I’ve argued that monetary policy is the fatal flaw of the right. In 1929 the US had an outstandingly efficient model. Banks were conservatively managed (although branching laws meant there were far too many of them.) We ran budget surpluses, trade surpluses, zero inflation, low unemployment, low taxes, etc. Tariffs were a bit too high, but nobodys perfect. And this policy regime was destroyed by the same people who had built it; conservatives. The left blamed the Depression on the economic model, not deflation. Then they proceeded to dismantle the model, which delayed the recovery for six years more than necessary.
In the 1990s Argentina finally started to move away from their statist model. There were signs they might follow in the footsteps of Chile. They achieved fast growth from 1991-98, even while bring inflation down from 171% to less than 1%. But the conservatives always seem to go too far. If low inflation is better than high inflation, then what’s wrong with deflation? What’s wrong is that deflation causes depressions, which opens the door to left wing governments. Sure enough the new Argentine government started moving back toward statism. Naturally they got a cyclical recovery after a sharp devaluation, but the statist policies will insure years more of economic under-performance in Argentina.
And now the once-promising Baltic States. This is from Ed Dolan’s blog:
In contrast, in the Czech Republic, the post-accession boom was accompanied by rapid appreciation of the Czech koruna, which strengthened from 33 per euro to 23 per euro in just 4 years. The strong currency kept import prices low and helped restrain inflation. Without the need to hold the exchange rate fixed, the Czech central bank was able to use monetary policy to avoid excessive wage increases or a housing bubble. When the crisis hit, the koruna depreciated as quickly as it had earlier strengthened, quickly restoring competitiveness. The recession in the Czech Republic was among the mildest in the EU.
The effects of the crisis on Latvia were entirely different. Without a devaluation, the only way Latvia could restore competitiveness was through deflation of prices and wages. This strategy, often called “internal devaluation,” has been extremely painful. The unemployment rate has soared to 22 percent as prices and wages fall. Meanwhile, unemployment in the Czech Republic has risen only slightly and has remained below the EU average throughout the crisis.
When will the right ever learn?
HT: Tyler Cowen