23 Apr GERMAN MIRACLE A LESSON FOR US
James Paterson – The Australian – Thursday 23 April
The emergency measures put in place to control the spread of coronavirus are necessary, but history shows that radical economic interventions imposed in times of crisis should be removed as quickly as possible once the crisis passes.
Extraordinary times justify extraordinary measures, and in order to combat this pandemic governments across the world have implemented restrictions unthinkable only weeks ago.
They will be with us for some time yet, but they should not remain in place a day longer than is necessary — and not just because doing so would be fiscally unsustainable.
Many of the economic interventions have strong parallels in history. In size and scale, and in their departure from policy orthodoxy, they are comparable to the measures introduced across the Western world during World War II.
Then, as now, we reacted to an international crisis with a unified national response. Companies are donating services and factories are being repurposed to produce valuable medical supplies, just as the private sector was redirected to aid in the war effort.
As during WWII, government spending has skyrocketed, much of which will be funded by debt. Our stay-at-home orders are akin to wartime curfews. Supermarket rationing of essential goods is reminiscent of wartime restrictions.
However, at the end of the war many politicians and economic experts sought to prolong those economic controls. Sometimes they had political motivations, sometimes it was based on fear of the consequences of suddenly returning to normal.
But countries that returned to normal fastest were most able to reap the benefits of prosperity in the years that followed.
The best example was West Germany. The German economy had been centrally controlled since 1936, with stringent measures ranging from rationing to the central allocation of labour and raw materials. These controls were continued under the Allied occupation until June 1948, when Ludwig Erhard, the director of the economic administration for the British-US occupation zone, abruptly announced the end of price controls and rationing directives.
Erhard did not have the approval of Allied command, and when the top US commander phoned him and said, “Professor Erhard, my advisers tell me that you are making a big mistake”, Erhard replied: “So my advisers also tell me.”
He soon ended most of the remaining economic controls, and the result was a revival now known as the “German miracle”. Between June and December 1948, industrial production in the Western occupation zones increased by half. The shortages and black markets disappeared, and employee absenteeism fell from a rate of 15 per cent to just 6 per cent.
Erhard went on to become West Germany’s federal minister for economics and eventually the chancellor. And under his policies, West Germany boomed. Between 1950 and 1960, average annual real per-capita GDP grew by 8.8 per cent.
This was double the growth of France and four times that of Britain — both comparable countries that received more aid under the Marshall Plan, but which took longer to remove their wartime economic controls.
Not only was Britain slow to remove wartime economic controls — with food rationing and building controls existing until 1954 — the Attlee government doubled down by nationalising entire industries, some of which were not returned to private hands until the 1990s.
The US also benefited from rapidly moving from a wartime to a peacetime economy. Between 1944 and 1947, US government spending fell by 75 per cent, and by 1946 direct government allocation of resources was essentially eliminated. Over the same period, real consumption rose by 22 per cent and gross private investment rose by 223 per cent in real terms.
The US’s rapid return to normal was also against the advice of prominent economists. Nobel prize winner Paul Samuelson, for example, warned that unless controls were extended, the US would experience “the greatest period of unemployment and industrial dislocation which any economy has ever faced”.
Yet despite 20 million men being released from the armed forces and related employment between 1945 and 1947, unemployment rose from 1.9 per cent to only 3.9 per cent. This was due to the addition of 16 million new jobs in civilian employment.
Australia’s own post-WWII experience was mixed. More than 100 wartime economic controls were revoked shortly after hostilities ended in 1945, and most of the remaining controls were removed over months. But some continued, and it wasn’t until the public’s rejection of the rents and prices referendum in 1948 that there was a shift towards a more free-enterprise economy.
Even then, it took the election of the Menzies government in 1949 to finally end rationing and prevent the Chifley government’s nationalisation of the banks. This enabled the growth and stability that came to characterise the Menzies era.
None of this is to suggest there won’t be lessons to be learned from today’s experience, nor that the world can or should be returned to exactly what it was before. The clock wasn’t turned back six years at the cessation of hostilities in 1945. Indeed, many of the changes necessitated by the war were positive and remained in place, such as the increased participation of women in the workforce.
But the lesson of history is that emergency measures in times of crises are unsustainable in normal times. The present measures should be wound back when the pandemic is over, and that should be done quickly so we can bounce back quickly too.
James Paterson is a Liberal senator for Victoria and deputy chairman of the coronavirus Senate select committee.