Listening to Arsonists

How Damaging Is Plutocracy for Economic Policy?

Is Plutocracy Really the Problem by J Bradford DeLong Project Syndicate

No Longer Fresh at Project Syndicate: Is Plutocracy Really the Problem?: After the 2008 financial crisis, economic policymakers in the United States did enough to avert another Great Depression, but fell far short of what was needed to ensure a strong recovery. Attributing that failure to the malign influence of the plutocracy is tempting, but it misses the root of the problem.... In fact, big money does not always find a way, nor does its influence necessarily increase as the top 0.01% captures a larger share of total income.... The larger issue...is an absence of alternative voices. If the 2010s had been anything like the 1930s, the National Association of Manufacturers and the Conference Board would have been aggressively calling for more investment in America, and these arguments would have commanded the attention of the press. Labor unions would have had a prominent voice as advocates for a high-pressure economy. Both would have had very powerful voices inside the political process through their support of candidates. Did the top 0.01% put something in the water to make the media freeze out such voices after 2008?... Read MOAR at Project Syndicate


Why did the economic policy response to the Great Recession that started in 2008 only partially reflect the lessons learned from the Great Depression that started in 1929? Up until now the smart money has been on Martin Wolf and Barry Eichengreen's interpretation: Enough was remembered to keep the 2008 shock, which was as large as the 1929 shock, from being nearly as destructive. But a lot had been forgotten as an ideological drift to the right took hold and was unchecked by reality because of the rareness of deep depressions in the countries from which global economics drew its thought leaders. And the partial relative success in managing the crisis at first gave the establishment confidence so that thought and policy remained substantially ossified by ideology and partisanship.

Now, however, comes Paul Krugman with an alternative explanation: plutocracy. At the start of the 2010s, the top 0.01%—30,000 people around the globe, half of them in the United States—were for the most part unconcerned with high unemployment which they and their circles barely saw, were greatly alarmed by government debt and calling for austerity, and exercised a Gramscian hegemony over the public sphere: "the political and media establishment internalized the preferences of the extremely wealthy".

Would American politics and political economy in the 2010s have been materially different had the 1980s, 1990s, and 2000s seen the income share of America's 0.01% constant, rather than rising from its old 1.3% to the past decade's 5%? Paul Krugman's judgment that it would be underpins his claim the because "in the end big money will find a way—unless there’s less big money to begin with", curbing plutocracy is America's political-economic job #1: the first "necessary step toward a healthier political system". But I think he is wrong. Big money does not always find a way. For big money to find a way is not that much easier when big money has 5% rather than 1.5% of national income—when the average plutocrat has 50000 rather than 12500 times the income of the average. And Big Money was not tightly attached to attempts to unlearn the lessons of the Great Depression.

Let's look at the five lessons, and at Big Money's attachment to them:

A first lesson—that an episode of high unemployment was extremely unhealthy and was not, as early 20th-century economist Josef Schumpeter had claimed, simply a bracing "cold douche" for the economy—was forgotten only by a lunatic fringe: for example, John Cochrane of Chicago and Stanford's cry that a recession was needed to stop people from pounding nails in Nevada. Big Money was not invested in the Hoover administration belief that the market system was so perfect that a general liquidation was to be welcomed.

A second lesson—that monetary expansion and bank rescues were powerful but limited tools to fight high unemployment—also drew dissent only from a fringe, albeit a larger fringe. This fringe's size and anger was, however, reinforced by an absence of an answer from Obama or Bernanke or Draghi or anybody else as to why so much concern was focused on restoring asset prices and cushioning those who had over leveraged than on those who had played by the rules and yet lost their jobs. Big Money may have mourned the loss of income from lower interest rates, but it applauded the boost to asset values.

But forgetting a third lesson—that the continuation of very low interest rates were proof positive that the economy was not awash in but rather still short of safe and liquid stores of values, and called not for cutting back on but rather further monetary expansion—rapidly became a required litmus test for holding office as a member of or being a candidate endorsed by the Republican Party. And an astonishingly large number of economists of formerly good reputation joined in, having forgotten that the market price that is the short-term safe interest rate is a good thermometer. Or perhaps they only wished to appear to have forgotten: the level of cynicism and posturing seemed, to me at least, unusually high. Here the financial wing of Big Money was important, fixating on a false idea that the Federal Reserve was trying to push values away from "fundamentals" and so was doomed, and not recognizing that "don't fight the Fed" is a rule-of-thumb for the good reason that within wide limits fundamentals are what the Fed says they are.

And a fourth lesson—that having the government print or borrow money and buy stuff was an effective tool of last resort when unemployment was worrisomely high—could not even command the assent of American President Barack Obama, his Treasury Secretary Tim Geithner, or his highest political and policy advisors beyond the end of 2009, at which time the unemployment rate was still 9.9%. Here it was not Big Money but rather the neoliberal surrender of the high ground by the Democratic Party. It was not Ronald Reagan or George H.W. Bush or George W. Bush who used his State of the Union address to say "the era of Big Government is over". It was Bill Clinton. And while Bill Clinton and his administration only one-quarter believed that, Barack Obama and his administration by and large did.

Last but not least, there was a fifth lesson: that governments could and did successfully keep interest rates low enough after World War II that the then-high levels of government debt did not lead to loss of control over the price level and an unwanted inflationary spiral. Thus stabilizing the government debt was simply not a priority as long as inflation was elevated: as John Maynard Keynes wrote in The Times in January 1937: "The boom, not the slump, is the right time for austerity at the Treasury..." But in this case those of us who remembered this lesson—well, we were the fringe viewed as "lunatic" by the near-consensus of the public sphere in the early 2010s. Here it was not the presence of Big Money—Big Money well understands that one makes money by borrowing when money is cheap and lending is dear—but rather the absence of other voices. In an earlier era the National Association of Manufacturers and the Conference Board would have been aggressively promoting and frequently quoted on the benefits of investment in America. In an earlier era the AFL-CIO would have had a prominent voice as an advocate for a high-pressure economy.

Did Big Money put something in the water to make Big Media freeze investment-in-America, labor, and mass-production manufacturing voices out of the public sphere? And if so, what? Yes, the political implications of plutocracy are annoying and destructive: Olin money distraining judges, Koch money misinforming people about global warming, Murdoch money terrifying old people that terrorists are crossing the southern border to kill them, Peterson money trumpeting fake awards for fiscal responsibility to budget arsonists—all of these are harmful.

But just because the public sphere of discussion and debate is burdened by plutocracy does not mean the fight for less irrational policies over the next decade is doomed before it begins. Indeed, Paul admits as much toward the end of his article, where he condemns future "journalist[s and] centrist politician[s] who... internaliz[e] the prejudices of the wealthy" as "pull[ing] another 2011, treating the policy preferences of the 0.1 percent as the Right Thing", and calls for "vigilance... [to] mitigate the extent to which the wealthy get to define the policy agenda". The first task is to ask yourself every day: Which voices are being heard much more frequently than they deserve? And which voices are not being heard at all?


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