Glenn A Knight

Glenn A Knight
In my study

Friday, April 10, 2009

A Phony War on the Economic Crisis?

On March 12 of this year, a friend sent me (and some other friends) an article by one David Ignatius:

A 'Phony War' On the Crisis
By David Ignatius
Thursday, March 12, 2009; A19
For all the legislative commotion surrounding the economic crisis, we are still living in the equivalent of "the phony war" of 1939 and 1940. War has been declared on the Great Recession, but it's basically politics as usual. The bickering and mismanagement that helped create the crisis are continuing, even though we elected a president who promised a new start.

History tells us that phony war doesn't last forever and that when it ends, all hell breaks loose.

First, don't even ask me why it has taken me almost a month to respond to this entry in the "panic-now-and-avoid-the-rush" sweepstakes. I've had other things on my mind.

Before we get to the propriety of Mr. Ignatius's reasoning by analogy from the phony war of 1939-40 to today's recession, I have to note that even as regards wars, history doesn't teach us anything like the lesson Mr. Ignatius claims that it does. I can think of two instances in which there was a longish pause between the declarations of war and the onset of hostilities, both of which were at least partly due to timing. One is the "sitzkrieg" alluded to by Mr. Ignatius, and the other is the period from the election of Lincoln until the firing on Fort Sumter in Charleston Harbor. In both cases, part of the hesitation was due to winter weather. In the case of the Civil War, the South was not prepared to initiate hostilities until Lincoln actually took office (March 4, 1861).

On the other hand, there was the Potato War of 1777-1778, the War of Jenkins's Ear, the Cuban Missile Crisis, and any number of other instances in which the war looked like getting off to a good start, and then it just petered out. The War of the American Revolution, for example, had several periods of less than active hostilities, alternating with periods of frequent battles. The difference was usually marked by an attempt by the British to go somewhere in the colonies by an overland route.

Now, as to the analogy with the economy, Mr. Ignatius seems to be concerned about the deficit. Why, we'll spend our way into the poorhouse! The Chinese own half the country now, and the Arabs own most of the rest! The next thing you know, the financial structure will collapse and we'll all be doomed!

Walter Russell Mead, in his excellent work God and Gold: Britain, America, and the Making of the Modern World, points out that as soon as the British made their national debt a permanent part of the financial landscape, there were those who were sure this would be the ruin of the nation. Mr. Mead quotes Thomas Babington Macaulay as follows: "At every stage in the growth of that debt the nation has set up the same cry of anguish and despair. At every state in the growth of that debt it has been seriously asserted by wise men that bankruptcy and ruin were at hand. Yet still the debt went on growing; and still bankruptcy and ruin were as remote as ever."

Mead also points out that the British national debt was large by today's standards. "At the end of the American Revolution, the British national debt stood at 222 percent of BDP; at its peak in 1822 it was at 268 percent of BDP.

Actually, the national debt was a great source of strength, and the bigger it grew, the more closely it tied the nation to its government. As Mead points out, Alexander Hamilton did very well indeed to imitate the model of British finance when he nationalized the debt and set up the First Bank of the United States.

Before we decide to follow Mr. Ignatius over the cliff of despair at the lack of businessmen in the Obama administration, let us note that businessmen are the one who create crises and recessions. From time to time they have to be rescued from the consequences of their optimism.

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