If Steve Waldman is right, we´re screwed!

To Steve Depression is a choice! We only thought that preferences were over growth and employment but suddenly, four years ago, demographics changed all that:

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives.

Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable.

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

Maybe Steve´s making the wrong generalization. That´s not the preference of the “aging polities”, but the preference of the policymaker honcho himself: Dr. Ben Bernanke. He´s always made his views about the “credit view” of the monetary policy transmission process very clear (for a readable primer see here). That is very consistent with his behavior as soon as financial difficulties erupted with Paribas halting redemptions in three investment funds in early August 2007.

From that point on we witness the launching of a veritable soup bowl of letters (TAF, TSFL, TALF) and announcements of (almost) unlimited financial support to financial institutions.

And during all those months in both 2007 and 2008, Bernanke´s Fed forgot about the long term success (“Great Moderation”) that had been “acquired” through stabilizing NGDP along a level path.

So I take solace from the concluding paragraph in this Scott Sumner post:

During 1933 most of the experts on Wall Street railed against FDR’s dollar depreciation program, insisting it wouldn’t work.  Meanwhile traders drove stocks higher and higher as dollar depreciation triggered rapid growth in output.  In the 1970s high inflation drove stocks lower, even as Keynesian economists peddled their Phillips Curve theories.  Since 2008 lower inflation expectations have driven stocks lower, even as old-time monetarists insist there’s an inflationary time bomb waiting to explode.  That’s why we need to replace the FOMC with an NGDP futures targeting regime.  There are no hawks or doves on Wall Street, no ideologues.  Just realists.

Maybe they´ll soon assert their preferences.

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9 thoughts on “If Steve Waldman is right, we´re screwed!

    • I don´t disagree. But whose choice? The “collective” or the policymakers. And I don´t believe they simply respond to “external forces”. In the case of the Fed, furthermore, all the hoopla about “independence” would be a hoax.

  1. I have pondered this very question as well. Who are the people who so fervently bray about the sanctity of currency and the sacred status of those who invest in bonds?

    A large part of the Theo-Monetarists must be bond buyers—and as our (USA) national debt balloons at very low interest rates, we are creating a huge class of “investors” (really rentiers, or Theo-Monetarists) who have a blood-stake in no inflation.

    For holders of US bonds, a no growth-no inflation scenario beats a high growth-high inflation scenario.

    This is trouble.

  2. There of course is value in the challenge itself! The clearer the definition of the problem now, the better off we are.

    • Becky – Imagine if his statement about preferences is correct. But I think it´s not borne by the evidence. Over the decades, different fed Chairmen had different outlooks and different “preferences”. And there was no “popular revolt”. Japan may have come to its predicament because in 1974 there was a labor (not “aging polity”) revolt. The BoJ was the very first to adopt an (implicit) inflation target that soon became 0%.

  3. Hi Marcus! I must say that Steve does do a good descriptive job of how we have actually behaved. Ant it does seem that countries like Japan and those in Western Europe have done something like that.

    My optimism is that we in American are a much younger country. Part of the trouble with age is you become to wise-prudence is a great enemy.

    I should say I find that link for Bernanke a fasicnating look into his mind .

  4. Pingback: If Steve Waldman is right, that Depression is our collective choice, we´re screwed « Economics Info

  5. Pingback: Assorted Links « azmytheconomics

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