Somewhat self-serving, but at the end Brad DeLong gets it right!

In “Perils of Prophecy“, DeLong writes:

We economists who are steeped in economic and financial history – and aware of the history of economic thought concerning financial crises and their effects – have reason to be proud of our analyses over the past five years. We understood where we were heading, because we knew where we had been.

In particular, we understood that the rapid run-up of house prices, coupled with the extension of leverage, posed macroeconomic dangers. We recognized that large bubble-driven losses in assets held by leveraged financial institutions would cause a panicked flight to safety, and that preventing a deep depression required active official intervention as a lender of last resort.

Indeed, we understood that monetarist cures were likely to prove insufficient; that sovereigns need to guarantee each others’ solvency; and that withdrawing support too soon implied enormous dangers. We knew that premature attempts to achieve long-term fiscal balance would worsen the short-term crisis – and thus be counterproductive in the long-run. And we understood that we faced the threat of a jobless recovery, owing to cyclical factors, rather than to structural changes.

So the big lesson is simple: trust those who work in the tradition of Walter Bagehot, Hyman Minsky, and Charles Kindleberger. That means trusting economists like Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken RogoffRaghuram Rajan, Larry Summers, Barry EichengreenOlivier Blanchard, and their peers. Just as they got the recent past right, so they are the ones most likely to get the distribution of possible futures right.

Then, abruptly, he switches gear:

But we – or at least I – have gotten significant components of the last four years wrong. Three things surprised me (and still do). The first is the failure of central banks to adopt a rule like nominal GDP targeting or its equivalent.

The failure of central banks to target nominal GDP growth remains incomprehensible to me, and I will not write about it until I think that I have understood the reasons. 

The possible conclusions are stark. One possibility is that those investing in financial markets expect economic policy to be so dysfunctional that the global economy will remain more or less in its current depressed state for perhaps a decade, or more. 

Better late than never. If only he (and others) had focused on this last point from the start instead of proselytizing in favor of “self-financing fiscal stimulus” things might have progressed differently.

13 thoughts on “Somewhat self-serving, but at the end Brad DeLong gets it right!

  1. At this point we need NGDP level targeting by central banks so that the floodwaters do not get to the second floor. Delong said “I will not write about it until I think that I have understood the reasons.” Perhaps he can get away for a little while this summer….because without NGDPLT we will also have students graduating from college who – without substantial work to repay their loans – as a further long term issue.

  2. I wonder what DeLong means by “monetarist cures were likely to prove insufficient”? That the depression could not have been averted by monetary policy alone (a strong claim, presumably based on economic theory), or that the depression was not going to be averted by the monetary policy that was actually going to be adopted (a weaker claim, based partly on political punditry)? Obviously, subsequent history has shown the weaker claim to be true; the strong claim I believe to be false.

  3. DeLong, don’t act so innocent. It was Keynesians like you who were responsible for causing America to fear inflation like the devil (quite literally, in Richard Fisher’s case), so that now it is politically impossible to allow the >2% inflation required for recovery – otherwise, as Rick Perry informed us, “it would get pretty ugly”.

  4. Why isn’t Christina Romer on DeLong’s list?

    I’ve just discovered that Christina Romer is an economic historian….but I’m not sure what that means in the context of an economics department….why would she not be seen as a person who “got the recent past right”?

    • DeLong is also an economic historian! We´ll never know, but maybe Christina favored more aggressive MP while she was at the CEA, but Summers may have blocked any such suggestions. As he stated recently in the FT, with interest ratesnear zero MP is mostly powerless!

  5. Glad to have DeLong on board. I hope he comes to regard those of us in the MM movement as his friends, as well as colleagues.

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