At last, the similarities between the present and the 1930s are being drawn. But the analysts fail to register the one big lesson from the Great Depression that could save the global economy. Result: expect the austerity measures of Western governments to drive nations into a collision from which there can be no recovery.
One of the best informed observers is Ambrose Evans-Pritchard. He writes in the London Daily Telegraph. His beat is the world economy, and I would recommend a close following of his articles. But he is incorrect to write in today’s column that “tight fiscal policy offset by ultra-loose money is the only option for Europe, the US, and Japan”.
There is an alternative. In Britain, it was written into the law books in 1931. Finance minister Philip Snowden re-introduced the direct tax on the rent of land (adopted in the 1910 budget but aborted in the face of aristocratic opposition). Snowden understood that a shift in taxes would have allowed Britain to maintain spending and consumption to offset the deflationary impact of the 1929 crisis.
Again, the landowners resisted implementation of the tax shift. The law was scrubbed by the Tories in 1934. So Britain, like the rest of Europe and the US, dug itself into a deeper depression from which there was no escape. Well, I don’t count as an escape the re-arming of nations for an all-out fight to the death just so that they could rebuild themselves from ashes.
The Value of Plan B
Today the Financial Times launches The austerity debate. Martin Wolf, its chief economics writer, sympathises with the “postponers” who fear a savage cut-back in public spending just as western economies appear to be recovering. Slash that spending, and the private sector will not compensate. So more job losses will follow.
Missing from this debate will be the Plan B resolution. Shifting taxes off wages would moderate pressure on the labour market. Fewer jobs would be lost. At the same time, the productivity gains from drawing revenue from the rent of land would kick in. These gains are huge. Some estimates for the US appear in Chapter 12 of my book 2010: The Inquest.
The Win-Win Strategy
By eliminating tax-induced distortions to the economy, the average annual increase of income per worker in the US would be over $8,500, according to Professor Nic Tideman of Virginia Tech University. And this gain would increase by an average of nearly $500 every year as the efficiencies of the new approach to raising the public’s revenue took hold. So curbing the public debt would be offset by expanded spending in the private sector.
This tax shift policy was endorsed by Martin Wolf last week in an article in which he graciously described my book as “a superb new jeremiad”. But will he drive home the lesson that postponing the austerity strategy is not an option? Time is not on anyone’s side. History moved fast in 1931. Hitler lurked in the wings, waiting for the democratic mandate…