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The retreat of macroeconomic policy
By J. Bradford DeLong |
November 27, 2010, Saturday
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ONE disturbing thing about studying economic history is how things that happen in the present change the past - or at least our understanding of the past.
Governments before World War I - and even more so before World War II - did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons, all of which vanished by the end of World War II.
First, there was a hard-money lobby: a substantial number of rich, socially influential, and politically powerful people whose investments were overwhelmingly in bonds. They had little personally at stake in high capacity utilization and low unemployment, but a great deal at stake in stable prices. They wanted hard money above everything.
Second, the working classes that were hardest-hit by high unemployment generally did not have the vote.
Third, knowledge about the economy was in its adolescence.
All three of these factors vanished between the world wars. Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low.
Economists today know a great deal more, and the working classes all have the vote.
Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc were over in the rich world. No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10 percent and inflation was dormant without doing something major about it.
I was wrong. That is precisely what is happening.
How did we get here? How can the US have a large political movement - the Tea Party - pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote? Why are politicians not terrified of their displeasure?
Economic questions abound, too. Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned? Why is the idea that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?
Today, the flow of economy-wide spending is low. Thus, US Federal Reserve is moving to have the Fed boost that flow by changing the mix of privately held assets as it buys government bonds that pay interest in exchange for cash that does not.
That is entirely standard. The only slight difference is that the Fed is buying seven-year Treasury notes rather than three-month Treasury bills. It has no choice: the seven-year notes are the shortest-duration Treasury bonds that now pay interest.
Yet America's right wing objects to this, for reasons that largely remain mysterious. Blather about Federal Reserve currency manipulation and excessive risk-taking is not worthy of an answer.
Still, here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-World War II near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.
(J. Bradford DeLong is a professor of economics at the University of California at Berkeley. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
Governments before World War I - and even more so before World War II - did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons, all of which vanished by the end of World War II.
First, there was a hard-money lobby: a substantial number of rich, socially influential, and politically powerful people whose investments were overwhelmingly in bonds. They had little personally at stake in high capacity utilization and low unemployment, but a great deal at stake in stable prices. They wanted hard money above everything.
Second, the working classes that were hardest-hit by high unemployment generally did not have the vote.
Third, knowledge about the economy was in its adolescence.
All three of these factors vanished between the world wars. Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low.
Economists today know a great deal more, and the working classes all have the vote.
Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc were over in the rich world. No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10 percent and inflation was dormant without doing something major about it.
I was wrong. That is precisely what is happening.
How did we get here? How can the US have a large political movement - the Tea Party - pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register to vote? Why are politicians not terrified of their displeasure?
Economic questions abound, too. Why are the principles of nominal income determination, which I thought largely settled since 1829, now being questioned? Why is the idea that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?
Today, the flow of economy-wide spending is low. Thus, US Federal Reserve is moving to have the Fed boost that flow by changing the mix of privately held assets as it buys government bonds that pay interest in exchange for cash that does not.
That is entirely standard. The only slight difference is that the Fed is buying seven-year Treasury notes rather than three-month Treasury bills. It has no choice: the seven-year notes are the shortest-duration Treasury bonds that now pay interest.
Yet America's right wing objects to this, for reasons that largely remain mysterious. Blather about Federal Reserve currency manipulation and excessive risk-taking is not worthy of an answer.
Still, here we are. The working classes can vote, economists understand and publicly discuss nominal income determination, and no influential group stands to benefit from a deeper and more prolonged depression. But the monetarist-Keynesian post-World War II near-consensus, which played such a huge part in making the 60 years from 1945-2005 the most successful period for the global economy ever, may unravel nonetheless.
(J. Bradford DeLong is a professor of economics at the University of California at Berkeley. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
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