What can financial crises reveal about institutional stability? How can history help us to weather future recessions? Professor of Economics Christopher M. Meissner examines the rise of political radicalism, applying lessons from economic history.
Economic history not only reveals the causes of financial crises, but also enlightens us about the effects of policies intended to resolve them. This knowledge can help policy makers contend with current economic problems.
“Economic history can be informative for not just how we understand the past, which is valuable in and of itself, but also for a lot of debates and things going on around us today,” Meissner says. “It’s indispensable.”
Meissner, a research associate with the National Bureau of Economic Research (NBER), studies the social causes and effects of financial crises. Economic historians he says, translate complex economic phenomena into methodical models that are more easily understood and analyzed by scholars and the general public. They also cover a wide research scope, from cultural studies to medicine. Their field is also innately interdisciplinary, examining raw data for statistical analyses and applying economic theory to historical cases.
“We do the job of the historian and the economist,” says Meissner, “paying attention to the archival sources and acquiring the data.”
Inspired by the big questions
Meissner’s interest in economics began early in his academic career. He earned an A.B. in that subject from Washington University in St. Louis, where he was inspired by the Nobel economist Douglass North. “He asked very big questions about why some countries are rich and some countries are poor,” Meissner explains. He was most impressed by North’s research approach, which did not shy away from applying theories ranging from neoclassical to Marxian economics.
Meissner also pursued big questions in his graduate studies at UC Berkeley, earning his Ph.D. in 2001 with a dissertation explaining why countries adopted the gold standard at different times. In later publications, he continued exploring the history of the global economy, delving into a diverse area of topics, from the impact of international trade on democracy to the effects of banking crises on cardiovascular mortality rates.
He was excited, he says, to discover that “you could answer big questions, starting with basic economics and then going on to other fields in the social sciences. That was very appealing.”
As much data as possible
Following the global financial crisis of 2007–08, some economists theorized that the crisis was caused by increasing income inequality and the resulting lending spree by financial institutions in a bid to maintain the living standards of the poor. They further claimed that rising inequality also caused the worldwide depression of the 1930s.
“I started wondering if this could be true,” Meissner says, “because that’s not the usual story about the onset and the severity of the Great Depression.”
Meissner’s research method relies on the thorough investigation and analysis of global financial data—“as much data as possible.” He collaborated with the notable Canadian economist Michael Bordo to collect historical data from dozens of countries over the last 100 years. Their findings showed that links between inequality and crises are neither significant nor obvious, suggesting that inequality is an ineffective predictor of future financial crises.
The tragedy of austerity
After the 2007–08 crisis, several countries concluded that they needed to limit expansionary fiscal policy and avoid deficit spending. “Voices out there said, if households are tightening their belts, then the government must also tighten its belt,” Meissner explains.
Although these austerity measures — generally conducted through cuts in social programs and higher taxes — might seem like a common-sense response, they actually contradict over half a century of macroeconomic studies. “These studies indicate that the correct response in a downturn is to spend more and cut taxes,” Meissner adds.
Not only do austerity measures worsen financial problems, but they also have proven to increase political extremism. Meissner’s recent research on Weimar Germany’s austerity measures indicate that they prompted an increase in support for the Nazi party at the polls.
“While it’s not the only contributor to the rise of the Nazi Party, austerity measures did seemingly boost Nazi vote-share between 2 and 10 percentage points.” That was just enough to permit the Nazis to form coalitions and eventually obtain total control of Germany by 1933.
“Austerity tipped things over the edge, causing one of the greatest human tragedies in history.”
Austerity and the far right
Meissner's research suggests that the current rise in far-right populism is partly a result of austerity measures. By ignoring the lessons from economic history, policymakers are intensifying social problems without resolving the issues in an already precarious financial environment.
“History never repeats itself,” Meissner asserts. However, he is interested in, and also concerned by, the persistent mistakes of policymakers—mistakes that worsen financial crises.
For example, no country is free from crises, but some states like Japan and Canada have clearly responded better than countries such as Brazil and Greece. Meissner is currently collaborating with Professor Bordo on a project that investigates the reason for this: “Why do some countries have greater financial stability, over time, than others?”
Meissner and his colleagues find that countries that apply historical lessons about institutional economic stability do better than those that do not:
“Countries that are doing better, when they have a crisis, do some soul-searching at the society level and attempt to make the financial system more stable for the future. Other countries don’t seem to learn. They have the same kinds of crises over and over. They keep defaulting on their foreign debt, keep hyper-inflating, and keep having currency crises. Why aren’t they learning?”
History for today
UC Davis boasts one of the top economic history programs in the United States. Its researchers consistently voice their findings in widely-read mainstream media. For instance, Meissner’s research on Weimar Germany and the Nazi Party has recently been featured in the news website Vox and the magazine Newsweek.
"People here are productive and they write things that people read,” Meissner says. "We want to keep that reputation."
He plans to continue answering the big questions that afflict the modern world. By doing so, he hopes to also increase awareness of economic history's valuable contributions to multiple disciplines, including sociology, medicine, political science, and anthropology.
"We want to make sure that people understand the importance of history for the economy today," he concluded.
— Miguel A. Novoa Cipriani
This article originally appeared on the website of the UC Davis Institute for Social Sciences.