Tag Archives: Economics

SANCTIONS are increasingly popular, but do they actually work? – Madeline Grant * BLOCKING PROGRESS. The damaging side effects of economic sanctions – Dr. Nima Sanandaji.

“If goods don’t cross borders, soldiers will.”

Have we really given sufficient thought to whether such measures actually work?

Reliance on sanctions is a mistake. Sanctions generally do not achieve their underlying objectives, Not only do sanctions undermine the well-being of those living in targeted countries, they also create substantial costs for the world economy. In addition, sanctions reduce economic and civil liberties, and by disrupting global value chains undermine peaceful relations, leaving everyone worse off.

If the Iraqis had been able to trade with the world, it is doubtful if groups such as ISIS would have found a breeding ground in the country. The US, which has been the main diplomatic force pushing for sanctions, only bears a small share of the cost, just 0.6 per cent of the Western trade loss.

Shutting out countries from the global marketplace is not conducive to free markets or free societies. Linking the world together in advanced global value chains is the best strategy for future peace and prosperity.

Around the world, growing numbers of governments are using economic sanctions as a tool to influence the behaviour of other countries. Their tactics are nothing new. Sanctions and embargoes have a long and chequered past, dating back to antiquity, when the Athenian statesman Pericles issued the so-called “Megarian decree” in response to the abduction of three local women in 432 BC. Yet, as Gary Hufbauer and Jeffrey Schott note in their study of the topic, rather than preventing conflict, Pericles’s sanctions in Ancient Greece brought a number of unintended consequences; ultimately helping to prolong and intensify the Peloponnesian War.

This might be the first instance of sanctions being tried, and failing, but we have many more recent cases to choose from. Veterans of GCSE history may remember the League of Nations and the failure of its sanctions to protect Abyssinia from Fascist Italy. Draconian regimes still rule countries like Iran, largely under American embargo since 1979 – not to mention Cuba, whose sanctions date back to 1962.

Fast forward to 2018, and the global appetite for sanctions looks as strong as ever, with President Trump edging ever closer to full-scale trade war with China. Rarely a week seems to go by without news of fresh sanctions against Russia from the Western world. Citizens, horrified by extra-judicial killings and cyber warfare, might well favour such penalties. In times of public outrage, it may feel and look good for policy-makers to be “doing something”. But have we given sufficient thought to whether such measures actually work?

Trade sanctions do occasionally achieve their strategic or foreign policy goals. Yet far more often, they are ineffective blunt instruments.

Policy-makers should aim to promote free trade on a global level, to secure peace and prosperity.

Those that fail to learn from history, are doomed to repeat it, in Churchill’s famous words. Unfortunately, the long and largely fruitless history of sanctions suggests we’ve learnt very little.

CapX

BLOCKING PROGRESS. The damaging side effects of economic sanctions

Dr. Nima Sanandaji.

Dr. Nima Sanandaji is a Kurdish Swedish author of 25 books and the president of the European Centre of Entrepreneurship and Policy Reform.

Executive summary

During the twentieth century, economic sanctions became more prevalent. In the twenty-first century they have become a frequently used tool for governments seeking to change the behaviour of other countries.

An extensive research literature exists on the effectiveness of sanctions. Overall the research shows that sanctions very rarely achieve foreign policy goals. At the same time, sanctions create negative externalities.

Sanctions limit the economic well-being of people in targeted countries, in some cases leading to malnourishment or even starvation. They also undermine economic and civil liberties, instead encouraging centralised state control.

While sanctions are often aimed at destabilising governments, people in sanctioned countries often turn to their government when the country is isolated from the global marketplace. The sanctions on Russia in early 2014 coincided with Vladimir Putin’s popularity rising from an all-time low to an all-time high point.

The sanctions against Russia have led to a trade loss estimated at US$114 billion, with US$44 billion borne by the sanctioning Western countries. In percentage terms, Germany bears almost 40 per cent of the Western trade loss, compared with just 0.6 per cent incurred by the United States.

Two wealthy countries that are neutral in sanctions against Russia Israel and Switzerland have experienced a trade loss of 25 per cent between 2014 and 2016. This is nearly as high as the 30 per cent trade loss of the largest four sanctioning economies. Since sanctions undermine global value chains, neutral third-party countries are also hurt.

Fostering global value chains is a better strategy for promoting security, since economic interdependency makes peace a more attractive alternative than conflict. Market exchange is typically a better option than sanctions if the objective is a free, peaceful and prosperous world.

Introduction

Economic sanctions have become an increasingly popular tool in foreign affairs since the end of the Cold War. The concept of economic sanctions is not new. In fact, 2,400 years ago Athens declared a trade embargo on the neighbouring city state of Megara, strangling the city’s trade. Powers with naval dominance, such as the British Empire, used trade blockades during times of war. However, while sanctions were a known policy tool, they were seldom systematically used until modern times. During the twentieth century sanctions become more prevalent, and in the twenty-first century their position as a popular foreign policy tool has solidified.

This paper argues that this reliance on sanctions is a mistake. Sanctions generally do not achieve the underlying objectives, while they create substantial costs for the world economy. In addition, sanctions reduce economic and civil liberties, and by disrupting global value chains undermine peaceful relations.

Economic sanctions usually aim at either signalling dissatisfaction with particular policies, constraining the sanctioned nation or its leaders from further action, or to act as a coercive measure towards a government in an attempt to reverse its actions. Sanctions can severely undermine prosperity in countries when the ‘international community’ joins together in isolating them. In 1966, the United Nations for the first time introduced comprehensive sanctions against Rhodesia. Eleven years later similar measures were enforced against South Africa. These policies were directed at undermining white supremacy rule, an aim which seems to have been accomplished. These sanctions policies were successful due to the context in which they were introduced. Rhodesia and South Africa were countries governed by apartheid rule, and the large majority of the population were discriminated against due to the colour of their skin. Many whites also strongly objected to apartheid. A similarity can be drawn to Ronald Reagan’s escalation of the Cold War, which arguably accelerated the fall of the Soviet Union. In both cases, pressure was put on systems already on the brink of collapse.

During the Cold War period, sanctions were still relatively uncommon. If the West isolated a nation economically, it ran the risk of turning that nation over to the Soviet bloc. Rhodesia and South Africa were obviously the exception, since they were rejected by both blocs due to their racist policies. When the Cold War ended, Western powers gained both military and economic dominance and hence could apply sanctions policies more frequently without as many geopolitical risks. However, contrary to the early experience with apartheid states, sanctions overall proved to be less than effective.

Sanctions rarely achieve their goals

Extensive research has been carried out on the outcome and impact of economic sanctions, with different claims over their results. The Oxford Reference overview article on economic sanctions states that ‘There is considerable disagreement over their effectiveness. Critics point out that they are easily evaded and often inflict more pain on those they are designed to help than on the governments they are meant to influence”. The first major wave of research on the effects of economic sanctions was published during the 1960s and 1970s. The consensus of these papers, as summarised by Baldwin (1985: 373), was that sanctions were not as effective as military force.

The debate is not one-sided, as for some time there was academic enthusiasm about sanctions. According to Rogers (1996: 72), ‘Economic sanctions are more effective than most analysts suggest. Their efficacy is underrated in part because unlike other foreign policy instruments sanctions have no natural advocate or constituency’. An influential study by Hufbauer, Schott and Elliot (1990) was for some time seen as proof that sanctions were an effective tool to achieve policy change in foreign countries. The researchers examined 115 identified cases of sanctions between 1914 and 1990, and concluded that sanctions achieved their foreign policy goals in 40 of them.

In a widely cited study, Pape (1997) examined these 40 cases and concluded that only five of them involved a success for sanctions policy. Thus, four per cent rather than 35 per cent of the cases examined were a success for sanctions policy. Of the remainder, eighteen were determined by force (military defeats, governments being overthrown, etc.) rather than sanctions, eight were failures in which the target state did not concede to the coercer’s demands, six were trade disputes, and three remained undetermined.

For example, the sanctions against Germany during World War I and against Germany and Japan during World War II had been counted as having achieved their goals in the Hufbauer et al. study. However, Pape argues that both cases were won by military force. During World War I, for example, the food shortage linked to the British blockade led to the starvation of around 500,000 Germans. But the country continued to fight until militarily defeated. Another example is Rafael Trujillo, the president of the Dominican Republic, who was a protégé of the United States. His regime was seen as an embarrassment due to its repressive actions, and the US acted to remove him from power. As part of this policy, tariffs were imposed on Dominican sugar, while oil, trucks and military spare parts were embargoed. Pape challenges the conclusion of Hufbauer et al. that this was a successful case for sanctions, since the issue was resolved when the president was assassinated and his family driven out of the country. Pape concedes that sanctions in themselves have occasionally achieved foreign policy goals, such as when India imposed sanctions on Nepal in 1989 and when the US imposed sanctions against Poland in 1981. However, these are rare cases.

Although rare, the successes of sanctions policies are worth exploring. In 1989, India imposed a trade blockade on Nepal over a dispute about transit treaties and uneasiness over Nepal’s increased closeness with China. Since Nepal is a landlocked nation, it imports all of its petroleum supplies from India. The urgent fuel crisis brought on by the sanctions forced Nepal to introduce the policy changes desired by India. In 2015 Nepal accused India of having imposed a new undeclared blockade, which cut off fuel supplies and thus caused an economic and humanitarian crisis. The blockade forced Nepal to introduce constitutional amendments relating to the minority community of Indian origin in the country. Thus, it seems that India has achieved its aims through sanctions more than once. This is not surprising since the conditions and aims of the sanctions were similar in both cases.

Another case is the sanctions that the US and other Western countries imposed on Poland in 1981, in order to push for political change. Specifically, the sanctions were imposed after the martial-law crackdown of the Polish state on the Solidarity trade union. The sanctions had a major effect on Poland’s economy and seem to have influenced politics. The Solidarity movement was ultimately successful in helping to transform Poland from Marxism to democracy and a market economy.

There are also some new studies in favour of sanctions, though the consensus is still against them. Marinov (2005: 564) concludes that: ‘There is much pessimism on whether [sanctions] ever work. This article shows that economic pressure works in at least one respect: it destabilizes the leaders it targets’. In an empirical analysis, Dashti-Gibson, Davis and Radcliff (1997) reach a similar conclusion. According to this study, sanctions are able to destabilise countries, and financial sanctions in particular may achieve other goals. However, even with this form of more successful sanctions policy, the authors find a modest downward trend over time in the relative effectiveness. Drezner (2003) notes that most scholars consider sanctions an ineffective tool of statecraft. By taking into account unrealised threats of sanctions, Drezner shows that the bulk of successful economic coercion episodes are those in which the threat of sanctions leads to a policy change.

Sanctions limit economic and social liberty, instead encouraging state control

On the other hand, one must also consider that sanctions not only limit the economic well-being of people in the targeted country (in some cases leading to malnourishment or even starvation), but may also reduce economic and civil liberties. By doing so, they undermine the free exchange which breeds global prosperity and peaceful relations.

Peksen and Drury (2010) used a time-series cross-national dataset of sanctions over the period 1972 to 2000 to study the effectiveness of sanctions in reaching their goals. The authors concluded that ‘both the immediate and longer-term effects of economic sanctions significantly reduce the level of democratic freedoms in the target’ (ibid: 240). This occurs through reduced political rights as well as reduced civil liberties in the sanctioned state.

One illustrative example is the sanctions policy imposed on North Korea. World powers have relied on economic and financial sanctions to isolate the North Korean regime and force it into denuclearisation discussions. However, as the Council on Foreign Relations explains, it is doubtful if sanctions have reached their goals and if they ever will (Albert 2018). In fact, these policies have pushed North Korea to stick to a centrally planned command economy. Fortunately, there have been some openings for North Korea to trade with China and to a limited degree also South Korea. Gradually the North Korean state has incorporated some elements of free markets into its economic model, a change which has brought about a quiet social revolution (Kranz 2017). North Korea is still an authoritarian and brutal state, but the shift towards a market economy is nonetheless positive, it has for example reduced starvation.

Recently, North and South Korea signed the Panmunjom Declaration for Peace, Prosperity and Unification of the Korean Peninsula. This historic document represents a move towards peace in one of the longest global conflicts; a conflict which could result in nuclear war. An important part of the deal between the two Korean states is about fostering trade links. A question worth asking is: what if North Korea had not been exposed to international sanctions? It is likely that the state would have pushed for market integration at an earlier stage and also to a greater extent. It is also likely that the leadership of the country would have been less rather than more hostile towards the rest of the world.

Sometimes sanctions achieve certain goals, for example undermining the finances of a regime, while also creating massive unintended effects. A famous example is the economic sanctions directed against Saddam Hussein’s Baathist regime in Iraq. A near-total trade and financial embargo was imposed by the UN Security Council four days after Iraq’s invasion of neighbouring Kuwait. There is a general consensus that the sanctions achieved their goal of limiting the military development of Iraq, but also that the sanctions created poverty and malnutrition among the civilian population. According to UNICEF, per capita income in Iraq dropped from $3510 in 1989 to $450 in 1996 (Sen 2003). People’s living standards collapsed.

Free exchange fosters peace

Some 4,000 years ago, the first tamkarum entrepreneurs of the world emerged in Iraq and neighbouring Syria. During the early middle ages, the free-market renaissance of the Islamic Golden Age was focused on Baghdad. In part, this tradition of enterprise lived on even during modern times.

Before the UN sanctions were introduced, Iraq still had elements of a developed economy and a well-educated middle class. The country could have built upon this, and its entrepreneurial culture, to become more prosperous. Instead, due to global isolation the country’s economy collapsed. Educated people left Iraq as job opportunities became scarce. So, the sanctions did not topple Saddam Hussein, but did significantly limit the ability of people to benefit from market forces.

Iran also has a millennia long story of enterprise. The first known account of specialisation in a marketplace was given by Xenophon two thousand years before Adam Smith, and was based on the accounts of the marketplace of ancient Persia. In the sixteenth century, a Portuguese account describes the impressive amount of sophisticated agricultural and industrial goods for sale at the port of Hormuz, described as a free marketplace. Iran, Iraq and Syria all have deep traditions of enterprise and global exchange that could be tapped, but for this to happen trade routes must be open.

The importance of market commerce for long-term stability is often neglected. Yet, trade and commerce are often the alternative to conflict. Sanctions can break the link of the targeted nation to the global marketplace. Goods that used to be imported are suddenly in short supply, and those who work in exporting firms might lose their jobs. The government therefore intervenes to ensure that the immediate crisis is addressed. The country turns away from market freedom towards state intervention, and the people begin to view the rest of the world with suspicion. In the case of Iraq, the people ultimately turned not only to state reliance but also to tribal society and feuding militias. Sanctions thus induced future instability.

If the Iraqis had been able to trade with the world, it is doubtful if groups such as ISIS would have found a breeding ground in the country.

Putin’s popularity increased when Russia was sanctioned

One aim of sanctions is to destabilise governments, inspired by the regime changes in Rhodesia and South Africa. However, these were unusual cases, in which the vast majority of the populations suffered from white supremacy rule and naturally viewed the state with suspicion. In countries where the bond between the ruling classes and the population is stronger, sanctions can have the opposite effect by expanding the rulers’ grip over society.

A topical case is the sanctions introduced against Russia in early 2014, which have since expanded, at least from the US. These sanctions were implemented after Russia intervened in Ukraine. One concern raised in a report from the Centre for European Policy Studies is that the sanctions actually facilitate what they are designed to combat, they make Putin more popular, not less (Dolidze 2015). The mechanism through which this happens is that average Russians deem the sanctions imposed by the rest of the world to be unfair, siding with their own government position. The report states: ‘it seems that the “unfair” western sanctions have had the perverse effect of increasing Putin’s popularity at the start of the Ukraine crisis in November 2013 to the present, his ratings have risen from an ever-low to an ever-high point’.

In the last Presidential elections, held in March this year, Putin won re-election for his second consecutive term in office with 77 per cent of the vote. Although these numbers are not reliable, and some opposition candidates were blocked, it still seems that Putin currently holds strong approval ratings. The support comes as no surprise. One should remember that people above all else are motivated by seIf-interest for themselves and their families. If the US imposes sanctions which significantly increase the cost of putting food on the table for your family, you are not likely to hold a positive view of US policies.

The US recently began to target businesspersons as a way of broadening the scope of sanctions. Earlier this year, the US Treasury published a list of 96 businessmen of Russian origin. The unusual element to this was that this list was not focused on political or criminal activity; it was compiled according to wealth, based on the yearly wealth index published by Forbes. The list even includes businesspersons living in exile and in fear of persecution after falling out with the Russian state.

In theory, the sanctions against Russia are targeted on a few sectors and towards the firms owned by the political elite of the country. The reality is, however, far from the intended design of the sanctions. The inherent complexity of a world economy made up of global value chains has resulted in significant unintended consequences, which not only hurt the Russian population, but also European economies, and even those Western economies which have not participated in the sanctions policies.

Trade losses from sanctions against Russia

Crozet and Hinz (2017) analyse the friendly-me effect of the Russian sanctions and the counter-sanctions imposed by Russia. The authors study monthly trade data from 78 countries, as well as firm-level data, to estimate the actual impact of the sanctions. The authors find that the sanctions have led to a total trade loss of US$114 billion, with US$44 biliion borne by sanctioning Western countries. Out of the loss borne by the sanctioning countries, 90 per cent is incurred by EU member states. Germany is particularly badly affected, while the US, which has been the main diplomatic force pushing for the sanctions, only bears a small share of the cost. In percentage terms, Germany bears almost 40 per cent of the Western trade loss, compared with just 0.6 per cent incurred by the US.

In a recent study, Dennis Avorin and I look more closely at the friendly fire effect of sanctions policy. We focus on the two Western economies that did not participate in the policy to impose sanctions on Russia (Sanandaji and Avorin 2018). One might imagine that the two countries, Switzerland and Israel, would have massively increased their trade with Russia since the sanctions hinder Russia from trading with other Western economies. The trade data between 2014 and 2016 suggest that the opposite is true. Exports to Russia fell by around 25 per cent in the two non-sanctioning economies. This is nearly as high as the 30 per cent drop in exports experienced on average by the four largest economies engaged in the sanctions (US, Japan, Germany and UK). Between February 2014 and December 2016, we estimate that Israel had a trade loss with Russia amounting to US$680 million, while the loss for Switzerland was US$2.38 billion.

Of course, correlation and causation are two different things. It is dichult to separate the effect of reduced trade brought on by sanctions and the effect brought on by the fall in the Ruble (which in turn does reflect sanctions, but also other important economic drivers such as lower oil prices). Yet, the observation that the loss in trade was almost of the same magnitude in sanctioning and non-sanctioning economies is still important, not least because one might have expected Russia to turn to trading with Switzerland and Israel as an alternative to the other Western countries. Third parties are obviously hurt by unintended consequences.

This provides an important lesson. When the global value chains that connect people and businesses together in the modern world economy are disrupted, massive unintended losses are created. Countries that in theory are neutral are also significantly affected. As a tool for foreign policy, sanctions may have their use. But their cost in practice is much higher than was originally intended.

As the nineteenth-century economist Otto T. Mailery wrote: ‘If goods don’t cross borders, soldiers will’. This is, of course, even more relevant in the modern global economy in which global value chains create substantial interdependency between nations. Sanctions policies which exclude countries from trade with Western economies through unintended consequences reduce peaceful interdependence and thus undermine long-term global security.

A greater understanding of the history of capitalism as an institution might be useful in this regard. A commonly held view today is that the market economy is a recent invention of the Western world. In fact, for much of the last four millennia, the Middle East has alongside China and India been a free-market centre of the world, with advanced manufacturing, financial institutions and global trade. The periods characterised by market exchange have also been quite peaceful. Peaceful market exchange between the East and the West continued until the beginning of the eighteenth century, when the British Empire introduced sanctions against the industrial goods of Persia, India and China.

The motive was to foster Britain’s own industrial development. Instead of peaceful market exchange, a more aggressive form of colonial capitalism was to dominate. When later the same countries turned towards state planning, this was in large part motivated by the fact that the market economy had become associated with foreign colonialism. These embargoes, associated with the British industrial revolution, moved economic policies in the great eastern civilisations away from the market economy and thus had a significant effect on world politics. Shutting out countries from the global marketplace is not conducive to free markets or free societies.

Russia, likewise, is today associated in the West with state planning and the Soviet period. Yet, the country has a long history of peaceful trade. The Novgorod Republic, a predecessor to modern Russia, was a merchant republic. Until the communist revolution, Russia had deep trade relations with Europe and even the US. After the fall of communism, the country could have moved towards a market-friendly model. Relatively recently, there was interest in implementing market reforms inspired by Chicago School economists. The personal income tax rate in Russia is a flat 13 per cent, while the top corporate tax rate is 20 per cent. In these regards, at least, the country is quite market-oriented. However, corruption and bad governance hindered moves towards a market economy and an oligarch-dominated economy developed instead. We cannot however disregard the effect of sanctions. When sanctions are imposed on a country, it is likely to turn away from economic freedom and towards central planning. In fact, even the threat of future sanctions will favour central planning. The simple reason is that an economy is in great trouble if it is reliant on foreign goods and sanctions are introduced. Better then to rely on state enterprises or enterprises run by oligarchs with close links to the state leadership.

There is still hope for countries such as Russia. The Index of Economic Freedom finds that Russia is a relatively free-market country when it comes to business freedom, trade freedom, tax burden and fiscal health. The weaknesses of the system are, amongst others, lack of protection for private property and low freedom for investors. The government of Russia would have stronger incentives to improve these weaknesses if the country were more integrated into global trade and investment networks.

A last point about sanctions is that they became popular when the Soviet bloc fell. The western world gained economic dominance and the US in particular started using this dominance to pursue foreign policy goals. Today, however, China, India and other countries are rising as prosperous world economies. If the West pushes countries away through sanctions, they will become more dependent on trade with China and India instead. The West ultimately isolates itself, not only the sanctioned economies.

The point is not that sanctions are always the wrong policy, but that they should be used with regard for their considerable friendly-fire effects. In addition, a key aim of foreign policy should be to include more and more countries in free global trade.

Linking the world together in advanced global value chains is the best strategy for future peace and prosperity.

Why should someone who is anti-austerity care about debt – Simon Wren-Lewis.

For a country that can create its own currency there is never any necessity to default.

Most of the posts I have written about austerity have been aimed at countering the idea that in a recession you need to bring down government deficits and therefore debt. But what if you accept all that (you are anti-austerity). Why should you care about debt at all? Why do we have fiscal rules based on deficits? Why not spend what the government needs to spend, and not worry that this resulted in a larger budget deficit?

The story often given is that the markets will impose some limit on what the government will be able to borrow, because if debt gets ‘too high’ in relation to GDP markets will start demanding a higher return. You can see why that argument is problematic by asking why interest rates on government debt would need to be higher. The most obvious reason is default risk. But for a country that can create its own currency there is never any necessity to default.

Being anti-austerity does not mean we can forget about debt completely, as long as we are using interest rates rather than fiscal policy to control demand.

. . . Mainly Macro

Modern Monetary Theory. IMF continues to tread the ridiculous path – Bill Mitchell.

Last week, the IMF released its so-called Fiscal Monitor October 2018.

Apparently the British government, which issues its own currency, has ‘shareholders’ who care about its Profit and Loss statement and the flow implications of the latter for the Balance Sheet of the Government.

Anyone who knows anything quickly realises this is a ruse. There is no meaningful application of the ‘finances’ pertaining to a private corporation to the ‘finances’ of a currency-issuing government.

A currency-issuing government’s ‘balance sheet’ provides no help in our understanding of what spending capacities such a government has.

A currency-issuing government can always service any liabilities that are denominated in its own currency.

. . . Professor Bill Mitchell’s blog

The Rise And Fall Of The American Middle Class – William Lazonick. 

Social Europe

William Lazonick is a Professor at the University of Massachusetts Lowell, where he directs the Center for Industrial Competitiveness. He is also a Visiting Professor at the University of Ljubljana where he teaches a PhD course on the theory of innovative enterprise. Previously he was an Assistant and Associate Professor of Economics at Harvard University, Professor of Economics at Barnard College of Columbia University, and Visiting Scholar and then Distinguished Research Professor at INSEAD.


How economic boom times in the West came to an end – Marc Levinson. 

Unprecedented growth marked the era from 1948 to 1973. Economists might study it forever, but it can never be repeated. Why? 

The second half of the 20th century divides neatly in two. The divide did not come with the rise of Ronald Reagan or the fall of the Berlin Wall. It is not discernible in a particular event, but rather in a shift in the world economy, and the change continues to shape politics and society in much of the world today.

The shift came at the end of 1973. The quarter-century before then, starting around 1948, saw the most remarkable period of economic growth in human history. In the Golden Age between the end of the Second World War and 1973, people in what was then known as the ‘industrialised world’ – Western Europe, North America, and Japan – saw their living standards improve year after year. They looked forward to even greater prosperity for their children. Culturally, the first half of the Golden Age was a time of conformity, dominated by hard work to recover from the disaster of the war. The second half of the age was culturally very different, marked by protest and artistic and political experimentation. Behind that fermentation lay the confidence of people raised in a white-hot economy: if their adventures turned out badly, they knew, they could still find a job.

The year 1973 changed everything. High unemployment and a deep recession made experimentation and protest much riskier, effectively putting an end to much of it. A far more conservative age came with the economic changes, shaped by fears of failing and concerns that one’s children might have it worse, not better. Across the industrialised world, politics moved to the Right – a turn that did not avert wage stagnation, the loss of social benefits such as employer-sponsored pensions and health insurance, and the secure, stable employment that had proved instrumental to the rise of a new middle class and which workers had come to take for granted. At the time, an oil crisis took the blame for what seemed to be a sharp but temporary downturn. Only gradually did it become clear that the underlying cause was not costly oil but rather lagging productivity growth – a problem that would defeat a wide variety of government policies put forth to correct it.

The great boom began in the aftermath of the Second World War. The peace treaties of 1945 did not bring prosperity; on the contrary, the post-war world was an economic basket case. Tens of millions of people had been killed, and in some countries a large proportion of productive capacity had been laid to waste. Across Europe and Asia, tens of millions of refugees wandered the roads. Many countries lacked the foreign currency to import food and fuel to keep people alive, much less to buy equipment and raw material for reconstruction. Railroads barely ran; farm tractors stood still for want of fuel.

Everywhere, producing enough coal to provide heat through the winter was a challenge. As shoppers mobbed stores seeking basic foodstuffs, much less luxuries such as coffee and cotton underwear, prices soared. Inflation set off waves of strikes in the United States and Canada as workers demanded higher pay to keep up with rising prices. The world’s economic outlook seemed dim. It did not look like the beginning of a golden age.

As late as 1948, incomes per person in much of Europe and Asia were lower than they had been 10 or even 20 years earlier. But 1948 brought a change for the better. In January, the US military government in Japan announced it would seek to rebuild the economy rather than exacting reparations from a country on the verge of starvation. In April, the US Congress approved the economic aid programme that would be known as the Marshall Plan, providing Western Europe with desperately needed dollars to import machinery, transport equipment, fertiliser and food. In June, the three occupying powers – France, the United Kingdom and the US – rolled out the deutsche mark, a new currency for the western zones of Germany. A new central bank committed to keeping inflation low and the exchange rate steady would oversee the deutsche mark.

Postwar chaos gave way to stability, and the war-torn economies began to grow. In many countries, they grew so fast for so long that people began to speak of the ‘economic miracle’ (West Germany), the ‘era of high economic growth’ (Japan) and the 30 glorious years (France). In the English-speaking world, this extraordinary period became known as the Golden Age.

What was it that made the Golden Age exceptional? Part of the answer is that economies were making up for lost time: after years of depression and wartime austerity, enormous needs for housing, consumer goods, equipment for farms, factories, railroads and electric generating plants stood ready to drive growth. But much more lay behind the Golden Age of economic growth than pent-up demand. Two factors deserve special attention.

First, the expanding welfare state. The Second World War shook up the social structures in all the wealthy countries, fundamentally altering domestic politics, in particular exerting an equalising force. As societies embarked on reconstruction, no one could deny that citizens who had been asked to sacrifice in war were entitled to share in the benefits of peace. In many cases, labour unions became the representatives of working people’s claims to peacetime dividends. Indeed, union membership reached historic highs, and union leaders sat alongside business and government leaders to hammer out social policy. Between 1944 and 1947, one country after another created old-age pension schemes, national health insurance, family allowances, unemployment insurance and more social benefits. These programmes gave average families a sense of security they had never known. Children from poor families could visit the doctor without great expense. The loss of a job or the death of a wage-earner no longer meant destitution.

Second, in addition to the growing welfare state, strong productivity growth contributed to rising living standards. Rising productivity – increasing the efficiency with which an economy uses labour, capital and other resources – is the main force that makes an economy grow. Because new technologies and better ways of doing business take time to filter through the economy, productivity improvements are usually slow. But in the postwar years, productivity grew very quickly. A unique combination of circumstances propelled it. In just a few years, millions of people moved from low-productivity farm work – more than 3 million mules still plowed furrows on US farms in 1945 – to construction and factory jobs that used the latest machinery.

In 1940, the average working-age adult in western Europe had less than five years of formal education. As governments invested heavily in high schools and universities after the war, they produced a more educated and literate workforce with the skills to produce far more wealth. Advances in national infrastructure gave direct boosts to national productivity. High-speed motorways enabled truck drivers to carry bigger loads over longer distances at higher speeds, greatly expanding markets for farms and factories. Six rounds of trade negotiations between 1947 and 1967, ultimately involving nearly 50 countries that signed the General Agreement on Tariffs and Trade (GATT), brought a massive increase in cross-border trade, forcing manufacturers to modernise or give up. Firms moved to take advantage of technological innovations to operate more productively, such as jet aircraft and numerically controlled machinery.

Between 1951 and 1973, propelled by strong productivity gains, the world economy grew at an annual rate of nearly 5 per cent. The impact on living standards was dramatic. Jobs were just for the asking; in 1966, West Germany’s unemployment rate touched an unprecedented 0.5 per cent. Electricity, indoor plumbing and television sets became common. Stoves burning coal or peat were replaced by central heating systems. Homes grew larger, and tens of millions of families acquired refrigerators and automobiles. The higher living standards did much more than simply bring new material goods. Retirement by 65, or even earlier, became the norm. Life expectancy jumped. Importantly, in Western Europe, North America and Japan, people across society shared in those gains. Prosperity was not limited to the urban elite. Most people began to live better, and they knew it. In the span of a quarter-century, living standards doubled and then, in many countries, doubled again.

The good times rolled on so long that people took them for granted. Between 1948 and 1973, Australia, Japan, Sweden and Italy had not a single year of recession. West Germany and Canada did almost as well. Governments and the economists who advised them happily claimed the credit. Careful economic management, they said, had put an end to cyclical ups and downs. Governments possessed more information about citizens and business than ever before, and computers could crunch the data to help policymakers determine the best course of action. In a lecture at Harvard University in 1966, Walter Heller, formerly chief economic adviser to presidents John F Kennedy and Lyndon B Johnson, trumpeted the success of what he called the ‘new economics’. ‘Conceptual advances and quantitative research in economics,’ he declared, ‘are replacing emotion with reason.’

Wages and investment were private decisions, but Schiller hoped government guidelines would contribute to ‘collective rationality’

The most influential proponent of such ideas was Karl Schiller, who became economy minister of West Germany, Europe’s largest economy, in 1966. A former professor at the University of Hamburg, where his students included the future West German Chancellor Helmut Schmidt, Schiller was a centrist Social Democrat. He stood apart from those on the Left who favoured state ownership of industry, but also from extreme free-market conservatives. His advice called for ‘a synthesis of planning and competition’. Schiller defined his philosophy thus: ‘As much competition as possible, as much planning as necessary.’

Most fundamentally, Schiller believed that government should commit itself to maintaining high employment, steady growth and stable prices. And it should do this all while keeping its international account in balance, within the framework of a free-market economy. These four commitments made the corners of what he called the ‘magic square’. In December 1966, when Schiller became economy minister in a new coalition government, the magic square became official policy. Following Schiller’s version of Keynesian economics, his ministry’s experts advised federal and state governments how to adjust their budgets to achieve ‘equilibrium of the entire economy’. The ministry’s advice was based on an elaborate planning exercise that churned out five-year projections. In the spring of 1967, the finance ministry was told to adjust taxes and spending plans to increase business investment while slowing the growth of consumer spending. These moves, Schiller’s economic models promised, would bring economic growth averaging 4 per cent through 1971, along with 0.8 per cent unemployment, 1 per cent annual inflation and a 1 per cent current account surplus.

But in an economy that was overwhelmingly privately run, government alone could not reach perfection. Four or five times a year, Schiller summoned corporate executives, union presidents and the heads of business organisations to a conference room in the ministry. There he described the economic outlook and announced how much wages and investment could rise without compromising his national economic targets. Of course, he would add, wages and investment were private decisions, but he hoped that the government’s guidelines would contribute to ‘collective rationality’. Such careful stage management cemented Schiller’s fame. In 1969, for the first time, the Social Democrats outpolled every other party. The election that year became known as the ‘Schiller election’.

Schiller insisted that his policies had brought West Germany to ‘a sunny plateau of prosperity’ where inflation and unemployment were permanently vanquished. Year after year, however, the economy failed to perform as he instructed. In July 1972, when Schiller was denied control over the exchange rate, he stormed out of the cabinet and left elected office forever.

Schiller left with the West German economy roaring. Within 18 months, his claim that the government could ensure stable prices, robust growth and jobs for all blew up.

The headline event of 1973 was the oil crisis. On 6 October, Egyptian and Syrian armies attacked Israeli positions, starting the conflict that became known as the Yom Kippur War. By agreeing to slash production and raise the price of oil, Saudi Arabia, Iraq, Iran and other Middle Eastern oil exporters quickly backed the two Arab countries. Shipments to countries that supported Israel, including the US and the Netherlands, were cut off altogether.

Oil-importing countries responded in dramatic fashion. Western European countries lowered speed limits and rationed diesel supplies. From Italy to Norway, driving was banned on four consecutive Sundays in order to save fuel. The Japanese government shut down factories and told citizens to turn out the pilot lights on their water heaters. US truck drivers blocked highways to protest high fuel prices, and motorists queued for hours to top off their gasoline tanks. In a televised address, the US President Richard Nixon warned Americans: ‘We are heading toward the most acute shortages of energy since the Second World War.’

Faced with higher petroleum prices, economic growth in 1974 collapsed. Around the world, inflation soared. When oil prices receded, the world economy failed to bounce back. Double-digit inflation dramatically undermined workers’ wage gains. From 1973 to 1979, average income per worker grew only half as fast as it had before 1973. Help-wanted signs vanished as unemployment rose. The economic experts, only recently so confident that their rational mathematical analysis had brought permanent prosperity, were flummoxed. Stable economic growth had given way to violent gyrations.

The underlying problem, it turned out, was not expensive petroleum but slow productivity growth. Through the 1960s and early ’70s, across the wealthy world, productivity had risen a strong 5 per cent a year. After 1973, the trend shifted clearly downward. Through the rest of the 20th century, productivity growth in the wealthy economies averaged less than 2 per cent a year. Diminished productivity growth translated directly into sluggish economic growth. The days when people could feel their living standards rising from one year to the next were over. As the good times failed to return, voters turned their fury on political leaders. In fact, there was little any Western politician could do to put their economies back on their previous tracks.

To give a short-term boost to an underperforming economy, central banks and governments have a variety of tools they can use. They can lower interest rates to make it cheaper to buy a car or build a factory. They can lower taxes to give consumers more money to spend. They can increase government spending to pump more cash into the economy. They can change regulations to make it easier for banks to lend money. But when it comes to an economy’s long-term growth potential, productivity is vital. It matters more than anything else – and productivity growth after the early 1970s was simply slower than before.

Turning innovative ideas into economically valuable products and services can involve years of trial and error

The reasons behind slowed productivity growth had nothing to do with any government’s economic policy. The historic move of rural peoples to the cities, around the world, could not be repeated. Once masses of peasant farmers and sharecroppers had shifted into more productive work in the cities, it was done. The great flow of previously unemployed women into the labour force was over. In the 1960s, building thousands of miles of superhighways brought massive economic benefits. But once those roads were open to traffic, adding lanes or exit ramps was far less consequential. In rich countries, literacy had risen to almost universal levels. After that historic jump, the effects of additional small increases in average education were comparatively slight. If higher productivity growth were to be regained, it would have to come from developing technological innovations and new approaches to business, and putting them to use in ways that allowed the business sector to operate more effectively.

When it comes to influencing innovation, governments have power. Grants for scientific research and education, and policies that make it easy for new firms to grow, can speed the development of new ideas. But what matters for productivity is not the number of innovations, but the rate at which innovations affect the economy – something almost totally beyond the ability of governments to control. Turning innovative ideas into economically valuable products and services can involve years of trial and error. Many of the basic technologies behind mobile telephones were developed in the 1960s and ’70s, but mobile phones came into widespread use only in the 1990s. Often, a new technology is phased in only over time as old buildings and equipment are phased out. Moreover, for reasons no one fully understands, productivity growth and innovation seem to move in long cycles. In the US, for example, between the 1920s and 1973, innovation brought strong productivity growth. Between 1973 and 1995, it brought much less. The years between 1995 and 2003 saw high productivity gains, and then again considerably less thereafter.

When the surge in productivity following the Second World War tailed off, people around the globe felt the pain. At the time, it appeared that a few countries – France and Italy for a few years in the late 1970s, Japan in the second half of the ’80s – had discovered formulas allowing them to defy the downward global productivity trend. But their economies revived only briefly before productivity growth waned. Jobs soon became scarce again, and improvements in living standards came more slowly. The poor productivity growth of the late 1990s was not due to taxes, regulations or other government policies in any particular country, but to global trends. No country escaped them.

Unlike the innovations of the 1950s and ’60s, which were welcomed widely, those of the late 20th century had costly side effects. While information technology, communications and freight transportation became cheaper and more reliable, giant industrial complexes became dinosaurs as work could be distributed widely to take advantage of labour supplies, transportation facilities or government subsidies. Workers whose jobs were relocated found that their years of experience and training were of little value in other industries, and communities that lost major employers fell into decay. Meanwhile, the welfare state on which they had come to rely began to deteriorate, its financial underpinnings stressed due to the slow growth of tax revenue in economies that were no longer buoyant. The widespread sharing in the mid-century boom was not repeated in the productivity gains at the end of the century, which accumulated at the top of the income scale.

For much of the world, the Golden Age brought extraordinary prosperity. But it also brought unrealistic expectations about what governments can do to assure full employment, steady economic growth and rising living standards. These expectations still shape political life today. Between 1979 and 1982, citizens in one country after another threw out the leaders who stood for the welfare state and voted in a wave of more Right-wing politicians – Margaret Thatcher, Reagan, Helmut Kohl, Yasuhiro Nakasone and many others – who promised to tame big government and let market forces, lower tax rates and deregulation bring the good times back. Today, nearly 40 years on, voters are again turning to the Right, hoping that populist leaders will know how to make slow-growing economies great again.

More than a generation ago, the free-market policies of Thatcher and Reagan proved no more successful at improving productivity and raising economic growth than the policies they supplanted. There is no reason to think that the populists of our day will do much better. The Golden Age was wonderful while it lasted, but it cannot be repeated. If there were a surefire method for coaxing extraordinary performance from mature economies, it likely would have been discovered a long time ago.

Aeon

How statistics lost their power, and why we should fear what comes next – William Davies. 

In theory, statistics should help settle arguments. They ought to provide stable reference points that everyone – no matter what their politics – can agree on. Yet in recent years, divergent levels of trust in statistics has become one of the key schisms that have opened up in western liberal democracies. Shortly before the November presidential election, a study in the US discovered that 68% Trump supporters distrusted the economic data published by the federal government. In the UK, a research project by Cambridge University and YouGov looking at conspiracy theories discovered that 55% of the population believes that the government “is hiding the truth about the number of immigrants living here”.

Rather than diffusing controversy and polarisation, it seems as if statistics are actually stoking them. Antipathy to statistics has become one of the hallmarks of the populist right, with statisticians and economists chief among the various “experts” that were ostensibly rejected by voters in 2016. Not only are statistics viewed by many as untrustworthy, there appears to be something almost insulting or arrogant about them. Reducing social and economic issues to numerical aggregates and averages seems to violate some people’s sense of political decency.

Nowhere is this more vividly manifest than with immigration. The thinktank British Future has studied how best to win arguments in favour of immigration and multiculturalism. One of its main findings is that people often respond warmly to qualitative evidence, such as the stories of individual migrants and photographs of diverse communities. But statistics – especially regarding alleged benefits of migration to Britain’s economy – elicit quite the opposite reaction. People assume that the numbers are manipulated and dislike the elitism of resorting to quantitative evidence. Presented with official estimates of how many immigrants are in the country illegally, a common response is to scoff. Far from increasing support for immigration, British Future found, pointing to its positive effect on GDP can actually make people more hostile to it. GDP itself has come to seem like a Trojan horse for an elitist liberal agenda. Sensing this, politicians have now largely abandoned discussing immigration in economic terms.

The Guardian

The politics shaping the Nobel prize in economics. 

The prize matters to everyone, because of market liberalism, which advocates marketisation, deregulation, union-busting, financialisation, inequality, outsourcing of healthcare, pensions and education, low taxes for the rich, and globalisation. In the 1990s, this rightwing platform was endorsed by New Labour, Clinton Democrats, and their equivalents elsewhere.

Like market liberalism, economics regards buying and selling in markets as the template for human relations and claims that market choices scale up to the social good. But the doctrines of economics are not well founded: premises are unrealistic, models inconsistent, predictions often wrong. The halo of the prize has lent credibility to policies that harm society, to inequality and financial disorder.

In the meantime, the me-first assumptions of economics have led to corruption and tax inequity, and an escalating public mistrust of governing elites. Valid economic doctrine has come into disrepute. Disdain for experts, and disaffection with economic reasoning has energised a politics of the excluded, of Jeremy Corbyn, Bernie Sanders, Marine Le Pen, Donald Trump and now Brexit. The Guardian