Published in Business Spectator (Melbourne), 23 February 2009
With much fanfare Channel Ten has started screening the new series of Life on Mars, in which a policeman is thrown back into the 1970s and struggles to understand what’s going on. His new environment looks very outdated and yet quite recognisable at the same time.
Economists these days know the feeling as they are on a similar time travel back into the 1970s. The global financial crisis may not have brought back bell-bottoms and platform shoes, but the economic debates sound remarkably similar. Wherever we look these days, governments around the world are deploying the same old recipes that were used during the oil crises of the 1970s.
Fiscal stimulation is on the menu once again, usually financed through large budget deficits. The ideas of British economist John Maynard Keynes are back in fashion. President Obama boldly declared that there was no disagreement that government action was needed to “jumpstart the economy”, echoing Richard Nixon’s famous dictum “We’re all Keynesians now”.
In Germany, too, old-style economic policies are back en vogue. The government has already passed two fiscal stimulus packages, worth a total of more than $120 billion. Even those politicians, who were responsible for the country’s economic policy in the 1970s are much in demand again, first and foremost former West German chancellor Helmut Schmidt. The social democrat, who just celebrated his 90th birthday, has eclipsed current chancellor Angela Merkel as the country’s most popular politician.
As co-editor of the weekly Die Zeit, Herr Schmidt continues to comment on the state of Germany, the economy and the world as such. In his spare time he gives speeches and writes books, on average at least one treatise a year, and never leaves the slightest doubt that only he knew precisely what to do.
But then again, Herr Schmidt has never been different. There is a famous anecdote in which the later chancellor Gerhard Schroeder was once called to his office where he found Schmidt shouting to US president Jimmy Carter and Soviet leader Leonid Brezhnev over the phone. After he had angrily hung up he said to the baffled Schroeder “I always have to explain the world to these arseholes!”
Schmidt is back as one of those living fossils who made politics in the 1970s and now claims to have the answers for the 21st century. But the recipes he advocated in Die Zeit sounded awfully familiar, among them an international framework for financial regulation accompanied by big financial stimulus packages to strengthen aggregate demand.
What Schmidt forgot to mention: His recipes are not new, nor were they successful in the past. On the contrary, his own policies show the long-term dangers of such policies.
The 1970s had seen the collapse of Herstatt Bank, a small privately owned bank in Cologne. As a result of this banking failure, the then German government under Helmut Schmidt initiated a meeting of the G10 countries. This resulted in the institution of new banking regulations under the supervision of the Bank for International Settlements in Basel, later known as Basel I.
But perversely, these new regulations encouraged shifting credit into off-balance sheet vehicles. As we now know, this was paving the way for the current financial crisis. Seen from this angle, a new international coordination of financial regulation that started with the best intentions generated long-term side-effects which were never anticipated. There is no guarantee that new international regulatory regimes would be any better than that.
In fiscal policy, Herr Schmidt’s ideas never worked, either. As finance minister from 1972 and chancellor from 1974 until 1982 he was the architect of the country’s fiscal policy at the time of the oil crises. His government tried to counter the economic shocks with billions upon billions of deutschemarks that were spent on infrastructure projects, energy saving measures and urban regeneration.
While the economic growth results remained meagre, the combined efforts to stimulate the German economy had only one lasting effect: Public debt as a percentage of GDP tripled between 1972 and 1982. When Schmidt left office, he also left more than 300 billion deutschemarks in debt to his successor.
Helmut Schmidt’s reputation as an economic genius was not helped by his failure to deal with rising unemployment either. He believed that he could choose between the evils of unemployment and inflation and stated that he would prefer five per cent of the latter over five per cent of the former. In the end, however, he got both. It is because of such policy blunders that the newspaper Die Welt once labelled Schmidt’s social-liberal coalition as the government with the worst economic policy in the country’s post-war history.
In Germany, but not only there, the economic ideas of the 1970s are celebrating a revival. But why would anyone want to retry the old recipes for more regulation and fiscal stimulus when they so spectacularly failed back then? It may well turn out that watching Life on Mars is a better way to indulge in 1970s nostalgia.