"The Retreat of Macroeconomic Policy"

Brad DeLong:

The Retreat of Macroeconomic Policy, by J. Bradford DeLong, Project Syndicate: One disturbing thing about studying economic history is how things that happen in the present change ... our understanding of the past. For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue.

Governments before World War I – and even more so before WWII – did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons...

First, there was a hard-money lobby... 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 – albeit not as much as we would like... 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... No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent 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, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that governments must intervene strategically in financial markets to stabilize economy-wide spending now a contested one?

It is now clear that the right-wing opponents to the Obama administration’s policies are ... objecting to the very idea that government should try to serve a stabilizing macroeconomic role.

Today, the flow of economy-wide spending is low. ... Yet..., 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-WWII 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.

I wrote about something similar here: The Return of the Laissez Faire Economy.