Grasping Reality on TypePad, by Brad DeLong

Full Column: Although the United States has entered a period of deepening social strife and economic depression, the Republicans who are in charge have neither the ideas nor the competence to do anything about it. The Democrats must start planning to lead, starting with a commitment to full employment.

BERKELEY – Like almost all other countries, the United States has become poorer since the COVID-19 pandemic began, because Americans can no longer engage in valuable activities that require close human contact. Millions of workers now need to find other productive things to do, and many of these new tasks will not be as valuable as the ones they replaced.

But there is no economic reason why the depression triggered by the COVID-19 crisis should be particularly deep or prolonged. The US leads the world in technological and organizational competence and is home to a highly skilled workforce. The problem is that recovery won’t happen by itself.

The fact that it took a decade for the US to recover fully from the 2008 financial crisis should inform today’s thinking. Back then, the US housing-construction sector had already shrunk back to its normal size before the subprime-mortgage crisis erupted, which meant that no sectoral structural adjustment was required. The challenge, rather, was to identify and reallocate resources to previously unproduced goods that would become more valuable in the future.

Moreover, the 2008 financial crisis and ensuing recession did not make American workers less skilled or reduce the effectiveness of existing technologies. In the short term, it destroyed many professional networks and reduced the social trust that underpins the economy’s division of labor. The only long-term effect was a loss of investor confidence in private-sector financial institutions’ ability to create safe, properly-rated financial assets.

But that is why it took a decade for US employment to recover from the subprime crisis. The world was short of safe assets, and governments failed to address that problem in the right way. The US, for its part, should have done more to mobilize extra private-sector risk-bearing capacity, create safe public assets, and support workers, including by printing money and buying stuff to drive effective demand and employment growth. Although there is no reason why it should take a decade for employment to return to its pre-pandemic level, that is probably what will happen. The same forces that led policymakers to declare victory over the crisis and shift to “austerity” in 2010 are already at work again today. It is clear that the US federal government over the next month will offer no new policy initiatives to mitigate the depression or to improve upon America’s failed public-health response.

It is also clear that the Republican Party has no valid ideas for how to achieve a “V-shaped” recovery. Additional tax cuts for the rich would do as much to boost demand and employment as they did when the GOP rammed through the Tax Cuts and Jobs Act in late 2017: absolutely nothing. Similarly, slashing social programs might make workers even more desperate to find jobs; but despair won’t translate into additional employment if the spending isn’t there. Nobody with any authority in President Donald Trump’s White House knows what to do, and no one would be competent enough to implement the right policy if they stumbled on it accidentally.

With the GOP controlling three of the US government’s four veto points (the presidency, the Senate, and the Supreme Court), America will remain without a coherent response to its multiplying crises at least until January 2021. Republicans are already doing everything they can to suppress voter turnout ahead of the election this November. But assuming that those efforts fail and Democrats reclaim the White House and potentially even the Senate, what should they do to rescue America from another lost decade?

First and foremost, the Democratic Party must commit unconditionally to the principle that every American who wants a job should be able to find one. And while that job need not be great, it must pay enough to keep the worker’s family above the poverty line. Every policy under consideration should be judged by whether it accords with this principle.

A federal commitment to full employment is not a new idea. The US Employment Act of 1946 embraced the principle, but has since been watered down, owing to complaints that government support of full employment is unaffordable. The best response to such objections has always been John Maynard Keynes’s quip during a 1942 BBC radio address that, “Anything we can do, we can afford.” What he meant is that, far from acting as an independent binding constraint on economic activities, the financial system exists precisely to support such activities.

Finding useful jobs for willing jobseekers is surely something we are capable of doing. But adjusting the prevailing payments and financial structure to support full employment would of course have consequences. For example, we might discover that, under conditions of full employment, the rich would need to bear substantial risk in order to achieve sustained compound growth on their wealth. As Keynes argued, full employment would “lead to a much lower rate of interest” and thereby function as the “euthanasia of the rentier.” So be it. To maintain their glitzy lifestyles, the rich would either have to draw down their capital or wager it on risky enterprises.

Supporting full employment also may turn out to require higher and more progressive taxes, and it may lead to public-debt levels that would seem unfathomable to those who lived through the 1970s. So be it. If sky-high debt is required to achieve full employment in the medium term, it is justified. The only way that it could become dangerous is if the economy were to shift out of its current secular stagnation, at which point sky-high debt would no longer be necessary.

Finally, restoring and maintaining full employment may require that we divert demand from elite consumption to labor-intensive sectors like public health. It also may require a large-scale labor-intensive public-works program. So be it. It’s time to make full employment our highest priority. Once we have done that, everything else will fall into place.

First Draft: There is no rational reason why the coronavirus depression has to be both deep and long. We have immense social power in terms of our technological and organizational competence and immense reserves of skill and energy in our workforce. We are poor or as a result of coronavirus: a lot of valuable activities that involve sustained close human contact, especially in places at all reminiscent of the batcaves in which the ‘rona evolved, now have costs greater than benefits. That means that many of us need to find different productive things to do, many of us temporarily and some of us permanently, and those different things will be somewhat less valuable to us than the sustained-close-human-contact jobs used to be.

But all of that does not provide a single rational reason why it should take, say, a decade before the share of Americans with jobs gets back to its pre-‘rona sustainable full employment level.

The problem is that there was no rational reason, a decade ago, why it should have taken a decade after the subprime financial crisis before the share of Americans with jobs ggotets back to its sustainable full employment level. Yet it did. The housing construction sector had already shrunk back to its normal size before the subprime crisis hit. There was no sectoral structural adjustment required. There was on need to grope for what previously unproduced commodities it was now to society’s benefit to make. The crisis itself did not make our workers less skilled or our technology less effective and powerful. In the short run, the subprime financial crisis destroyed a great deal of the network of social trust that supports our extremely powerful and fine societal division of labor. But in the long run the only durable effect of the crisis was to destroy investor confidence that private-sector financial institutions could create truly-safe properly AAA-rated financial assets.

And yet it took a decade after the subprime crisis before the share of Americans with jobs gets back to its pre-‘rona sustainable full employment level.

Why? Because the world was short of safe assets in the aftermath of the destruction of the confidence that private-sector financial institutions could create such. And governments failed to properly step in, either to create institutions to mobilize extra private-sector societal risk-bearing capacity to reduce the demand for safe assets, to create public safe assets in sufficient quantity themselves, or to stand up and print money and buy stuff and employ workers themselves to rapidly return the North Atlantic economy to sustainable full employment.

There is not a single rational reason why it should take, say, a decade before the share of Americans with jobs gets back to its pre-‘rona sustainable full employment level. But right now the odds are that it will. For the same forces in the factors that led the great and good of the north Atlantic to declare victory over the economic emergency of unemployment in 2010 and turn it toward “austerity“ are at work today. These forces and factors can be beaten: but they could have been beaten over 2010 to 2014, and they were not.

Over the next month the United States will in all probability do nothing on the policy level— nothing either to prevent the coronavirus depression from being deep and long nor to keep America’s public health response to coronavirus from being among the worst if not the worst in the global north.

America’s Republican Party has no valid ideas for how to create a V-shaped path for the economy. More text cuts for the rich would do exactly as much to boost demand and employment as the McConnell-Ryan-Trump TCJA did to boost demand and employment 2.5 years ago: zero. Cutting social insurance benefits relative to what they ought to be Will make more workers desperate to find jobs, but if the spending is not there workers’ desperation to find jobs has no more effect than does commuters’ desperate wish to go faster in a bumper to bumper traffic jam.

Nobody in the Trump White House with enough authority to make policy has any idea how to figure out what good policy might be, or even how to implement a good policy if they by accident uncovered one.

And with strongly partisan Republicans in charge of three of the four federal veto points—Presidency, Senate, and Supreme Court—in the U.S.’s antiquated orrery of a system, the Democratic Party can do nothing effective until January, and can operate then only if Republican voter suppression efforts are unsuccessful and if the voters trust the Democrats enough.

So what should the Democratic Party do, should there be a chance in January 2021 to rescue America from another lost decade like the one that followed 2007?

I believe that they should grasp onto one principle, and hold on to it for dear life. Every American who wants a job and is willing to work should be easily able to find one. It may not be a great job. But it will be a job. And it should keep their family above the poverty line. Every policy should be judged first by: is it part of that commitment?

Some will say that such a full-employment commitment—a commitment that Harry S Truman and his wing of the Democratic Party wanted to make back in 1946, when they proposed the “Full Employment Act”—is not something that we can afford. Here I remember what John Maynard Keynes said on the radio in 1942: “What we can do, we can afford”. The financial and payments structure exists to support our activities. It is not an independent binding constraint on them.

And surely finding useful jobs for people willing to work is not something we cannot do?

Now arranging the payments and finance structure to support full employment will have consequences. It may well not be possible for the rich to see their wealth compound without doing their job as substantial risk-bearers. Keynes certainly thought that was the case—that successful attaining full employment meant the euthanization of the rentier, and that the rich who wished to live in high style would be able to do so only by drawing down their capital, or making massive bets on risky enterprise. If so, so be it. Full employment may well turn out to require higher and more progressive taxes as part of its financing. So be it. Full employment may turn out to require levels of national debt the curl the hair of those who live through the 1970s. So be it: if sky-high debt is required for full employment, it is not dangerous; and if it were to be dangerous it would be because the economy will have shifted out of its current secular stagnation into a configuration in which sky-high debt is not necessary. Full employment may require that we divert demand from elite consumption to labor-intensive sectors like public health. So be it. Full employment may require a large-scale labor-intensive public-works program. So be it.

Prioritize full employment. And then all other policies will fall into their natural places around it.

#coronavirus #highighted #macro #orangehairedbaboons #2020-06-02

html file: https://www.bradford-delong.com/2020/06/what-the-democrats-must-do-project-syndicate.html

edit html: https://www.typepad.com/site/blogs/6a00e551f08003883400e551f080068834/post/6a00e551f0800388340263ec1f49f9200c/edit

pdf: https://github.com/braddelong/public-files/blob/master/ps-what-democrats-must-do.pdf

edit pages: https://www.icloud.com/pages/0fy-YHTnKbH6GxN31qw46o4Ag

slides <>

edit slides <>

HAS NEXT STEPS: slides, audio...