August 6, 2013 4:26 pm
But as was the case from the 1840s until the first world war, today’s convergence and competition – and the volatility that results – can and I believe will persist for a long time without globalisation breaking down. It held up for a long time then because, even as there were arms races and conflicts, France and Germany, let alone the UK and the US, had an interest in maintaining the status quo. And, as then, today’s dominant powers wish to maintain their legitimacy against non-state actors, including terrorists and revolutionaries, and preserve cross-border flows of trade and finance.
Furthermore, politicians are responsive to their own upper middle classes, whose wellbeing depends upon maintaining globalisation and keeping international disputes within limits. These groups are also creditors whose desires for price stability, combined with the pressures from currency competition, creates strong incentives for keeping inflation low. On average, such motivations will dominate over temptations to inflate their problems away. So, just as most countries usually adhered to the gold standard over a century ago, they will stick with independence for their central banks and fiscal consolidation now.
There was little or no response to recurring spasms of protest or calls for radical change by low-skilled workers in the 19th century, except when mass movements were assimilated into mainstream political parties with support from the elites. Something similar is at work today, with the protests of southern Europe and the demands of the Occupy movement largely ignored by policy makers catering to the voters of the (older) bourgeoisie.
The Old Normal is thus a tale of the global economy returning to unfettered markets in many ways, and – at the national level – to more volatile economic conditions with slower average growth as a result. This is a situation which I am predicting, not endorsing.
While domestic politics and international relations have changed greatly since 1914, the creation of safety nets and welfare states (even if now curtailed), and the development of nuclear deterrence among the major powers only strengthen the status quo bias of the current governments.
The Old Normal is not nice, but it is likely to last.
The writer is president of the Peterson Institute for International Economics