Controls, Controls, Controls
March 25, 2013 - 8:36 am
I know, I know — it shouldn’t surprise me when I wake up in the morning to find Paul Krugman selling his Nod Along New York Audience on the benefits of more and more controls. But what he’s done today is so sly, I just can’t let it pass. Today, it’s capital controls:
It wasn’t always thus. In the first couple of decades after World War II, limits on cross-border money flows were widely considered good policy; they were more or less universal in poorer nations, and present in a majority of richer countries too. Britain, for example, limited overseas investments by its residents until 1979; other advanced countries maintained restrictions into the 1980s. Even the United States briefly limited capital outflows during the 1960s.
Great Britain in the post-WWII years was hardly thriving. In fact, many wondered if Britain had become the new “sick man of Europe.” Then Margaret Thatcher came along and freed up the economy from Labor’s ruinous policies. But Paul Krugman doesn’t want you to know that.
But there’s more:
It’s hard to imagine now, but for more than three decades after World War II financial crises of the kind we’ve lately become so familiar with hardly ever happened. Since 1980, however, the roster has been impressive: Mexico, Brazil, Argentina and Chile in 1982. Sweden and Finland in 1991. Mexico again in 1995. Thailand, Malaysia, Indonesia and Korea in 1998. Argentina again in 2002. And, of course, the more recent run of disasters: Iceland, Ireland, Greece, Portugal, Spain, Italy, Cyprus.
What’s the common theme in these episodes? Conventional wisdom blames fiscal profligacy — but in this whole list, that story fits only one country, Greece. Runaway bankers are a better story; they played a role in a number of these crises, from Chile to Sweden to Cyprus. But the best predictor of crisis is large inflows of foreign money: in all but a couple of the cases I just mentioned, the foundation for crisis was laid by a rush of foreign investors into a country, followed by a sudden rush out.
This is a neat trick Krugman has pulled here, so I’m afraid most people won’t spot it. Certainly most of his people won’t.