Learning Lessons (or not) From the Past

The long quote below is from the Irish Times, August 7th 1992. It identifies the Thatherite fuelled property boom as the primary cause behind the British recession in 1992. The eventual outcome of this recession was a currency crisis with the UK leaving the EMS,  and Ireland subsequently devaluing its currency. To say policymakers (and economists) never learn from the past is an understatement:

“The Thatcher era was buoyed for some considerable time by the so called wealth effect engendered by rising house prices: the illusion of wealth which visits a homeowner when his property rises in value. Britain is currently in the throes of a negative wealth effect: prices fall so people, even those with no intention of selling, feel poorer and save more. Yet the option of reducing interest rates to encourage more spending and less saving is denied by the need to protect sterling’s position in the ERM. Ironically for Britain, its long-deferred membership of the ERM has coincided with high interest rates in Germany whereas for Ireland one of the benefits of a strong exchange rate policy in the ERM in the late 1980s was that Irish rates converged to low German levels

Britain has already benefited from ERM membership in the shape of reduced inflation but still British wage increases outstrip their neighbours. The debate about recovery has now expanded to include argument for wage restraint so that British industry becomes more competitive. Certainly wage restraint under the Programme for National Recovery was an important complement to the strong exchange rate policy in engendering growth and employment in this State in the late 1980s.

If Britain holds its nerve within the ERM, Ireland and the other member states will have an important ally in ensuring that monetary union is not dominated by the narrow view of the Bundesbank. But domestic pressures are mounting and Mr Major’s government will be hard pressed to hold its line”.

The importance of time as a variable in the sciences has never been more important. It may be a moving target but history is too important to be ignored.

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