The Rhyme of History

Productivity gains through technological advancements. New economic models. Business cycles smoothed by central banks. Digitalization, modern monetary theory, low-interest rate policy – what reads like a blueprint for the post-coronavirus pandemic era in reality describes the 1920s decade. People and the economy back then had been suffering the devastating effects of World War I. Further compounding the woes, the Spanish flu took an estimated death toll of up to 50 million victims. But national economies in the USA and western Europe slowly began to recover at the start of the 1920s. This brief period of prosperity was called the “Roaring Twenties” in the USA, the “années folles” in France, and the “Goldene Zwanziger Jahre” in Germany. People in Western metropolises started celebrating exuberantly again. The advent of assembly-line manufacturing enabled industry to produce a wide array of consumer goods for the masses. Real per capita income in the USA rose more than 4% per annum in the 1920s. Leveraged stock-market trading fueled a theretofore unprecedented equity boom, but it abruptly came to a crashing end in October 1929. The party was over. The hangover lasted 25 years. It took the Dow Jones Industrial Average until 1954 to claw its way back to its erstwhile all-time high.

Is history now repeating itself? Not necessarily: the welfare state in the Western world, for instance, is much better endowed today than it was in the Roaring Twenties. This has proven beneficial in the COVID-19 crisis, as this is likely to cushion potential adverse impacts despite the increase in public debt. Moreover, central bankers already applied the lessons learned from 1929 to the great financial crisis of 2008-9 by slashing interest rates or holding them low instead of raising them at the worst possible moment as was done in 1929. Finally, the vital financial sector is more strictly regulated today, and banks’ balance sheets are much more resilient than they were in the aftermath of World War I. And yet there are parallels between the Roaring Twenties and today, or in the words of Mark Twain, “history doesn’t repeat itself, but it often rhymes.”

So, what’s rhyming these days? To me, quite clearly, it’s the growing disequilibriums. Prominent mention should be given here to widening imbalances in the distribution of income and wealth within Western industrialized countries and between developed and emerging-market countries. Financial repression caused by sustained negative interest rates is steadily eroding the middle class, the backbone of every society. A similar situation was observable in the Roaring Twenties, which were “roaring” really only for a small minority. Back then as well, there were many more losers than winners. The digitalized economy is admittedly giving rise to a lot of exciting jobs these days, but they are being overshadowed by newly created poor-paying ones in online retailing logistics, for example. A new lower class could come into being, this time in the service sector rather than on the assembly line. Moreover, the structure of global value chains is increasingly coming under criticism. A potential deglobalization process would further exacerbate worldwide economic disparities. And finally, it’s questionable whether “Generation COVID”, i.e. young people currently in education or training, will have good chances in the job market of the future.

What now can be done to prevent the forthcoming boom from ending in another bust? A crucial factor will be how we deal with the inequalities described above. The expected recovery in economic activity should be driven by genuine productivity advancements and not by perpetual deficit spending. The economy must be freed from state dependency as quickly as possible. Structural transformation should be facilitated, but its adverse impacts should be mitigated. The Roaring Twenties marked the start of the age of oil. The 2020s herald its end. This unprecedented transformation process is comparable to open-heart surgery. It should be approached resolutely and ambitiously, but imperatively also in a socially responsible way. Finally, there is no way around deleveraging central-bank balance sheets and government budgets, but this too must happen gradually over time in a planned manner.

A look back at the times 100 years ago doesn’t provide a sure-fire master plan for success. But anyone who thinks that the laws of economics and human nature suddenly no longer apply in the post-COVID era is falling prey to a fatal error.