Thursday, September 23

Another 20 crazy? We need to do better than that | Dan davies

meEconomic history is not like normal history: it does not repeat itself like a sham and it does not rhyme. Technology advances, political and legal systems develop, debtors become creditors and vice versa. But some economic structures stubbornly remain the same. As Karl Marx said, we make our own history, but not in circumstances of our own choosing. Using the past to guide decisions in the present requires understanding what has endured and what has changed, and having a sober view of our history, not simply replicating the supposed golden ages of the past.

For that reason, we should not aspire to repeat the “roar 20s“Just because the decade begins with two and (hopefully) we are reaching the end of a pandemic similar to the Spanish flu. Despite the name, the roaring 1920s weren’t all that great for most of the population. Growth was slow and falling prices of consumer goods hid growing inequality by making everyone feel rich, just like the decade before the financial crisis of 2008. In both the 20th and 21st centuries, a period of growth ended with a financial collapse, a lost decade, the rise of right-wing populism, and leading countries that turned their backs on the commercial blocks.

But here the historical comparison quickly ends; This time, we have not recently survived a major European war, and we do not seem to be heading for another. If we want to understand the present, let alone think about the future, we have to start asking ourselves not what our current position has in common with the cycles of the past, but what is completely unprecedented.

Take interest rates, which have rarely been this low. The “Treasury opinion” – that increased government lending necessarily causes interest rates to rise – is in tatters thanks to the pandemic. The old arguments of the austerity period have been discredited; the usual suspects are still trying to pressure them, but voters are not convinced.

The truth is that, over the course of the pandemic, we have done all the things with public spending that everyone had warned against, and the sky has not collapsed. The Biden administration seems to have understood this; is about to approve a $ 3.5 trillion (£ 2.5 trillion) spending package on infrastructure, healthcare and social security. Not that I am so naive as to believe that our Treasure it will change the way you think: finance ministries always see their role in controlling spending departments. But they just aren’t as influential as they used to be in politics. Now that all the leading industrial countries have had to run record deficits and finance them with quantitative easing, the genie is out of the bottle.

The fear of rising interest rates has hampered our ability to think about the problems we face. One of the great intellectual tragedies of our time is that we cannot understand and confront the vast inequalities that have come to define Anglo-Saxon politics without analyzing the role of housing wealth, and we cannot understand house prices without understanding how. are affected by interest rates. Apparently no one in charge understands both.

The relationship between home prices and interest rates is almost insultingly trivial when you get it. If the tenant of a house pays £ 20,000 a year for rent and the house costs £ 1 million, then from the owner’s point of view the house is like a savings bond that pays 2%. While the interest rate on savings it is 0.5%, the owner is happy; in fact, you could buy more million pound houses if you can. But if the rates go up even 2-3%, the house becomes a worse deal than the bond. As a consequence, homeowners would likely sell their homes, lowering the price until some kind of stable relationship was established. Instead, house prices have soared 30% above their peak before the 2008 financial crisis.

What does this mean for politics? In my opinion, everything. It means that the real estate wealth of the boomer generation is largely goblin gold. They cannot sell it at a price close to the current one, there are not enough buyers, and even a small normalization of the economic cycle would make it disappear. Your interest in home profitability as an asset class makes sense when compared to the rising cost of care in later life. But this fear cannot justify the damage it causes to generational income.

In fact, if we are determined to navigate the present with the help of the past, perhaps we should go back not to the 1920s, but to the period known in France as the glorious thirty and in Germany as the Economic miracle (economic miracle) – the post-1945 flourish that rebuilt the continent. During those years, people asked a question that is still relevant today: if we could spend all that money on a war, or in our case on a pandemic, why not invest to make society flourish? The last time politics was made on that basis, Europe enjoyed an economic miracle.

The opportunity we face should not be underestimated. If there is the possibility of opening the necessary political space to recover full employment as a goal, and to view rising wages as a sign of success rather than an ominous sign, then it must be taken with both hands. As the saying goes, whatever your favorite social policy is, full employment is probably the best way to go. And if, over time, that means we get modest inflation and interest rates start to rise, what happens to that?

Canadian-American economist John Kenneth Galbraith said: “All great leaders have had one characteristic in common: it was the willingness to unequivocally confront the greatest anxiety of their people in their day.” For more than a decade, the developed world has seen the growing wealth and security of older people in the face of stagnation and growing precariousness of the younger generation. Leftist politicians have done well to the extent that they have tackled this trend, and poorly to the extent that they have avoided it. As we enter the 2020s, delayed by two years of isolation, the challenge remains to face the great heartaches of our time with the optimism of the postwar economic miracle, not the outdated tools of the “roaring 20s”. Only then will we ensure prosperity for all.

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