Dr Ha Joon Chang appears not to know his economic history

The remedies on offer are well known. Reduce budget deficits by cutting spending – especially \”unproductive\” social welfare spending that reduces growth by making poor people less willing to work. Cut taxes at the top and deregulate business (euphemistically called \”cutting red tape\”) so that the \”wealth creators\” have greater incentives to invest and generate growth; and make hiring and firing easier.

It is increasingly accepted that these policies are not working in the current environment. But less widespread is the recognition that there is also plenty of historical evidence showing that they have never worked. The same happened during the 1982 developing world debt crisis, the 1994 Mexican crisis, the 1997 Asian crisis, the Brazilian and the Russian crises in 1998, and the Argentinian crisis of 2002. All the crisis-stricken countries were forced (usually by the IMF) to cut spending and run budget surpluses, only to see their economies sink deeper into recession. Going back a bit further, the Great Depression also showed that cutting budget deficits too far and too quickly in the middle of a recession only makes things worse.

Umm, the UK\’s reaction to the Great Depression was to cut the deficit and devalue the pound. Worked very nicely, much better than the US response. Immediately post WWII Major Atlee reduced the budget deficit to a surplus: economy grew quite nicely as well.

It\’s just fine to have different views but you\’re really not allowed your own facts you know….

18 thoughts on “Dr Ha Joon Chang appears not to know his economic history”

  1. “World’s largest exporter and most significant trading economy” is a less representative situation than any of the other ones that Chang cites.

    Agree pieces like this should add “Austerity can work, if it’s part of a state-directed industrial policy, coming from a country with a vast export base, implemented alongside currency devaluation, and with captive markets available for its exported goods”. Germany post-reunification would be the (only?) other example.

  2. So Much For Subtlety

    Umm, the UK’s reaction to the Great Depression was to cut the deficit and devalue the pound. Worked very nicely, much better than the US response.

    Someone correct me if I am wrong, but didn’t everyone try that? Devaluation is a relative thing after all. If we drop the pound, the French will devalue the franc, or they did at the time. How did that work out? Wasn’t half the problem of the Great Depression competitive devaluations? Wasn’t the Bretton Woods system set up specifically to stop people doing it again?

    In the long run there is no substitute for being like the Germans. Or better yet the Swiss. That is, low inflation – my heart breaks looking at the Swiss currency record – stable prices, strong wage restraint, good education and a strong work ethic. Leave the currency to find its own level, but ideally it ought to be stable too.

  3. Ditching the Gold Standard worked very well too – the earlier, the better. Eurozone countries should take note.

  4. Actually Attlee’s government continued to increase the National Debt – it fell *relative to GDP* after the 1948 devaluation and the subsequent inflation – although he cut the budget deficit much more sharply than Osborne has.
    Ha Joon Chang is demonstrating his ignorance of the economic *present* – the highest marginal tax rates are on those who are in receipt of family credit, so they have an incentive to spend their time hunting for bargains rather than in paid employment. Believe it or not, that *does* make some poor people less willing to work.

  5. @ Jim
    Try reading what I actually wrote and the Treasury website which shows National Debt increasing. Cripps *reported* a budget surplus
    The Guardian table is, as usual, unreliable, (they claim that financial intervention *reduced* net borrowing in 2008 and 2009) but shows net borrowing in the Attlee years, so your reference doesn’t refute my comment.

  6. So Much For Subtlety

    Frances Coppola – “Ditching the Gold Standard worked very well too – the earlier, the better. Eurozone countries should take note.”

    That depends on what you mean by worked. It worked well in the short term. That is the point about competitive devaluations – the earlier you do it, the better as you are doing it at the expense of the fiscally responsible. But once they wise up and start devaluing too, there is no real advantage.

    In the long term? Despite France’s chaotic political life post-Revolution the franc stayed remarkably stable from 1800 to 1914. The French fixed it to gold and left it there until the First World War. The French then debased the franc. Let me quote Wikipedia:

    The outbreak of World War I caused France to leave the gold standard of the LMU. The war severely undermined the franc’s strength: war expenditure, inflation and postwar reconstruction, financed partly by printing ever more money, reduced the franc’s purchasing power by 70% between 1915 and 1920 and by a further 43% between 1922 and 1926. After a brief return to the gold standard between 1928 and 1936, the currency was allowed to resume its slide, until in 1959 it was worth less than 2.5% of its 1934 value.

    After World War II, France devalued its currency within the Bretton Woods system on several occasions. Beginning in 1945 at a rate of 480 francs to the British pound (119.1 to the U.S. dollar), by 1949 the rate was 980 to the pound (350 to the dollar). This was reduced further in 1957 and 1958, reaching 1382.3 to the pound (493.7 to the dollar, equivalent to 1 franc = 1.8 mg pure gold).

    In January 1960 the French franc was revalued at 100 existing francs. …. Only one further major devaluation occurred (in August 1969) before the Bretton Woods system was replaced by free-floating exchange rates. Nonetheless, when the Euro replaced the franc on 1 January 1999, the franc was worth less than an eighth of its original 1960 value

    In other words, once the French broke from the discipline of the Gold standard, their currency became toilet paper.

    I don’t think this has been in the interests of French people. I think a little less socialist inspired spending and a little more austerity would have done them a lot of good. In the short term, debauching the currency may seem a good idea, but in the long term it costs.

  7. SMFS

    The fact remains that the countries that held on to the gold standard longest suffered the most in the Great Depression. Whether returning to the gold standard once economies had returned to a more normal state was a good thing is in my view a completely different issue. I suggest you read Eichengreen’s “Golden Fetters” regarding the effect of the gold standard in the Depression.

  8. You say the economy grew nicely after Atlee’s action. Perhaps you were not there to enjoy the ‘Austerity’. My school had parts of its roof missing ( bombs) and the rest often leaked and there was almost no heating.
    On to university where some building parts would have put a slum to shame. (And classes of up to 200)
    Not to forget rationing and ‘export only’.

  9. Malpas: the economy grew; the general populace didn’t get the immediate benefit *because* economic growth was deliberately directed towards exports to pay back the Americans. That was a feature, not a bug.

  10. So Much For Subtlety

    Frances Coppola – “The fact remains that the countries that held on to the gold standard longest suffered the most in the Great Depression. Whether returning to the gold standard once economies had returned to a more normal state was a good thing is in my view a completely different issue. I suggest you read Eichengreen’s “Golden Fetters” regarding the effect of the gold standard in the Depression.”

    Thank you for the tip. I will certainly look him up. However the point about my devaluation is still valid – it is literally a race to the bottom where the responsible people who stick to the proper course suffer at the hands of those who recklessly debauch their own currencies. But if everyone does it, it has no benefit for anyone. Which is precisely what the Bretton Wood system tried to stop. So I will agree that in the short term, one country devaluing its currency will benefit. It is just that when everyone does, no one benefits.

    What is more, on what basis does he make this claim? The first country I can think of to come off gold was Germany. In 1931 I think. Just before Britain did. How well did the Germans do? America stuck with gold for a long time. They may have had an unpleasant Depression, but not as bad as the Soviets who went off gold even earlier. And the rest of the 20th century was pretty good for them.

    So how he manages to sort out all the influences over the long term would be interesting to know.

  11. surely the point is that he says measures to cut red tape and unproductive spending are not working. Perhaps because they aren’t actually cutting red tape or taxes or unproductive welfare spending? In fact doing the opposite!

  12. The first country I can think of to come off gold was Germany. In 1931 I think.

    Many countries, historically, had come off the standard during wartime – the US during the Civil War, for example. Germany came off in 1914 and, because of reparations paid from gold reserves, couldn’t afford to go back on. As we know, it went completely FUBAR between 1919 and 1923. The Dawes plan helped them to get back up to speed, until the US went SNAFU in 1929 but the Rentenmark wasn’t a gold standard currency.

    America stuck with gold for a long time. They may have had an unpleasant Depression, but not as bad as the Soviets who went off gold even earlier.

    Coming off the gold standard is not going to help if your economy is based on piss-poor central planning. Nothing could … (And it is at least arguable that piss-poor is the very best achievable under a central planning model.)

  13. @ Jim
    I said “continued to increase” not “continuously increased” and the reference you give shows it increasing from £18.56bn in April 1945 (end of fiscal year 44/5) to £21.37bn to £23.64bn to £25.63bn, pause in 48 to £25.62bn, small drop to £25.17bn then another rise to £25.80bn and £25.92 bn in April 1952 after a year split between Labour and Conservative. I think most people would regard £25.8bn as an increase of £18.56 bn!
    The National Debt rose by £10.5bn during the 6 years of WWII and by £7.3bn under 6 years of Attlee. The latter was more than ten times the total National Debt at the outbreak of WWI.
    You have just provided the evidence that National Debt continued to increase under Attlee.

  14. @john77: yes but it wasn’t a steady rise. It wasn’t as if they ran a constant budget deficit for 5 years as we are being told the thing to do now is (actually we are running a constant budget deficit, the siren calls are to run even larger ones). There was an understandable rise in 45-47 as the wartime expenditure continued. But from 47 onwards they had spending and taxation balancing out. This would equate to the Coalition balancing the books by this tax year (12/13), after having taken over in 2010.

    If you want us to emulate Attlee, I’d be quite happy with the books balancing by the 3rd year of the Coalition. Going to mean some hefty cuts and tax rises this year, but hey, if it was good enough for old Clem, its good enough for the Coalition. I look forward to an emergency budget any day soon.

  15. And to look at it another way, Attlee increased the National Debt by about 40% (from £18.5bn to £25.8 bn as above). The Coalition inherited a national debt of about £600bn.
    (I think – not sure if financial year 2009 means 08/09, or 09/10 – if its the latter they inherited about £750bn – figures here: http://www.ukpublicspending.co.uk/spending_chart_2009_2015UKb_11c1li111mcn_G0t).

    Either way if you add 40% to those figures you get at worst just over £1tn. Which we passed earlier in 2012.

    So for us to emulate Attlee we now need to balance our budget for the next 3 years. Are you going to tell Ed Balls or can I?

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