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.