdown. Rishi Sunak announced spending increases in his budget (an appetiser for what was to come) and shortly afterwards the Bank of England cut interest rates to a record low of 0.1%.
In some ways the mood then was similar to today’s. Covid-19 was seen as a temporary roadblock on the way back to “normality” just as the higher inflation caused by Russia’s invasion of Ukraine is seen as a transitory phenomenon, which will delay but not derail recovery from the pandemic. The Bank looks certain to raise interest rates by 0.25 percentage points this week, while Sunak had no desire to turn his spring statement on 23 March into a mini budget, but it looks like it could become one.
So what happens next? As an aside, it is worth noting that the pandemic has not gone away, merely been crowded out of the news by Ukraine. Infection rates have started to rise again after the easing of restrictions, while the displacement of millions of refugees across Europe will make it easier for the virus to spread. Currently, policymakers are paying more attention to the risk of a return to 1970s-style stagflation, which might come in two stages – a burst of inflation followed by stagnation. Higher energy bills are initially inflationary but are subsequently deflationary as they push up business costs and erode consumer spending power.
There is, though, an unmistakeable sense that the old model is running on empty, while the talk of levelling up and greening the economy suggests that the equivalent of the economic settlement that brought stability to the postwar decades is lurking out there somewhere. The current era of permanent crisis has highlighted the faults of the current system and the difficulties involved in returning to the pre-2007 status quo. It hasn’t yet given way to a fully fledged alternative, although history suggests that sooner or later it will.
Taking 1900 as a starting point, the period since has followed a pattern: periods of stability and prosperity (1900-14, 1945-1973, 1991-2007) during which signs of problems to come became ever more apparent; and periods of crisis (1914-45, 1973-1991, 2007 to the present) during which a new paradigm gradually appeared. The longer and deeper the crisis, the more profound the eventual change.
Attempts were made in the 1920s to restore the prewar status quo but none of them worked, at least not permanently