What lessons can be learned from the 19th century British? In the 20th century, the United States had to fight two major world wars and maintain a major military force against the Soviet Empire during the Cold War for nearly a half of century. United States also fought various smaller military operations along with fighting major combat operations in Vietnam and Korea. While the United States was stronger financially after the Cold War that Britain was after the Napoleonic war, the United States paid an economic price for its resolve during the Cold War.
In the 1970’s, government taxation and regulations strangled the economy. It was up to the Reagan Administration to reverse many of these policies and these policies provided the basis of the present economic surge that has occurred over the past 25 years. The actual percentage of government spending relative to the overall economy has changed very little and tax rates are presently half of what they were before 1980. The first lesson is that tax rates matter and if tax rates are cut from higher rates, government revenues grow. In the last quarter of century, government spending and government revenues have grown in part due to the stimulus of the Reagan tax cuts.
The one area of weakness presently has been the increase in government spending. Government spending has grown and the Bush administration had done little to restrain spending over the past four years. Increase in government spending to cover the cost of supporting the baby boomers in their retirement are included in future spending calculation, American fiscal policies threaten to derail the present economic surge. As the British found out, it is difficult to be involved overseas if the government domestic spending is unrestrained by politicians appetites for "spend and elect" politics.
The buzz word globalization described the interdependence of the present world economy and this was even true in the 19th century. The British not only ran a world wide Empire that encompassed nearly a quarter of the world population but the British had financial reach in every corner of the world. So any economic downturn in America would affect the British economy and vice a versa. With instant communication and the ability to transfer wealth with the touch of a computer keyboard, we see the effect of globalization quickly. Globalization was as much a fact in the 19th century as today and when the Great Depression hit in the early 1930’s, the entire world was affected. It was not limited to the United States. The various protectionist legislation passed in the United States affected the whole world and led to a trade war that help depress earnings and incomes throughout the world.
Article comments
1 - godoggo
First of all I normally just read about this sort of stuff without daring to comment because the comment boards of the econ blogs I read are frequented by smart econ degrees, or who have at least taken a class in the subject, unlike me. But what the hell.
Anyways, the reason I read this post was because the title lead me to expect a discussion of an interesting subject: the industrial revolution, which centered in England for various reasons (a lot of them cultural, though I think the government policies you mention were part of it too), and which I would think was probably the major cause of the impressive growth which England enjoyed.
Reagan. First of all, it's always worth reminding folks that the beginning of his presidency coincided with the bottom of a business cycle and ended around the top of one. My understanding is that growth since world war II has generally been around 2-3 percent. It was especially high in the 2 decades after the war, during which time the highest tax bracket got as high as 90%. Kennedy's cut down to 70% resulted in a temporary, Keynesian stimulus that actually did result in an increase in revenue - an almost unique phenomenon.
Anyways, in the 70's the economy got bogged down in stagflation, triggered by high oil prices from the Middle East. Reagan came into office, as I said, at the bottom of the business cycle, which was deliberately exacerbated (sp?) by the Fed in order to control inflation. Reagan's combination of tax cuts and massive spending increases (the latter largely as part of Reagan's plan to outspend the Soviets) led to a Keynesian stimulus, accelerating the economy's recovery (I think it's also generally conceded that he dealt well with the oil crisis). On the other had, Reagan predicted that his policies would lead to an actual increase in revenues. I read somewhere that he was actually inspired by Kennedy's experience. In any case, the idea was not taken seriously by economists, including his advisors, I believe, and it was famously ridiculed by Papa Bush as "voodoo economics." There was certainly no increase in revenues, and he left office with an enormous debt.
So this leaves us with the question of whether Reagan's tax cuts have had his intended result in the long run, if not in the short run. Were they the cause of the late '90s boom that increased revenues enough to briefly create a surplus (not that I believe a surplus is necessarily a good thing, but nevermind)? Well, the catalyst for the boom was the increase in productivity as a result of new technologies that had long been predicted, and had finally (for some reason) come to pass. These technologies were, mainly, microcomputers, which were invented by a bunch of tinkerers, some of whom cared about money, others who didn't, and the Net, which was invented by Big Government as part of the military infrastructure, and which was freed up (along with a lot of other government-developed technologies) at the end of the cold war (which I suppose you could give Reagan credit for if you buy the Outspend the Soviets plan as the cause, which I don't, although that's another story). Also crucial was the boom in new software, much of which is actually useful - although I'll note that ground zero for the computer revolution was a valley in liberal Northern California, which happened, in classic QWERTY fashion, to be the location of Steve Jobs famous garage - as well as the nearby City by the Bay. Anyways, the cause of, as opposed to the catalyst for, the boom was irrational exhuberance, tied to faith in the New Paradigm, Dow
36000 and Ayn Rand among the motleyed young geeks who benefitted from the boom, or hoped. Of course the increase in productivity persists, although it hasn't done, say, me, any good. We'll see...
And another thing. The reference to "stable monetary policy" caught my eye. This is a concept I associate with Milton Friedman, and gives me the impression that the author is trying to reinvent Smith as a modern conservative, although it's pretty hard to imagine how he might have reacted to Friedman's ideas. In any case, my understanding is that those ideas have been debunked by reality, specifically their implementation by Maggie Thatcher. Anyway, history, including 19th-century history shows that the result of overly-stable monetary policy is wildly unstable employment, which I don't happen to believe is conducive to growth.
And that's pretty much all I knows.
2 - Hal Pawluk
Interesting if incomplete (Adam Smith was for trade with "absolute advantage" rather than "free trade," for instance). Globalization is important today, but mostly because it kills the Ricardian (you missed David Ricardo, too) concept of free trade and free trade does not and cannot exist today.
Instead, what we have is globalization without free trade because money and jobs can now flow from country to country. That's what has trapped us in a situation that has resulted in the lowering of wages (jobs are being arbitraged internationally), creation of more jobs faster in other countries, etc.
I've blogged a few items that you might find interesting (links open in new window):
Free Traders and Globalizers -Waking Up At Last?
The "Cargo Cult" Is Alive And Well - Today It's Called "Free Trade"
Neocons On Jobs - Are They Totally Losing It?
Why Your Job Is Moving To Bangalore
These include links to further reading.
3 - suzypuzy101
interesting, clear to read and easy to understand. However would of liked some more info on how Britain's economic strength has changed now that we are in the 21st cent. O well, still useful and thanks!
4 - filck
this is a bad website
5 - nerdy man
flick is joking he loves this site a lot he thinks it is "interesting"
6 - STM
"Economic History of 19th Century England". I must get this book ... I love a bit of light reading just before bedtime.