WHAT, TO RAISE an awkward question, are the lessons of the recession now ending? Governments throughout the world are delighted to see the last of it. But in their relief they ought not forget how it happened, and what went wrong.
The triggering event was the Iranian revolution in early 1979, which, over the next two years, raised the price of oil 160 percent. Most of the major industrial countries, remembering the wave of inflation that followed the earlier oil crisis, immediately began taking steps to suppress a second wave. But they overdid it. The policies that they had thought to be modestly cautious turned out to be ferociously and unexpectedly deflationary. Instead of touching the brake lightly, they stamped on it.
The explanation of that miscalculation is that changes in the world economy over the past decade have made an extraordinary difference in the limits of each country's own discretion. Trade has grown greatly, and fixed exchange rates for currencies have been abandoned. The effect is to link economies more closely together. There's a highly persuasive description of this process in the semiannual review of the world economy published earlier this month by the Organization for Economic Cooperation and Development. The OECD draws two conclusions that deserve a close reading by people who make policy--especially the Americans, most of whom still, as a matter of ingrained habit, keep underestimating the influence of the rest of the world on this country's prosperity or lack of it.
First point: when the major industrial countries all move in the same direction at the same time, the impact on each of them will be greater than it anticipates on the basis of its own actions. That's what happened in 1979-82, when all of the rich countries reacted to the rising oil prices more or less the same way. They reinforced each other much more powerfully than any of them had anticipated.
Second point: these linkages also make it very difficult for any one country to depart very far from the general direction being taken by the industrial countries as a group. The latest example has been the failure of France's new Socialist government to speed up its economy and create jobs in 1981, when most of its trading partners were mainly worried about inflation. But France isn't alone. The United States went through a similar episode several years earlier. It means, as the OECD observes, that even the rich and powerful countries have less economic independence than they like to think, and successful policy in any one of them now requires the cooperation of the others.