In economic policy, as in war, it is important to learn from one’s mistakes. History demonstrates, however, that identifying the right lessons can be difficult.
Few institutions carried out harsher self-examination than the U.S. Army after Vietnam. When the officers who had been lieutenants and captains out in Vietnam’s jungles and rice paddies examined the tactics and policies of the war in advanced courses at the Army War College in Pennsylvania or the Command and General Staff School at Fort Leavenworth, Kan., they often judged their former superiors harshly.
The army established a permanent Center for Army Lessons Learned at Fort Leavenworth. It revised training at all levels and rewrote its doctrinal manuals. The well-executed Gulf War in 1991 was one result.
But while the self-examination corrected some failings, the army’s institutional memory faded on other matters. From 1945 on, planning for a tank war in Europe with the Soviet Union dominated tactical thinking. The counterinsurgency lessons learned in Korea and Vietnam were seen only as distractions. The experts in these matters in the Special Forces were an often-snubbed minority.
The “big picture” lessons in training and tactics that ultimately sprang from that era’s self-examination helped defeat Saddam Hussein in 2003. But lost were the lessons learned in fighting the “small wars,” dealing with an insurgent population, and this contributed to the problems that began with the fall of Baghdad. And so, young officers are once again poring over mistakes. The army’s 700-page official history of the Iraq war, released earlier this year, is only one example.
The government has had a similarly mixed record in dealing with economic difficulties. Congress passed the Federal Reserve Act in 1913 to prevent future economic damage like that suffered during financial panics in 1907 and 1893. The Fed had the necessary tools, but choked when first challenged in the post-war slowdown of 1919. An unnecessarily harsh recession resulted.
The Fed failed again in 1929, when it let the money supply contract and kept real interest rates far too high as the economy slipped into the Great Depression. Then, in the late 1960s through the ’70s, it erred in the other direction by increasing the money supply far too much, causing the worst peacetime inflation in U.S. history.
Paul Volcker taught us the remedy. Inflation has been low for 25 years. But now, many economists again see inflation threatening.
On Tuesday, Harvard professor and ex-International Monetary Fund Chief Economist Ken Rogoff predicted a deepening recession, but also warned that the Fed is letting inflation accelerate. “Rates are too low. They must realize we’re going to get inflation if things stay where they are. They need to raise rates but I don’t think they are going to because they’re way too nervous.” The same day, the presidents of the Federal Reserve Banks of Dallas and Richmond, Va., expressed similar warnings.
What lessons are most relevant now? Those of the dangers of tight money in a slowing economy, as in 1919 and 1929? Or the peril of letting inflation accelerate, as in the 1970s?
Or should economists focus on new twists, like the role of the Fed in the development of a historically unprecedented U.S. housing bubble? And what about appropriate levels of government regulation of financial markets?
Rest assured that individual economists will address these issues over time. The past year has generated topics for myriad Ph.D. theses. But the Fed and the U.S. Treasury probably will avoid the overt and searching self-evaluation that the Army began 35 years ago.
The worst mistake is to assume you have fixed a problem when the apparent success is due only to lack of a real test.
A century ago the British navy developed ships called battlecruisers. As large and powerfully armed as true battleships, they had much less armor, so they could achieve higher speed. “Eggshells armed with sledgehammers” was one view.
But in the 1915 Battle of Jutland, three British battlecruisers blew up, one only 14 minutes after the first shot. More than 3,300 sailors perished. Only 17 survived.
The Royal Navy conducted inquiries and altered plans for the next generation of these ships. HMS Hood, launched in 1918, incorporated these fixes. For 20 years, the Hood was considered the largest and most powerful fighting ship in the world. But in 1941, eight minutes after opening fire on the German battleship Bismarck, the Hood blew up, losing 1,412 sailors. Three survived. The design flaws really had not been fixed.
What lessons will we learn from the current financial debacle? Will they improve future decisions? Time will tell, but don’t count on it.
© 2008 Edward Lotterman
Chanarambie Consulting, Inc.