Grasping Reality on TypePad, by Brad DeLong

There are two separate issues, actually three, "fear, surprise, ruthless efficiency, and near fanatical devotion to the Pope!" No: I mean: support for hard money, austerity, and Republicans.

There is an important set of issues here. Since the founding of the Republican Party, odds are that if you look at a period at random the economy will be doing a lot better if a Democrat is president. Alan Blinder and Mark Watson say that they can find no reason for this, but I think that simple competence--not deregulating financial markets to extraordinary excess and allowing a debt-fueled overleverage bubble, not letting the deficit explode at a time when crowding-out is significant, not demanding that your close-friend-the-Federal Reserve Chair overgoose the economy, not pursuing budget balance in the middle of the Great Contraction--is likely to have a lot to do with it. And by now the 1% should have learned from history that economic policy under Democrats is likely be less incompetent than under Republicans. The demand for austerity--the United States has not had an inappropriate fiscal expansion large enough to truly serious damage to the economy since 1783, and very few Republicans were pro-fiscal austerity back during the Reagan years. And the age when the rich and the superrich benefitted materially from low inflation and deflation more than they lost from a low-pressure economy ended with World War I.

Robert sets forward three hypotheses:

1. Support for austerity springs from a rich-person's belief that the market must reward virtue (for if it rewards vice then they would have to deal with the fact that they are vicious), and hence prosperity can only be the result of hard work. If there were a way to produce prosperity costlessly--if there were free lunches to be eaten--then vice would be rewarded. Thus the extraordinary hostility to Keynes and all the others who point out that minor technical monetary and fiscal policy adjustments can go a long way toward generating prosperity. In the words of Churchill's private secretary P.J. Griggg: "I distrust utterly those economists who have with great but deplorable ingenuity taught that it is not only possible but praiseworthy for a whole country to live beyond its mens on its wits, and who, in Mr. Shaw's description, teach that it is possible to make a community rich by calling a penny tuppence--in short who have sought to make economics a vade mecum for political spivs..."

2. Support for hard money springs from the vanguard role played by commercial bankers in the self-organization and self-consciousness of the 1% as a Klasse für sich. It has not been the case since World War I that the 1% have had portfolios concentrated in nominal bonds and in land rented out on long-term leases on fixed nominal debts. Not since World War I have the 1% benefitted from hard money. But commercial bankers do: given their near-zero nominal cost of funds, higher nominal interest rates look to them like a very good deal (and are a very good deal in the short run). Start with their role as opinion leaders and add on their role in choosing a highly inordinate share of the directors of the regional Federal Reserve Banks, and the strength of the hard-money lobby becomes intelligible.

3. The Republican Party under a Democratic president. When there is a Democratic president--and only when there is a Democratic president--Republicans are united in opposition to loose money and loose fiscal policies that might produce a lower unemployment rate come the next election. The Republican Party praises the rich and tries (ineptly, as Robert says) to serve their interests. As susceptible to flattery as everyone else, the rich are attracted to Republicans, and tend to repeat whatever line the Republicans are currently pushing.

All three of these seem to me to be likely to have some purchase on reality. And I would add to them: (4) Simple money illusion: People are unhappy with even moderate inflation because they (falsely) think they would have gotten their inflation-fueled nominal wage increases anyway but that the inflation-fueled price increases have made them poorer.

But I do not find even all of these four, even taken all together, to be a satisfactory and complete explanation at all. It is certainly bad news for we economists who tend to believe that people understand at heart what their own material interests are and pursue them. It is even worse for those who think that the modern state is best thought of as an executive committee for managing the common affairs of the whole bourgeoisie.

(Of course, Karl Marx and Friedrich Engels did not think so: they thought: "The executive of the modern state is but a committee for managing the common affairs of the whole bourgeoisie..." The legislature of the modern state back in the early nineteenth century was presumably not The executive back then, see, was composed of ministers, largely nobles, appointed by monarchs. The legislature was elected, albeit by restricted electorates. At least at the beginning Marx and Engels were revolutionary believers in democracy. But I digress...)

And this is why I cannot help but look somewhat askance at the prospect of populist mobilization focused around issues of inequality to charge the battery to power changes in economic policy. For changes in economic policy in a much more Keynesian, Democratic direction are not just in the interest of the 99%. They are in the interest of the 1%. And of the 0.01%. There ought to be an easier way than through winning electoral majorities by parties like Syriza country by country: our plutocrats ought to simply wake up tomorrow, and say: "Gee. People like Bob Rubin and Larry Summers are right on the policy--not just what would be good for the little people, but what would be good for us! Let's all fund and vote for Hilary!"

Reference:

Robert Waldmann: What's the Matter with Wall Street?" >In... What's the Matter with Kansas? Thomas Frank asks why lower middle-class people in middle America vote for Republicans against their own self-interest...

I wonder why wealthy investors vote for Republicans against their self-interest. Brad DeLong wonders why they favor tight money and austerity against their self-interest.... There are two separate issues, actually three, "fear, surprise, ruthless efficiency, and near fanatical devotion to the Pope!"

No: I mean: support for hard money, austerity, and Republicans.

I will try to focus on hard money (but I will fail).... [The] FOMC will raise the target federal funds rate... an odd choice since inflation is below target and the dollar is rapidly appreciating. Why would the FOMC even consider doing something so odd?... Financiers, and policy makers who are in constant contact with financiers, support tight money.... [See] these excellent posts. Why?

1. Economics as a morality play: The market is our judge and rewards virtue--no pain no gain... [a] view... most frankly expressed by Michael Kinsley... [who] provides a valuable service, because he doesn't present any argument related to the effects of policy.... It is clear why the rich are eager to assume that the market rewards virtue--they have been rewarded... and wish to believe they are virtuous.... [But] if there is an easy [and] painless way to create more aggregate wealth, then it is harder to believe that the wealthy earned their individual wealth through great effort.

2. Sub-sub-class interest: Within the 1%, there is an organized, energetic subset who benefit from tight money... [because of the] strong nominal rigidity at zero on returns on deposits... [thus] bankers have a safe source of income roughly equal to the interest rate on T-bills.... Jeremy Stein [argues] that the FOMC must guarantee bankers safe returns high enough to cover administrative costs or else bankers will gamble.... we have a nice looking economy... it would be a shame if anything were to happen to it... guarantee them 2% safe or else it might get blown up again....
    
   This does not make tight money good for investment banks, broker dealers, hedge fund managers or, obviously, industrial firms. Yet the fairly narrow interest group of commercial bankers has a clear common interest. They also have a very explicit role in influencing Fed policy through the selection of Federal Reserve Bank presidents.

3. Partisanship:... Wall Streets unsurprising but marked Republican slant.... Rich investors tend to favor the GOP, since Republicans are very dedicated to attempting to serve their interests (incompetently) and sincerely praise them.
    
   Republicans favor tight money and austerity if and only if the President is a Democrat.... Loose money increased the probability that Obama would be re-elected and that Clinton will be elected. Therefore, loyal Republicans must oppose it. I think it is very possible that financiers favor their flatterers over those who actually make them richer.

Links:

• Robert Waldmann: Robert's Stochastic Thoughts: What's the Matter with Wall Street?
• Simon Wren-Lewis: The power of financial markets
• Paul Krugman: Nerds, High Priests, and the State of Economics
• Central banking: Jeremy Stein leans against the wind
• *Mike Kimel et al.:: Presimetrics: What the Facts Tell Us About How the Presidents Measure Up On the Issues We Care About
• Thomas Frank: What's the Matter with Kansas?: How Conservatives Won the Heart of America
• Brad DeLong: Austerity, Gramscian Hegemony, and Hard Money: To the Re-Education Camp! Weblogging
• Alan Blinder and Mark Watson: Presidents and the Economy: A Forensic Investigation
• Monty Python: Spanish Inquistion
• Hamilton Project: The Future of Work in the Age of the Machine
• Karl Marx and Friedrich Engels:** Manifesto of the Communist Party