"Concrete Economics", Pragmatism, the Hamilton Tradition, the Evolution of Macroeconomics, and the Post-2008 Nominal Demand Shortfall
Brad DeLong and David Beckworth: Macro Musings Podcast:
And the transcript, very kindly paid for by David, which I have not checked for correctness, consistency, or non-stupidity:
Macro Musings: Episode 17 - Brad DeLong on Hamiltonian Political Economy & Economic History
[00:00] [background music]
David Beckworth: [00:02] Welcome to Macro Musings, the podcast series where each week we pull back the curtain and take a closer look at the important macroeconomic issues of the past, present, and future. I'm your host David Beckworth of the Mercatus Center. We are glad you've decided to join us.
[00:18] Our guest today is Brad DeLong. Brad is a professor of economics at the University of California, Berkeley. He is also a research associate at the National Bureau of Economic Research and was formerly in the Clinton Administration as the Deputy Assistant Secretary of the U.S. Treasury.
[00:37] Brad's work ranges from business cycle dynamics to the political economy to the history of economic thought. Brad is also the author of several books, including his 2010 book The End of Influence: What Happens When Other Countries Have the Money and his more recent 2016 book Concrete Economics: The Hamilton Approach to Economic Growth and Policy. Brad, welcome to the show.
Brad DeLong: [00:58] Thank you very much. I'm extremely pleased to be here. Whatever "here" is in some metaphysical Internet sense.
David: [01:05] That's the beauty of this day and age, when I can have someone like you on the other side of the country on the show. I want to begin like I do with most of my guests by asking how you got into economics. This show's about macro. You have broader interests than just macro, but how did you get into economics and into macro in particular?
Brad: [01:23] I suppose first it would be Rick Erickson, Soviet specialist, Soviet economic specialist. Assistant professor at Harvard at the end of the late 1970s, who taught the most mind blowing version of Econ 1 for those of us who had I would say relatively advanced math, that he wound up with an Econ 1 section which was a go faster, do more section, and which had a great many people in it who could handle partial derivatives. He took full advantage of that.
[02:00] That was a mind-blowing experience in terms of getting one interested in economics. Then that was followed by having John Geanokopolos for Intro to Micro. Which was also a mind blowing experience, because he also had a largely applied math major class and was willing to push the envelope.
[02:23] If you know John, you know he is the most dynamic, witty, engaged, enthusiastic person imaginable, as well as being one of the very smartest people on the planet and very much willing to share that.
[02:37] After that point, we were excited about economics. We were interested in pushing it more. We were uninterested in taking undergraduate courses, because they seemed to us to go too slow and not to use the mathematical toolkit that made things a lot easier and a lot clearer and allowed you to go a lot faster and do a lot more.
[03:00] At that point we we being me, my freshman roommate Andrei Shleifer, and our friend Steven Kaplan bullied ourselves into the graduate macro core course at Harvard in the spring semester of our sophomore year taught by Olivier Blanchard and Marty Feldstein. Their view was "If you want to come, come. You'll probably die."
[03:29] We came, we didn't die. We're all happy now. Steve at Chicago, Andrei at Harvard, me at Berkeley. Andrei with his Clark medal and so forth.
[03:43] Olivier and Martin were as inspiring, as smart, and as impressive as John and before him Rick Erickson had been. Then immediately after that Andrei hooked up with Larry Summers as a research assistant. From there it seemed that the social network was very well greased. The intellectual project was very well greased. The fact that we had the analytical tools made it a no brainer as to what we should do.
[04:22] That's how I wound up here. That and the fact that when I graduated from college in 1982, the unemployment rate was 10.6 percent, and graduate school, especially one funded by the NSF, seemed a smarter thing to do than to go out into the private sector job market.
David: [04:46] It's always good to hear that great teachers play a role in shaping one's life. I think in economics, it's one of those disciplines where you can either have a great teacher or a disappointing teacher and they make a big difference whether you thrive in it.
[05:01] I read a story about you as an undergrad. You mentioned your roommate Andrei. This story said he and another roommate I believe of yours were overwhelmed by your reading prowess. You would just blow through books incredibly fast. In fact I think at one point he called you a superhuman when it comes to reading. Can you share with us that little story?
Brad: [05:26] I actually don't remember ever being called a superhuman.
David: [05:29] It's in the Harvard Crimson, that's right.
Brad: [05:31] I do remember being told, "How do you read so much?" I felt the shoe was on the other foot. That here is Andrei showing up in Cambridge, Massachusetts as someone who claimed not to have been by any means the strongest mathematic student that Moscow Science Mathematics High School Number Two. I had been well and expensively prepared. How many of us were there?
[06:09] I guess I was one of the four people in Washington, DC in 1978 to have graduated from high school with a second year of calculus expensively provided to me by the Sidwell Friends School to which I am grateful. Not all high schools would assign a teacher to teach a class of four.
[06:32] This way we're very much willing to, but they were relatively well paid for it, so I'm grateful to them as well. I show up, my first semester at Harvard and wind up in advanced calculus math 55.
[06:46] I'm finding that math 55 has a syllabus, a third of which I had already covered, and so since I had since the first third of math 55 before, I'll be at a much, much more elementary level in terms of the linear algebra curriculum, and Andrei hadn't. The first two months impressed him with the false idea that I was a mathematical genius, I'd just seen this before.
[07:18] Ever since then, I have been in awe of how quickly he can grasp theoretical and quantitative arguments, and see where the mathematical argument is going and what will be possible and what won't. I've been feeling like I've been running other false pretenses that he thinks I'm smarter than I am, but that's because I was well prepared by Sidwell Friends.
David: [07:39] Let's turn to your new book. It's actually co authored with Stephen Cohen called Concrete Economics. Tell us the key arguments that you are making in that book. I know you have some historical examples, if you could draw in some of those as well.
Brad: [07:56] If you look at the United States since the late 1970s and if you look at where the economy has been going, you see we've been making a whole bunch of debts in terms of how the government structures the market place or de-structures the market place. We've been pouring a whole lot of economic resources into a large number of areas.
[08:27] We've been devoting a lot of resources to elite consumption in the belief that if we pay our elites, our top 1 percent, our top 0.1 percent, and our top 0.01 percent more a greater share of the total national product than we were from the 1940s to the 1970s, they'll do a better job at corporate control, at corporate management, at allocating investments that's spurring people to work hard.
[08:57] We've been pouring an absolute fortune into health care administration in an attempt to keep a private sector health insurance market place of one sort of another up and running, and we've been pouring a massive amount of money into finance that the way very smart Thomas Sclafani puts it.
[09:22] That we used to have financial assets of about two and a half times a year's GDP, and we would pay all told in management fees, in commissions, in price pressure to market makers. Pay about one percent of asset value each year to finance for managing our stuff which makes two and a half percent of GDP plus a half percent of GDP to run the payment system, a financial sector of three percent of national product.
[09:56] Today, we have four times annual GDP in gross marketed market of all financial assets of one form or another and we seem to be paying two percent of GDP to Wall Street in a metaphorical sense, in commissions, in management fees, and in price pressure when we panic and sell, or get enthusiastic and buy from the professionals. That's eight percent plus another half percent of GDP for running the payment system. That's eight and a half percent.
[10:28] That's a huge social investment in a sector that really does provide intermediate goods, the payment system, the corporate control, allocation of investment, and so forth.
[10:42] I think that the returns from all of these investments, whether it's in a more unequal distribution of income and wealth and higher elite consumption in order to spur our overclass to actually put their nose to the grindstone and do the job, whether it's devoting a fortune to healthcare administration.
[11:07] Uwe Reinhardt of Princeton, I think, has the statistic about how American doctors are 30 percent more cost effective than German doctors, but American healthcare administrators are only one sixth as effective as German healthcare administrators at output per cost and in the hypertrophy of finance.
[11:26] These are not really the industries of the future. These are not industries that lead to rising standards of living and economic growth in general. This is very different from the industries that America used to invest in. Whether it was aerospace, whether it was the initial waves of government support for the computer revolution, whether it was the interstate highway system.
[11:55] Before then, whether it was the decision to actually go for infrastructure, and also the Hamiltonian support for manufacturing and for what was then an advanced payment system and Indeed, an initial capital market back at the very early days.
[12:16] These are all political economic decisions. These are all produced by ways the government does or does not structure and restructure marketplaces. These are all the result of pushing and hauling by populist groups on the one hand, by technocrats on the other, by people who've managed to get a good thing going and are properly seeking rents on the third. Of course, it's easier to get rents if what you're doing is actually productive.
[12:49] Yet, it seemed to work quite well up until 1980 or so. By and large, the industries of the future, whether they were the Republican bet on land grant colleges in the 1870s, or the Jefferson Lincoln -- on up to the 1890s -- decision that we were going to sell off public lands cheaply to occupiers, rather than, with the exception of the railroads, allow land barons to engross them.
[13:24] The decision to give large and highly corrupt subsidies to build out a transcontinental railroad network that then enabled all kinds of not just extremely high scale mass production, but also high scale distribution. That is, the continental market for the Americas played a big role in producing America's edge over Europe in the late 19th century.
[13:48] All of these seem to be smart, in the way that our decisions since 1980 really have not been, so we thought we should write a little book about why this was so. The elevator pitch takeaway message is that back before 1980, we were self interested, we were political, we were somewhat corrupt, but we were also pragmatic.
[14:19] We thought we should be in the business of growing the economic pie more than anything else, and we would take a look at what were the options open to us at any one point and say, "What's going to grow this economic pie?" Given what's actually happening on the ground without paying too much attention to grand theories.
[14:42] Then around 1980, somehow we lost the narrative and we began pulling ourselves much more toward grand theories, as in, "Ideology tells us that this cannot work. Ideology tells us that that cannot work." It's that loss of American pragmatism that we want to blame for the fact that we currently have an economy that's grossly underperformed, except for our superrich over the past 35 years.
[15:22] We want a call to get back to a non ideological, but rather pragmatic approach to economic policy and political economy. Don't say that fundamental principles tell us that this is a good thing to do. Tell us how this policy is going to make us richer on the ground, soon and now.
David: [15:45] Let me ask you about one of the original discussions in your book. That goes back to Alexander Hamilton. You referenced him earlier...
Brad: [15:54] Yes, we're trying to sail as close as possible to the Hamilton boom without having an intellectual property misappropriation test case right now.
David: [16:02] You mentioned there's this tension, that any student who's had American History knows, between Alexander Hamilton's view of where America should go versus Thomas Jefferson. Here's a question I have that ties it to the point you mentioned about 1980. One of the things that's happened since 1980, that maybe confounds this issue is globalization begins to take off.
[16:28] The world economy slowly opens up and that's going to have some effect. I wonder. Today we see the rise of populism with certain candidates in different parts of the world. There seems to be a populist backlash. Does it hearken back to this debate between Alexander Hamilton and Thomas Jefferson? The elite versus the farmer philosopher...
Brad: [16:55] Thomas Jefferson is pretty damned elite.
David: [16:57] That's true. Fair point.
Brad: [17:00] Thomas Jefferson is not your yeoman farmer, much as he idealized yeoman farmers and thought, very ideologically, that...One of the guys who'd learned a little too much and yet not enough history of the duration and collapse of the Roman republic.
[17:27] He had people who thought that Rome was a great society, as long as it was all yeoman farmers who believed in the republic and solidarity, and farmed their own land, but willingly contributed to public purposes, waging wars, and serving in office.
[17:45] You go to Washington, DC, and you see all of these buildings reminiscent of what the people in the late 18th and the early 19th Centuries thought classical Rome ought to have looked like. Classical Rome being the Rome before the empire. Jefferson heard that and he believed that, so he loathed banks, he loathed cities, he loathed merchants, he loathed manufacturers, he loathed an urban proletariat.
[18:18] He wanted a country of yeoman farmers with all the other corrupt stuff somewhere offshore, with the exception of those people who were his own personal slaves. He did, at least, manage to free those who were his own personal descendants.
[18:44] That was a very strongly ideological road that Jefferson and company wanted America to take after 1776, after 1787, and fortunately, we did not take that road.
David: [18:57] Let's go to the example of the First Bank of the United States and the Second Bank of the United States. Hamilton clearly was a supporter of the First Bank of the United States which is our first central bank, and Jefferson was opposed to it. Then we see that lasted 20 years, and then a few years later the Congress charters the Second Bank of the United States which is our second central bank.
[19:21] Andrew Jackson comes into the picture, and he effectively shuts it down when he wins an election. What I want to point out about that period, though, is there is this tension again between at least perceived harm being done by the Second Bank of the United States by the elites. The president of the Second Bank was perceived as this elite, and it echoes to the present, I guess.
[19:46] Coming to the present, do you see any similarities between this debate between Hamilton, Jefferson, in terms of banks, in terms of elites, versus the Donald Trump supporters of the world, the people in Brexit, the rise of populism in Europe...Do you see that? Going back to your book, what proposals do you have to bring that tension down, to address it in a meaningful way?
Brad: [20:21] I say there are people who say that tension really isn't there in any stronger sense than in the past. That the way Tyler Cowen puts it, that it was always the case that 20 percent of America was crazy, but it used to be that 20 percent was divided between the two political parties.
[20:44] That there were western and northern type of people who were fairly crazy, who were ensconced in the Republican Party because they feared immigrants and the immigrant Democratic machines of the cities, and crime, and so forth.
[21:01] There were the people on the southern side, but they were not in the Republican Party. They were in the Democratic Party because Lincoln had freed the slaves, and they weren't going to forget that. The elements of Trumpism were always there, but they were marginalized because they were split between the two great coalitions of American politics, the right of center and the mostly left of center coalition. [21:34] If you want to put it another way, as Truman's Secretary of State Dean Acheson did, the party of enterprise, and the party of those who feared that enterprise is not going to give them their fair share of the stuff.
[21:50] Then we have this great partisan realignment starting in 1964, when Goldwater decides that there's a political opportunity to throw overboard the Republican Party's historic commitment to the American, African American population.
[22:06] Now we have everyone sorted, and so the Trumpists are still 20 percent of America, but they're 40 percent of the Republican Party, and because they're energized, they're 60 percent of the Republican primary electorate. That's Tyler's view, and I think there's a very strong case that that's a correct view. That it's a serious problem, and it's a serious problem not just for the Republican Party, but for America as a whole.
[22:41] In some ways it reflects the problems of America and of the Democratic Party back in the 1850s when the southern slave power was a minority in the country as a whole, and a minority even in the south.
[22:57] Because they were energized and activist and concentrated the Democratic Party, effectively the southern slave power elite controlled the Democratic Party and then were able to win more than their fair share of national elections.
[23:15] A grave problem, but it's not a big change in terms of the underlying economic interests and views of the people, or even of the underlying sociological interests and views of the American people. It's just a concentrate not a weak point in our political system. I think that's by and large likely to be correct.
[23:42] In Britain and elsewhere, other things are happening and the other things that are happening are produced largely by the fact that the Great Recession has now been significantly deeper in Europe than in the United States. As we know from the 1930s, European political systems and America, too, are very vulnerable to any form of economic distress.
[24:10] "Throw the bastards out and go for somebody who is not part of the establishment," seems to be what they do. They can go left, they can go right, they can go into outer space, they can go deep underground. They're just going to go somewhere.
[24:30] It's a combination of politicians who are attempting to ride this wave, coupled with true believers, coupled with the fact that ex Prime Minister Cameron is a real idiot, has produced a situation in which Scotland and Wales are regarding non London England with horror and despair right now.
[24:57] In which case, the great cosmopolitan city of London is looking at the people surrounding them and just wondering what's going to happen to them as their political destinies are settled by a bunch of politicians who are riding a wave composed of people who truly do not understand, who have not been briefed, who have been substantially misled as to what their proper relationship with Europe should be.
David: [25:32] I'm sympathetic to your argument about the deepness of the Eurozone crisis setting the stage for some of the challenges over there. That's a fair point. The Great Depression, 1930s, we saw that same phenomenon occur across the world, particularly in Germany and Italy.
[25:51] I want to move on now to an article you wrote in "The Journal of Economic Perspectives" in 2000. It was titled, "The Triumph of Monetarism," and you recently revisited it. I'd like you just to tell us the argument you made back then and what observations are you making now 15, 16 years later about that argument?
Brad: [26:12] I think that the germ of it, although I don't know if I acknowledge it in the article, came from Matthew Shapiro, now at the University of Michigan, who said that he had an interesting time as he went through undergraduate at MIT and then through graduate school at MIT. As a freshman at Yale, he was taught that monetarists were bad because they believed that changing the money stock changed nominal GDP and changed output.
[26:44] This was why the Chicago school was a bad thing, and yet by the end of his last year of his graduate study at MIT, he was being taught that Chicago style economics was bad because they thought that changes in the money stock did not affect nominal GDP. Or maybe they affected nominal GDP, but they certainly did not affect output. [laughs] This was very weird. That is, to be a Keynesian in 1974 was to deny that monetary variables had an important role to play in the C + I + G = PY equation.
[27:32] By 1984, 1985, the Keynesians were saying, "Well, of course, the money stock is close to a sufficient statistic for nominal GDP. Velocity's not very volatile, and you combine nominal GDP with some degree of price inertia at the aggregate level, and of course, most movements and business cycle frequencies are driven by changes in demand and spending. Money demand and money supply."
[27:58] Money supply being partly exogenous and partly endogenous, and then saying this was truly weird. A very weird change in a very short time as to what one was supposed to say in order to a Keynesian in good standing.
[28:16] I decided I should go back and I should take a look at the intellectual history. The conclusion of "The Triumph of Monetarism" was that practically all modern Keynesians, as of 2000, were really monetarists.
[28:32] That is the only dispute they possibly had with Uncle Milton was on whether a key percent fixed nominal money stock growth rate rule was an adequate feedback rule for monetary policy, in order to do the best you could at stabilizing aggregate demand.
[28:55] That practically everyone agreed that fiscal policy planning and legislative implementation lags meant that fiscal policy really should be off the table except for automatic stabilizers, which were useful. With Paul Krugman whimpering off in the corners saying, "What if you happen to hit the zero lower bound and wind up in a liquidity trap like Japan?" Everyone also saying, "Nah, Japan's weird. We won't get there."
[29:23] Fiscal policy should have automatic stabilizers but otherwise should be settled on classical terms. Monetary policy should be the primary economic stabilization tool, and the interesting research questions are all about what should replace the k percent growth rule as an intermediate target which the central bank should try to use in order to try to stabilize the ultimate variables that it cares about.
[29:53] Calvo pricing, price rigidity, the Euler equation, the new Keynesian IS curve, all of these things, all of these tools, all of these doctrines, all of these arguments, were simply an attempt to put an underlying rationale behind instincts that were generally Friedman like.
[30:18] That is that monetary policy was the key link, that the central bank had an awesome responsibility, that you didn't want anything as fully automatic and rigid as the gold standard, but you did somehow want to effectively constrain the central bank so that it couldn't misbehave the way that Richard Nixon had persuaded Arthur Burns to misbehave in 1972 and that Richard Nixon had failed to persuade Martin to misbehave back in 1960.
[31:00] This was the problematic within which the discussion was taking place outside of the real business cycle people, who were off on their own building tools and yet failing to build anything that could be estimated or even calibrated to actually match the data as it came through.
[31:21] How it was that a bunch of people who were essentially monetarists had decided they were really Keynesian seemed to be an interesting question.
[31:30] The fact that they were really monetarists, even though many of them didn't know it and others claimed not to know it, that they were much closer to Friedman than they were to someone like Tobin seemed to me something that people should be taught and that should be underlined.
David: [31:48] What was the insights that you have looking back now at this 15 years later, 16 years later?
Brad: [32:03] Suppose you're Milton Friedman. It's just after World War II. You've managed to get an academic job at Chicago. You've had a relatively difficult time getting it because you're not enthusiastic about socialist planning or even semi socialist planning. You're a member in good standing at the Mont Pelerin Society.
[32:28] Simon Kuznets had given you a job at the NBER for a while, even though he'd worked you hard.
[32:34] Before then, your first attempt to have an academic career had flamed out when, as I understand it, the legislature at Wisconsin had told the administrators in Madison there were too many Jews on the faculty. We don't want you tenuring, promoting any more young Jews. There are too many of them, especially for Wisconsin.
[32:52] This gives Friedman a very sensible and rational fear of an over mighty government, reinforces his predispositions to think that what we want is a competitive markets everywhere. Pigouvian taxes where they're really necessary, but only where they're really necessary, because the process of passing them is subject to rent seeking.
[33:20] Even a bias toward actively engaging in Pigouvian taxes is probably harmful, as much as the micro says you ought to have them. The best you can do is try to preserve competitive markets and let the market system rip. If monopolies do emerge, they'll be eroded over time if they aren't powerfully backed up by the government. The whole thing.
[33:44] The problem with this, though, is that people point and look at the Great Depression and say, "Isn't this an absolutely mammoth market failure? Doesn't the fact that the market failed here and badly needed correction by some public sector entity indicate that there are likely to be equally big and bad market failures elsewhere?"
[34:08] The one hand, macroeconomics is a weak point for the general Chicago/Mont Pelerin view of the world. Also, his allies, ideological and otherwise, in other parts of economics, they want to say, "Gee, we have to have a gold standard, because anything else is government intervention in the marketplace."
[34:33] We see this today. Someone like John Taylor is confused, highly, highly confused, when he claims that somehow central bank opened market operations to shift the interest rate or like a minimum wage, and a market distortion, and create Harberger triangles. Never been able to figure out what the Harberger triangle is, because he's simply wrong.
[34:58] Friedman decided he needed to sail a very narrow and very clever intellectual path through the clear ocean between these Scyllas and Charybdises.
[35:10] Which was to say the Great Depression was a government failure because the government has as one of its principle market structuring obligations to maintain a proper monetary standard, just as it has an obligation to maintain proper weights and measures so you know what you're buying and selling.
[35:30] A proper monetary standard requires the avoidance of both deflation and inflation, requires a monetary policy. A k percent growth rule is an approximation to that. The policy of having the central bank massively intervene in the marketplace buying and selling high powered money in order to keep the money stock stable, that's actually a neutral monetary policy.
[36:00] That's government non intervention in the marketplace. The non interventionist government is the one that frantically buys and sells liquid assets in order to keep the supply of liquidity services flowing to the private sector through the banking system constant.
[36:17] At some level, this is insane. The money stock is, after all, a thing that is largely inside money. The money stock is largely a measure of the amount of liquidity services provided to the rest of the economy by the banking sector. Milton Friedman's k percent rule is a quantity target for the output of the liquidity services industry.
[36:43] Is there any other industry for which the government has an obligation to obtain a quantitative target for the service flow? Do we have a Federal Electricity Board that follows a policy of trying to keep the path of kilowatt hours generated stable? Do we have a Federal Railroad Commission with the job of trying to keep the number of freight cars loaded per month stable?
[37:08] No, we don't. Why are liquidity services, in some sense, the key link? Friedman never answered this. As long as he could maintain that his k percent rule or even a modified k percent rule, something that approached nominal GDP targeting, at least by the time Friedman was giving advice to Japan in the late 1990s...
[37:36] As long as he could maintain that that was actually the neutral monetary policy that was non interventionist, you could maintain the seamless garment of being a free market, libertarian economist who believes that competitive markets without government interference were ideal.
[37:56] Yet, avoid the vulnerabilities to financial chaos, collapse, and Great Depression that Friedman strongly believed had been generated by the interwar gold standard and, before then, by the fact that the pre Federal Reserve United States monetary system was extremely vulnerable to collapses of the money supply and financial crises.
[38:23] It turns out that that was a successful rhetorical line intellectual position to hold on for pretty much until Milton Friedman died. As soon as 2008 rolled around, all of a sudden the monetarist coalition that had understood, say, the types of policies that Friedman recommended for Japan in the 1990s and also for the US in the Great Depression...
[39:11] The right of center coalition willing to swallow that as a neutral monetary policy was simply not there. Maybe if Friedman, in his time, had still been in there arguing, it might have been able to maintain, but the number of people who confidently expected quantitative easing to produce massive inflation no later than 2011 was very, very large.
[39:42] Paul Ryan still doesn't understand why all his economic advisers told him that Ben Bernanke was debasing the currency and needed to be stopped immediately.
[39:57] When then Texas governor Rick Perry went to Iowa and said that Bernanke's monetary policies were almost treasonous and that if he came down to Texas, we would give him the hot reception that people in Texas used to give to Communists and civil rights leaders, he was pursuing, in some sense, what had become the mainstream of right of center opinion on monetary policy.
[40:36] Which is that somehow there's something very wrong with having the government do the massive, large scale interventions in the money market that it has been doing ever since mid 2008, and this is bound to be a destructive interference with the free market somehow.
[40:57] That's a very strange position for people who at least still bow to Milton Friedman as great libertarian economist ancestor to put themselves in.
David: [41:10] Let me switch topics, but in a similar vein, in the few minutes that we have left. That is you have mentioned several times in your writings how you thought prior to 2008 it was widely understood that macroeconomic policy, both fiscal and monetary policy, would be used to stabilize the growth path of nominal demand.
[41:33] It didn't do that. It's disappointing. I think we can both agree on that point. In the next five minutes we have left in the program, why do you think it's come to this? What has led policymakers to settle for allowing past mistakes to have occurred and not to correct for them?
Brad: [41:54] Damned if I know.
David: [41:56] You think it's inflation targeting? Is it commitment to low inflation?
Brad: [42:02] I really do not know. I'm supposed to do a paper for this for the Federal Reserve Bank of Boston in October, and I agreed because it's still very much a mystery to me. That is, you have a consensus model, at central banks at least, that we have. We very much want to avoid deflation, because we fear Irving Fisher like debt deflation spirals.
[42:40] We believe in substantial amounts of nominal price rigidity in the short and medium run in labor and product markets, so we can't count on rapid price adjustment, either downwards or upwards, in order to stabilize nominal GDP. As John Maynard Keynes said, inflation and deflation are really unjust, as well.
[43:07] It seemed to me that, given your belief in a world where there's this macroeconomically significant market failure of short and medium run price rigidity, what you do is you use monetary policy to try to stabilize nominal GDP.
[43:23] If monetary policy won't do the job, then you turn to your next tool, which is fiscal policy. After all, the purpose of macro policy is to make Say's law true in practice given the market failures we have out there. This wage and price rigidity is the principle market failure.
[43:43] Yet, ever since late 2009, not just politicians in legislatures and in executives but central bankers, as well, have been reaching for reason after reason not to take the signal that decelerating growth in nominal GDP should lead one to think in the context of a world in which you think that stable inflation expectations and short and medium run price inertia are the key features that need to be handled.
[44:31] I really do not know why, especially with interest rates at their current level and thus with real debt service on the US national debt, not just zero but negative, that you don't even need hysteresis of any form at current interest rates for fiscal expansion to reduce the debt burden, just the short run stuff. The short run tax offset will do it.
[45:04] Then, the long run, we're borrowing at less than the nominal GDP growth rate of the economy.
[45:14] Why helicopter drops and infrastructure investment are not obvious no brainers across the political spectrum and also across the spectrum of economics as tools to get nominal GDP back onto its pre 2008 track remains an extraordinary mystery to me.
[45:37] As much as I try to listen to the Ken Rogoffs, and the Marty Feldsteins, and the others who are opposed to one or more of these tools, I simply cannot wrap my mind around what their arguments really are.
David: [45:48] I look forward to reading your paper for this conference, since you'll be thinking about this issue for some time. Our guest today has been Brad DeLong. Brad, thank you for being on the show.
Brad: [46:00] You're welcome. Thank you very much.
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Transcription by CastingWords