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Another disaster at political-economic policy analysis by Brad DeLong!

Brad DeLong, Brad DeLong | August 8, 2015

Over at Equitable Growth: I had thought we were well-past the interwar watershed in economic policy. The interwar watershed had three parts:

* The winning of the franchise by the working class.
* The portfolio rebalancing of the non-entrepreneurial wealthy.
* And the recognition that the gold standard was not unbreakable.

The last of these robbed the gold standard and its cousins of much if not all of its practical policy virtue. The second of these moved the extremely powerful interest group of accumulated wealth away from the hard-money side, for their wealth was no longer overwhelmingly concentrated in nominal bonds and lands let out for long terms at fixed nominal rents. The first brought into a politics a very large group for whom high employment was a great good and high inflation at most a minor substantive injury.

We were thus supposed, after the interwar watershed, to be in John Maynard Keynes’s world of practical and pragmatic demand management in order to balance aggregate demand and assist in structural adjustment. As he put it in his 1924 _Tract on Monetary Reform:

Thus inflation is unjust and deflation is inexpedient. Of the two, perhaps deflation is, if we rule out exaggerated in places such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. but it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned.

The individualistic capitalism of today, precisely because it entrusts saving to the individual investor and productions the individual employer, resumes a stable measuring rod of value, and cannot be efficient–perhaps cannot survive–without one.

For these great causes the most free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which distinguishing characteristics are possessed, and different degrees, by the weather, the birth rate, and the Constitution–matters which are settled by natural causes, or are the resultant of the separate action of many individuals acting independently, or require a revolution to change them…

When the Greek crisis hit in 2010, my reaction was that this could well be a great blessing in disguise: Greece was so small that only trivial commitments at the scale of the eurozone in terms of real money would be necessary to resolve its entire debt, and hold the Greek economy harmless — relative to any alternative policy — while adjustment took place.

The obvious alternative was the standard IMF package: A mix of restructuring and write down coupled with substantial depreciation and a loan to keep imports flowing as long as policy reform was taking place successfully.

The absence of exchange rate depreciation was going to make adjustment very hard for the Greek economy. That absence of depreciation was something Reese was giving up in return for the bargain that was the euro. In return, if the euro bargain was to survive, ruffles in Frankfurt had to be willing to offer things of equivalent value. And it seemed very clear in 2010 what those things of equivalent value were: extra transfers over and above those that would follow from a normal I am at program to offset the extra harm from the lack of depreciation; and extra help in terms of expanding demand for Greek products from northern Europe. That meant that Brussels and Frankford would push the envelope on eurozone inflation, and within the eurozone the bulk of that inflation would be concentrated in northern Europe, where the fundamental cost disequilibrium vis-à-vis Greece was greatest…

I was, once again, very wrong…

Comments to “Another disaster at political-economic policy analysis by Brad DeLong!

  1. Brad, daily news reports, including Berkeley Blog, keep proving We The People just aren’t getting it, not really understanding what we need to know of most importance for taking actions to protect our long-term future.

    Whether human brains haven’t really evolved enough to allow us to implement ways to protect our future as we are increasingly threatened such as you report here, and/or we just haven’t been able to find a better way to use our computer-age communications advantages, we must find a better way before time runs out because climate changes, worldwide violence and inequalities are seriously threatening our opportunities for making the right things happen today.

    Do you think you can unite your colleagues to focus on expediting implementation of solutions, or is acceptable long-term future quality of life just an impossible dream for the human race after all?

  2. No, you may finally be right. As G.W.Bush put it (in his best statement ever) – this could be a “success that hasn’t occurred yet”.

  3. “I was, once again, very wrong…” – don’t feel bad Brad, we have absolutely no world leaders who are getting it right either in this leaderless world we live in today.

    History proves that we need something like WWIII to produce leaders like Churchill and Roosevelt and the rate things are going with climate changes we are declining and falling with the greatest of ease instead.

    We not only fail to learn from the lessons of history, we fail to try to protect future generations from our failures to learn from history, with no leaders to protect us from ourselves that we are willing to believe in.

    Socrates’ search for Truth and Morality continues, while Greece crashes and burns once again.

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