Politicians and the Politics of Economics
Economic policy has the power to change millions through the actions of political leaders.
Politics and economics converge and sometimes collide when politicians feel that they have to promise and deliver some combination of improved living standards, lower inflation, lower taxes better public services, fiscal rectitude, and sometimes a cocktail of different – and perhaps incompatible objectives.
Hamilton: The Economic Founding Father
In the new United States, Alexander Hamilton (1755-1804) was at the centre of political and economic life: as a revolutionary solider; then a leading politician; as co-author of the US Constitution; and as an economic policy maker and thinker.
Hamilton set up the framework for America’s Industrial Revolution and private enterprise economy and for a system of trade protection to support manufacturing – widely copied elsewhere in the subsequent two centuries. He supported the industrial North against the agrarian South.
In 1781, as the end of the war drew near, he produced a blueprint for dealing with a fiscal crisis involving federal taxation, the creation of a national bank, the use of bond markets and foreign borrowing to raise credit for the government, and a system of public debt management.
He became the first Treasure Secretary in 1789.
He made explicit something we now take for granted the national debt will never be repaid.
He created a private national bank called the Federal Reserve.
Hamilton differed from Smith in what became known as the “infant industry” argument for the protection of manufacturers.
Peel: Free trade
Sir Robert Peel (1788-1850). He was responsible for a transformative shift in British policy from protectionism to free trade through the abolition of the Corn Laws.
The idea that trade was to be welcomed and promoted rather than tolerated emerged in the late sixteenth and early seventeenth centuries. There evolved a broad set of ideas, which we now call mercantilism, which was prevalent until Smith the economist, Richard Cobden and John Bright the political campaigners, and Peel the practical politician overturned.
The young Peel was a thoroughly conservative member of the ruling class in an age when Catholics were seen as a subversive minority deserving few rights. He positioned the Conservatives as the party of moderate reform.
Peel was a crucial influence in turning Britain unequivocally in the direction of free trade. Essentially four factors were involved: a decisive change in the intellectual climate and fashionable economics ideas; a successful political campaign, led by the Anti-Corn Law League underlying economic forces shifting power from landowners to urban consumers; as well as Peel’s own political influences and skill as Prime Minister and Leader of the Conservatives.
Britain has remained a largely free trading country for the 170 years since Peel’s reform.
Bismarck: The Economics of ‘Iron and Blood’
Otto von Bismarck (1815-1898). He had little interest in economic policy.
- He used a custom union – the Zollverein – to promote closer economic integration. There are many parallels with today’s European Union.
- He implemented a policy of protecting Germany’s emerging manufacturing and traditional agriculture through tariff protection.
- He introduced social protection for workers, the forerunner of European welfare states and ‘social Europe’.
Much of the heavy lifting was left to Prussian finance official, Rudolf von Delbruck.
Bismarck maneuvered his way into the center of Prussian court politics and in 1862, aged forty-seven, the King appointed him Prime Minister.
He moved rapidly, after the defeat of Austria, to promote the integration of Germany, economically and politically. Within a short period: there was a common currency, a central bank and a common code of commercial law.
Friderich List has often been credited with creating the intellectual framework for German industrialization and the use of protectionist trade policy.
The practical manifestation of Bismarck’s social welfare reform was a system of social insurance.it was his reply to the threat of socialism.
The habits of cartelization and cozy interest groups dominating policy have persisted until modern times despite the efforts of Ludwig Erhard and others.
Lenin: From War Communism to State Capitalism
Vladimir Lenin (1870-1924). At the end of his life, he also developed a model of what he called ‘state capitalism’: the New Economic Policy (NEP), creating market incentives for peasant farmers and utilizing domestic and foreign capitalists on a controlled basis. It was launched in 1921.
Lenin’s Marxism was city-based and worker-oriented.
Bolsheviks tried three big things:
- The first was the use of coercion and state direction as a tool of economic policy.
- The second was the priority to be given to the urban proletariat (over the peasantry and business and middle-class interests).
- The third objective was the rapid speed at which it was desirable, and necessary, to socialize the economy in contrast to the more gradualist Mensheviks.
One previously unthinkable step was the opening up of the economy to foreign investors in the form of concessions for resource sectors like oil and timber.
Lenina described the NEP as ‘a transactional mixed system’ and he used the term ‘state capitalism’ by which he meant a fusion of socialism and capitalism.
NEP influenced Deng Xiaoping who studied in Russia. He and Lenin both insisted upon that economic and political liberalization did not go hand in hand.
Roosevelt: The Keynesian Revolution Without Keynes
Franklin Delano Roosevelt (1882-1945) was the first major political figure who came to power almost exclusively to remedy an economic crisis.
His New Deal has come to be used as a model, or prototype, for large-scale government interventions in capitalist economies. His New Deal is frequently and rather loosely described as Keynesian.
In 1932 the US economy stood at its lowest ebb in modern history. One of the contributing factors to the Great Depression was the growth of protectionist sentiment, and the USA led the way with tariff increases and tougher immigration restrictions.
Irving Fisher developed a theory of “debt deflation”, explaining how an accumulation of debt can become a cause of the economic collapse.
The New Deal was essentially defined by the rhetoric of economic warfare and Roosevelt’s burst of energy when setting out a program of action in his first 100 days in office. He rescued banks and created a program of government and industry cooperation (NRA – National Recovery Act).
The Glass-Steagall banking bill was about the separation of investment banking from commercial banking.
One step to fight the deflation was to take the USA off the Gold Standard.
The most important element in the New Deal was the use of economic policy to promote recovery by boosting purchasing power: demand.
From a legislative perspective, he introduced a social insurance scheme, strengthened the rights of trade unions, and banking reforms, strengthened regulation of utilities, and progressive tax reforms.
Roosevelt’s economic legacy remains a subject of continuing controversy. To some he was ‘the savior of capitalism, others thought he greatly undermined the private enterprise system through high taxation and regulation.
Erhard: The Social Market and Ordoliberalism
Ludwig Erhard (1897-1977), was an economist of the social market, a social democratic ‘middle way’. He was also ordoliberal, believing in strict, state-imposed rules to govern a competitive market economy.
Two economists particularly influenced him: Wilhelm Rieger and Franz Oppenheim.
He was a supporter of cartels and a critic of competitive markets.
Erhard encountered the work of Wilhelm Ropke.
Early post-war German history was to become a contest between Erhard’s intellectually strong, but rather arid, economic liberalism and Schumacher’s idealistic and emotionally charged version of socialism.
Erhard saw three big evils: socialism; market distortion through cartels, controls, and other impediments to the market; and archaic laissez-faire.
The Americans were more inclined to German economic recovery than other winners of WWII.
Erhard got his position as the Director of the Administration for Economics in 1948. A new Deutschmark was created. Some price controls were lifted. But there was also a sharp surge in inflation. Also, unemployment rose.
He consolidated his political power around CDU.
Erhard’s limitations as a politician acted as a serious drag on his effectiveness.
The most obvious and measurable legacy of Erhard’s policies was the long period of strong growth from 1948 until the 1960s.
Erlander: The Social Democratic Model Made Real
Tage Erlander (1901-1985) was one of the four Social Democrat Prime Ministers in Sweden: Hjalmar Branting, Per Albin Hansson, Olof Palme, and Erlander.
When those of left-center political persuasion are presented with a system that satisfies their politics and works economically they will often cite Sweden.
The Stockholm School of Economics – inspired originally by Knut Wicksell was very influential in Sweden.
Erlander identified with the work of Eduard Bernstein and not Marx or Kautsky. He also often cited J.K. Galbraith and was keen on Keynesian economics of the active state.
The Swedish Social Democrats had a long history, they were aligned with Lenin’s Marxism. Hanson developed a model of social control of the economy through centralized pay bargains and labor regulation rather than nationalization. This world was described, in a popular book at the time (1936) by Marquis Childs, as the Middle Way.
Erlander won six elections from 1948 forward. Their share of votes was always between 46 and 49 %. The main component of his substantial achievements was the step-by-step enlargement of the welfare state.
He believed that equality was compatible with Sweden’s market economy. His go-to words were solidarity, cooperation, and community. For him, the key to the success of the welfare state was economic growth.
The centralized and union-dominated labor bargaining system, leading to high wages, had the effect of driving inefficient firms to the wall; but this was tolerated as a necessary consequence of rising productivity and international specialization through trade. The system was called the Rehn-Meidner model after the two economists from the Trade Union Federation LO helped to develop it in 1931 under Erlander’s political leadership.
He refused to set up an upper limit to the share of public spending in the economy and continued to argue that public services and welfare spending enhanced personal freedom.
Despite compromises and some retrenchment, much of the Swedish model remains intact today. There is a generous social safety net and universal benefit financed by taxation.
Peron: Peronism and Economic Populism
Many politicians use the language of populism: claiming to speak for the ‘people’ against the ‘elite. One populist movement that has proved remarkably durable was Peronism in Argentina.
Before 1930, Argentina was seen as part of the rich, developed world with the world’s eighth-highest per capita income. A liberal system, great exports, big influx of capital, mainly from the UK (railroads and agriculture).
By the start of the twentieth century, there was a growing tension between the traditional elite and a rapidly expanding working class whose numbers were being swelled by immigration. Argentina was hit by the Great Depression. Public servants were unpaid. The army intervened. One member was also Juan Peron (1895-1974). He had his own coup, thirteen years later.
He admired Mussolini, he shared the fascist distaste for both international capitalism and communism.
Peron won the 1946 elections. He shifted power to labor and the trade union movement. The second strand was economic nationalism. He established a state monopoly over foreign trade.
The Argentine economic thinker who inspired politicians was Raul Prebisch, the ‘Keyness of Latin America’. His framework was ‘desarrollo a dento’ (inward-looking development).
Public spending surged under Peron from 20 to 45 percent of GDP.
The system Getulio Vargas from Brazil developed, is variously described as ‘national capitalism’ or ‘corporatism’. It was similar to the systems of Peron, Mussolini, Salazar or Franco.
Peron was a victim of a coup himself. But Peronist politics came back after huge inflation and economic problems.
Park: The Development State and Hypergrowth
South Korea’s growth and transformation were remarkable. Park Chung-hee (1917-1979) ruled South Korea for eighteen years after the military coup in 1961.
Park is broadly recognized as the author of The ‘Miracle on the Han River’. He was influenced by ideas from Japan’s Meiji dynasty that reformed and modernized Japan from 1868 onward.
Park used the phrase ‘guided capitalism’ for his system. It was an attempt to reconcile free enterprise ideology and the military instinct for command and control.
President Park’s vision was to make Korea a ‘second Japan’.
The tension between the inflationary dangers of hypergrowth and the pain of stabilization would become a recurrent theme in Park’s Korea. There was one particular theme of Meiji Japan that was to prove invaluable when applied in Korea: adapting the Japanese zaibatsu model to Korea’s equivalent chaebols. Hyundai, Samsung, and LG were the most famous chaebols.
The deal was that the chaebols would follow state-formed policy objectives and take risks in investing in big ambitious projects in the knowledge that the state stood behind them with capital and to cover political risk.
Much of the early development politics was about the problem of how to transfer the relatively unproductive labor and the savings of the rural population into industry.
In 1972 there was a crisis, but Park increased production and export based on loans and it worked until 1979. When the next crisis hit, there was some unrest between Park and the director of KCIA, and Park was shot.
Lee: The Eclectic Economics of Lee Kuan Yew
Lee Kuan Yew (1923-2015). He was the Prime Minister of Singapore from 1959-1990. Singapore is a remarkable economic success story.
He has been lionized by people who would be characterized as neoliberal from Margaret Thatcher and Ronald Reagan to numerous business leaders. But he was a man of the left and acted as a supporter of the British Labour Party.
He largely delegated economic thinking and policy development to his former school tutor and friend Goh Keng Swee.
The Singapore of Lee’s youth was Britain’s main commercial and naval port in East Asia. He went to school in the UK. He was actively involved in the 1950 general election campaign. There were two fundamental problems with politics in Singapore which preoccupied please for the next decade. The first was that the Chinese-educated population was heavily infiltrated by the communists. The second problem was the relationship with the Malays and in particular with the ethnic Malay leadership in Malaya.
The Malays did not want Singapore. In 1965 they effectively expelled Singapore from Malaysia.
There is a particular issue for Singapore in that, like Ireland and Luxembourg, it has become a hub for multinational companies that declare profits there for tax reasons or because it is a headquarters.
The Singapore model was to facilitate growth through a strong government machine and to keep Singapore open to trade and investment. This strategy relied heavily on the state being efficient a great deal of effort was made to entice the brightest and best into public sector service to be ruthlessly meritocratic in appointments and to remove any incentive to corruption.
There was a tradition of free trade capital flows and immigration going back to the foundation of the colony by the British early in the 19th century. Where Singapore was so different in its development model from other East Asian countries was its heavy reliance on multinational companies especially those from the USA and Japan.
The reasoning was that these companies would bring the latest technology to Singapore their management systems and marketing know-how from which local people would learn.
Another line of criticism was that the Social Democratic ideal gradually disappeared. Labor and consumer rights and wider human rights were treated as second-order issues. Strong single-minded government because became authoritarian.
It was the United Nations through its development program UNDP that has key external influence on policy.
List government provided through the Housing Development Board good quality houses.
Public corporations were set up to invest in strategic sectors such as retail banking, telecommunications, transportation, shipping, shipbuilding, and land.
Over the 70s and 80s as state power increased so did the interventionist tendency. If Lee had a unique role among political figures who transformed economic thinking it was to demonstrate the crucial role of active and effective government in a capitalist economy. He realized that if Singapore was to progress as a service-based highly productive economy it had to succeed in creative industries and that required a less controlling state.
Thacher: Thatcherism and Its Cousin, Reagonomics
Margaret Thatcher (1925-2013) could claim to have ‘blazed the trail’ for Reagan.
In the 1980s and 1990s, there was a seismic shift in economic policy in many parts of the world. The transformation of communism into capitalism in the USSR and Eastern Europe; the Washington consensus in Latin America and the market-based reforms in China and India.
The importance of Thatcher and Thatcherism is that a powerful connection was made between economic forces and underlying moral and political values.
Factors that allowed Thatcher to introduce her politics were: high inflation, high unemployment, inflation spilled over into imbalances in trade, and the relatively slow growth of productivity.
Thatcherism emerged through a sequence of major high-profile campaigns: the battle against inflation, the curbing of trade unions, privatization, and other major deregulatory measures. The requirements of strict monetary policy also required that interest rates should remain high. The strong pound had a devastating effect on manufacturing exports. Inflation fell rapidly and was back in single figures by the spring of 1982. The second plank of Thatcherism is sometimes called supply-side economics, the deregulation of markets. The third, perhaps the most significant and recognizable, element in Thatcherism was privatization.
It was in Thatcher’s second term that major sell-offs got underway with British Telecom.
Deregulation was also a key element in Thatcherism, although it proved difficult to reconcile with prioritization in the case of utilities.
To describe Thatcherism in terms of free market economics is largely to miss the point or half the point.
Reaganomics is usually described as having four simple principles: lower marginal tax rates, less regulation restrained government spending, and non-inflationary monetary policy.
Ronald Reagan (1911-2004) came to the presidency as a standard bearer for conservatism.
There is a continuing argument in the US about what Reaganomics actually amounted to. There was extensive deregulation in areas like telephony, energy, and banking, although much of this had been initiated before Reagan.
Thatcher made a crucial difference. She stuck with controversial and unpopular policies when others would have backed off.
The wider international impact is more debatable. Perhaps the most grievous blow against Thatcherism has come from one of its less highlighted elements – nationalism.
Deng: China’s Economic Architect
Of all the characters reviewed in this book Deng Xiaoping (1904-1997) contributed the most in terms of his impact.
When, in 1979, Deng assumed A dominant role in the post-Mao leadership of China, Chinese peasants, the vast majority of the population, had a per capita income of $40 a year.
Deng had no background in economics or business, and he never studied at university. He was a graduate of the University of Life. He believed in evidence and experiment: ‘crossing the stream by feeling for the stones’.
His approach was eclectic, radical, and open-minded and explicitly encompassed market economics and much of what we would regard as capitalism.
In 1959, Mao embarked on a policy of commune-based mass mobilization to generate’ backyard industrialization’ at breakneck speed, abandoning a balanced approach incorporating agriculture.
Deng was a victim of the Cultural Revolution and he was placed under house arrest for two years. In 1976 he was again in problems. But Mao died that year and the Gang of Four was arrested.
Deng took power and started with reforms. The main initial push towards economic modernization came from deepening ties with leading developed countries. The first target was Japan and Deng organized an official visit.
Deng created the special zones in Guangdong and Fujian provinces. The zones would be given the flexibility to experiment with different ways of doing things.
Deng was a ‘builder; Cheng Yung was a ‘balancer’.
In early 1988 Deng encouraged the idea of lifting the remaining price controls. Inflation surged. The experiment was stopped.
Deng economic changes did spark some democratization tensions. 1989 happened. Deng had personal responsibility for ordering the crackdown and he never expressed any regret.
He established a model of development – a social market economy – which worked. Unlike Korea and Taiwan, China has not sought to liberalize its politics. Deng also established within his model an important element of institutional, long-term stability and continuity: a leadership transition.
Manmohan Singh: The Quiet Reformer
It could plausibly be argued that India often grew faster, in spite of rather than because of, government ministers of whatever stripe.
If any individual stands out as having liberated India’s growth potential it is Manmohan Singh (1932- ), Finance minister from 1991 to 1996 and Prime Minister from 2004 to 2014.
As with Erhard, Manmohan Singh is one of the very few economists to have reached the top of the political greasy pole. Unlike Erhard, he was not a classic economic liberal but was immersed in ‘left Keynesian’ economics at Cambridge.
He was born in what is now Pakistan and, when he was a teenager, his family was uprooted and moved up to the Indian side of partitioned Punjab.
India’s approach to economic policy has been shaped by the different strands of the Independence movement, which was in turn shaped by India’s experience as part of the British Empire. Nehru’s approach was central planning. Gandhi’s approach was the importance of the Indian village. Building up agriculture and village industry, rather than heavy industry, to provide employment and rural development more generally.
In the first decades after the war, the central planning approach seemed to work. But the first five-year plan was a disaster. Indira Gandhi’s economic policy took a left turn in response to this crisis. Things did not improve.
Her elder son, Sanjay, was obsessed with the then-fashionable idea that India suffered A Malthusian problem – poor people had more children than they could care for.
The beginning of the 1980s marked something of a turning point. The economy had stabilized as had politics.
Corruption became commonplace at all levels and rarely prosecuted. The time was ripe for reform. Who would do what was political and necessary to make it happen?
After a period of the Gandhi family running India, Narasimha Rao became Prime Minister. He invited Manmohan Singh to become Finance Minister.
The budget was subject to painful retrenchment and the rupee was devalued. There was more extensive deregulation of Trade and Industry. Quotas on imports of capital goods and raw materials were scrapped and tariffs slashed. Foreign investment was welcomed. The most sensitive issues – like the privatization of state assets or freeing up the highly regulated labor market or the land market – were largely left for another day.
In the 2004 election, the Congress party won. Its leader Sonia Gandhi realized that Manmohan Singh was the right Prime Minister.
Between 2004 and 2011 India achieved a remarkable growth of 8.5% per annum. As Prime Minister and architect of the earlier reforms, Manmohan Singh attracted international recognition.
In 2014 a new government was formed led by Narendra Modi.
Balcerowicz: Big Bang Theory and Practice
The biggest economic and political transformation in modern times has been the collapse of communism in the Soviet bloc. Poland stands out for several reasons. It is the most populous country in Eastern Europe. And the biggest economy. In 1989 and 1990 inflation hit 600%. Poland adopted a ‘Big Bang’ approach to economic transformation in the 1990s. The country’s economy has grown without interruption – even during the global economic crisis – for 25 years.
The Balcerowicz Plan was launched by a Solidarity government under Prime Minister Tadeusz Mazowiecki. Economic direction was given by Leszek Balcerowicz (1947- ).
It is difficult to understand the development of modern Poland and its political and economic transformation outside the context of Polish nationalism and its link with Catholicism.
The economic legacy of communism in Poland was structurally similar to that of the rest of Eastern Europe. Poland had a relatively large peasant sector. Support for the radical Balcerowicz Plan was based in large part on a broad public acceptance that the system was broken and required fundamental change rather than tinkering.
There was large-scale spontaneous privatization with the theft of public assets. Corruption became endemic.
The notion of moving radically, rapidly, and decisively was strongly held by the political leadership of Solidarity.
The Balerowicz/Sachs Plan was launched on 1. January 1990.
The immediate priority was stabilization to stop hyperinflation, which required firstly drastically reducing the subsidies that underlay the large budget deficit, and secondly tightening the money supply. Price controls were to be lifted, providing the main mechanism for a market economy to operate.
Trade was rapidly liberalized to establish competition. The currency was devalued. Privatization was a key objective.
The shock was big. But if there is to be pain, it is better to get it over with quickly to avoid losing the patience of the public. Richard Layard said that it does seem that the worst place to be is in between capitalism and communism, and the best policy is to hasten through the phase as rapidly as possible.
Abe: Japan Pioneers Abenomics
Japan was always catching up with the West. In the nineteenth century and after WWII. In 1989 a major financial crisis hit Japan. But Japanese leaders understood sooner than anyone else the nature of the crisis, that would hit the rest of the world twenty years later.
The Japanese had to find a solution to the demographic challenge of ageing, causing a declining population and workforce.
Abenomics is the public face and personalization of an economic strategy summarized in the imagery of three arrows: monetary and fiscal expansion together with structural reform.
After WWII Japan’s economy was very regulated. Households were encouraged to save, and their savings provided the capital for business investment on a large scale.
Money supply and investment in assets created a bubble in asset prices. Hyman Minsky explained how capitalist economies progress from cautious to daring to reckless behavior through banks lending against property based on a bet that house prices will continue to rise and that interest rates will remain low enough to service the loan. This is essentially what happened in Japan.
Abe came to power after the crash in 1989. The crash was softened by government intervention. After the correction, the government raised taxes and cut spending in 1997. In 2001 Quantitative Easing (QE) was launched in Japan.
Abe was able to form a stable LDP government around his economic package.
Hobbit was a skillful politician who realized that counterintuitive ideas – running fiscal deficits to improve the public finances; and increasing government debt in order to reduce it – have to be carefully packaged. He increased spending, introduced QE, and increased competition, reforming labor markets and liberalizing trade with neighbors. And he devalued the currency.
Trump: Trumponomics, Economic Nationalism and Pluto-populism
The America First appealed to a large section of his supporters.
Trump had strong gut instincts but little expertise.
In the case of China, Trump’s hostilities led to the US imposing a wide range of tariffs on Chinese goods.
One long-lasting consequence of both Trump’s trade war and COVID-19 is a decoupling of Chinese and US supply chains which are based on advanced technology.
There were several specific actions to stimulate growth including tax cuts. The corporate taxes were cut from 35% to 20%.
Trump saw globalism as a weakness.
Sixteen Politicians: Sixteen Varieties of Economics
Economic policy is not just applied economics; it is applying economics in a world where political constraints, incentives, and outcomes are quite different from standard economic models of consumers and firms.
There is a special place in the heaven of economics for those leaders who achieved major economic transformation while sustaining their political popularity. Few did. Roosevelt, Thatcher, Erhard, Lee, Erlander.
The economics of politicians matters more than ever.
