Web Clippings--20050420
Foreign Affairs - Sisyphus as Social Democrat - J. Bradford DeLong

Hard Landings II...

When I look at the galleys of the new edition of my Macroeconomics textbook, I am struck by a sense of disappointment. Don't get me wrong--I do think that it is better than every other macro textbook out there, being clearer (though less comprehensive) than Abel-Bernanke, more comprehensive (at the cost of only a little bit of additional difficulty) than Mankiw, and much more approachable (though not as theoretically sophisticated) than Blanchard. But I wish that people who read through or take a course based on the book could then have the tools needed to analyze things like, say, the current debate over the dangers to the U.S. economy from a "hard landing" of the international monetary system.

And the textbook doesn't quite get you there. The amount of material needed to bring students truly up-to-speed on the major issues of the day seems to be a little bit more than I can dare demand.

If I were teaching intermediate macro right now, I would be very tempted to push the envelope and try to get the students to that spot right now. So here are my thoughts on the possibility of a "hard landing," crafted so that they can make sense to students who are only 3/4 of the way through intermediate macroeconomics.

Briefly, the model and the argument teach us that a hard landing is more likely:

  • The greater the size and speed of the interest rate and exchange rate movements that take place when foreign central banks stop buying dollars to keep the value of their currencies low.
  • The more rigid is the U.S. labor market and the harder it is to move workers and capital from construction and consumption to export and import-competing industries.
  • The greater is the pass-through to import prices, and thus the more does a fall in the value of the dollar put upward pressure on U.S. inflation.
  • And (this is the big one), whether enough Wall Street firms are exposed and leveraged enough to be bankrupted by large exchange rate or interest rate changes. (Parenthetically, the fact that the U.S. can and so far has borrowed in dollars makes this a much smaller worry than it would be if things were otherwise.)

Anyone who feels like making use of this, please feel free to do so--and, most important, tell me if it works.