Democracy is fragile in recessions. In times of economic prosperity, good economic policies produce good results, so that eventually both major political parties become committed to their continuance, as with Bill Clinton in 1992 or Tony Blair in 1997. Only in resource economies, where good policies can become disjointed from good results, can the electorate become confused between what works and what doesn’t; thus democracy is a more fragile flower in Argentina, Brazil or Peru than in Western Europe or Asia. However if recession becomes prolonged, the voters can lose faith in rational economics and become corrupted by radical nostrums of left or right. In today’s economy, we are in increasing danger of this.
In the United States, only two severe recessions have occurred since the electorate believed government economic policy could affect their living standards (the Panic of 1837, severe though it was, produced no major outbreak of populism.) In 1893-96, the country got lucky. The depression coincided with an admirably economically orthodox President, Grover Cleveland, and even at the bottom of the slump orthodox policy in the form of William McKinley was able to win fairly easily over William Jennings Bryan’s forces of economic chaos.
In 1929-33, the country was economically unlucky, in that the depression was substantially worsened by the actions of the ineptly interventionist Herbert Hoover, but politically fortunate in that in 1932 an apparently attractive solution was available in the form of the economically unsound but only moderately radical Franklin Roosevelt. Roosevelt’s actions prolonged the Great Depression just as Hoover’s had exacerbated it, but following the 1938 mid-term elections orthodoxy was restored and prosperity returned even before the lift of wartime armaments orders.
Other countries in the Great Depression had different fates. Britain was exceptionally lucky, in that its advent coincided with a minority Labour government, constrained to orthodoxy by its lack of a working majority. Thus when the economy worsened and the government fell, a National Government under the economic management of the admirably orthodox Neville Chamberlain was available, which was able to alleviate Britain’s Depression sufficiently to make the 1930s a time of considerable economic advance. Other countries were less lucky – Argentina, relatively democratic and very prosperous in 1929, rigged elections for the conservatives when the crisis hit, which got them blamed for a miserable 1930s “Infamous Decade” that condemned capitalism forever in the minds of the Argentine electorate.
In Germany, notoriously, economic misfortune led to political disaster. After the crisis hit, the economically admirable Heinrich Brüning was elected chancellor in March 1930, and proceeded to institute austerity policies of public spending cuts and salary reductions very similar to those of Neville Chamberlain in Britain a year later or Latvia in 2008-09. However unlike Chamberlain Brüning had neither the full support of President Hindenburg nor a stable majority in the Reichstag. Foolishly, he called an election before his austerity policies had produced any benefits, and allowed Hitler’s NSDAP to become a major Reichstag force. With international forces against Brüning (the major banking crisis of 1931 forced the Darmstädter bank into bankruptcy) the Nazis were able to use Keynesian economic arguments against him in the series of elections in 1932, forcing him out in May 1932 and maneuvering into power in January 1933.
The German electorate was not helped in its decision-making by the weak Weimar constitution (Konrad Adenauer, already a major figure as Mayor of Cologne, turned down the Chancellorship twice, “not wanting a temporary job.”) Brüning’s mistaken political tactics were also damaging. But the key factor in Germany’s collapse into totalitarianism where other countries survived was its memory of truly catastrophic policies less than a decade before, with the Weimar Republic inflation. Thus even though Bruning’s economic policies were sound, the German middle class was enfeebled by the loss of its savings in 1923, and was seduced by economic charlatanism in the service of pure evil.
This time around, the recession’s initial advent has already damaged the cause of economic sanity. The crazed caterwauling for “stimulus” in early 2009, almost universal in the Western world, pushed the world economy off its normal recovery course. Those countries – the United States, Britain, France, China, Brazil, Japan and southern Europe – which were enthusiastic about stimulus are today struggling with overwhelming budget problems and recessions of unexpected length and persistence. Only Germany, whose Social Democrat finance minister Peer Steinbrück in December 2008 denounced “crass Keynesianism,” has enjoyed a reasonably robust economic recovery – provided Chancellor Merkel does not destroy it by handouts to its profligate EU partners.
With the recession persisting, the temptation to make economic policy jump the tracks is increasing once again. Needless to say, further “unorthodox” policies will produce further poor results, which will be used to justify yet further departures from economic orthodoxy. In a democratic system, politics can get pulled further and further from sanity, beyond a Cristina Kirchner and a Hugo Chavez to a Fidel Castro. The danger does not arise only from the left; one can equally imagine the advent of a hyper-protectionist right, using Smoot-Hawleyite tariff policies and economic nationalism to destroy international trade and perpetuate poverty by a different means.
In the United States, the upcoming election is critical but may not be determinative. A re-elected President Obama will continue to grow government and will keep the destructive soft-money policies of Fed chairman Ben Bernanke, thus furthering the U.S. slide into economic decline. At worst, a friendly Congress will encourage him in this effort, producing further deadweight legislation, most likely on global warming. More likely, a mixed Congress will frustrate the worst instincts of the Obama presidency but will fail to make any progress against trillion-dollar deficits or “funny money.”
That may not be the worst possible outcome. If the United States avoids complete economic collapse, an election in 2016 could still reverse the tide. On the other hand, if Mitt Romney is elected, and then chooses to keep Bernanke and do little or nothing about the deficit, U.S. economic performance will continue to deteriorate, but when 2016 comes around (assuming Romney seeks re-election) the electorate will be in the same position as in 2008, with no viable alternative offering better policies. At that point, after eight years of economic malaise, the possibility of a truly scary political outcome becomes only too plausible.
In other countries, the position is similar. France has already elected an economically scary leader in Francois Hollande. His plans to increase the top rate of income tax to 75% as well as increasing France’s wealth tax to punitive levels will almost certainly cause the kind of wealth exodus that will implode France’s economy and endanger its position in the euro. Given the eccentric French electoral system, it is also by no means certain that a swing of the pendulum in five years will bring back a center-right figure like Nicolas Sarkozy – it is equally likely that the French electorate will swing far-left or nationalist, though Marine Le Pen is much less frightening than most non-mainstream political figures.
In Japan, the two main parties, the Democratic Party of Japan and the Liberal Democratic Party, have combined to force a major increase in the country’s sales tax. While this will alleviate the country’s frightening debt problem, it will also be highly deflationary and is no substitute for the draconian public spending cuts that the country needs. An election is due by August 2013 and may be held earlier. Since both main parties are currently highly unpopular and largely discredited, an outside force may well win it. In an ideal world, that force would be represented by small-government free marketers loyal to Junichiro Koizumi, prime minister 2001-06, the only successful Japanese prime minister since the 1980s. In the world and economy of today’s Japan, that ideal solution is very unlikely.
In Britain, the 2010 Coalition took office on a program primarily of spending cuts, which were much needed and few of which have eventuated. Instead, increases in taxes and loose monetary policy have caused a return to recession accompanied by substantial inflation, part of which is suppressed in official figures. It now appears that the Coalition may be breaking apart. That would probably bring a return to a Labour government, which under Ed Miliband would be much more economically foolish than that of 1997-2010. Britain was close to political instability in 1974-75; it could easily get there again.
Finally, in Germany, villain and victim in the 1930s, the current outlook for 2013’s election is for either a re-election of Angela Merkel, or a switch to the moderate and unthreatening Social Democrats. That’s the huge political advantage the country has gained by avoiding “stimulus.” There’s only one fly in the ointment; if the EU succeeds in getting the kind of massive German-funded bailout of southern Europe its more enthusiastic devotees want, then even Germany may slide into recession, and its political stability be correspondingly endangered. That didn’t lead to a good outcome last time, to put it mildly – yet another excellent reason for resisting EU bailouts with the utmost vehemence.
In emerging markets, the outlook is grim. None of the BRIC group of countries is decently run, and their governments’ failings are becoming increasingly apparent. In Brazil, excessive spending is leading once again to the Latin populism that has kept the country poor. Russia already has a truly scary government, likely if hardship hits to become more so. In India, the Congress party is close to both economic and political bankruptcy, and there is no longer the clear pro-market alternative once represented by the admirable Atal Bihari Vajpayee. Finally, China’s bad debt problem may at last be catching up with it; the most likely political response to an economic collapse would be a descent into either hyper-nationalism or Maoism.
That country-by-country analysis does not take account of the most frightening possibility of all: that an upsurge in protectionism and foolish policy in a number of the world’s major economies pushes the global economy into a death-spiral from which it will find it very difficult to emerge. One would hope that the world’s leaders would have the sense to avoid this – but given the poisonous interaction between economic failure and political foolishness, that hope could prove folorn.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)