J. Bradford DeLong
A Strange Kind of Tea for the Tillerman J. Bradford DeLong U.C. Berkeley October 15, 2010
A Different Set of Friends Last week I spent some time with a group of people I don't usually spend much time talking to. They were not rich--by which I don't mean that they had overstretched themselves by buying a seven-figure principal residence but rather that they weren't rich: their household income was in the five or, for some of them, perhaps the very low six figures. And (which is unusual for Berkeley) they were not lefties, neither cultural nor sociological. They were deeply concerned with the future of our country. And they were desperate to figure out how to engage in effective political action--but had few illusions that the politicians they would vote for in November were their kind of people with their interests at heart. I suppose that in a previous era, back when there were private-sector unions, they might have been union stewards. But now we have no private-sector unions. And so they are activists from the California Tea Party.
My Argument So I went through my standard spiel. Housing bubble. 5 million excess houses built in the desert between Los Angeles and Albuquerque, and on
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J. Bradford DeLong
all of them the least $100K of mortgage debt will not be repaid. A $500B loss in an $80T world economy. Shouldn't have been a problem— securitization exists to spread risks. But the banks pretended that the AAA MBS issued by other banks were high-quality Basel capital even though they knew full well the dreck that they were issuing. A financial multiplier of 40. A flight to safety. A big shift away from spending on currentlyproduced goods and services and on currently-employed labor as people tried to build up their stocks of safe assets. A multiplier as people who lost their jobs stopped spending, and the situation snowballed. It could have been worse, I said. Without all of the rescue policies we would probably now have an unemployment rate of 16 percent rather than 10 percent. But they question is what to do now with the economy. The idea is not to go to socialism—not to nationalize large chunks of the economy and have everybody work for the government—but to conduct strategic interventions in financial markets. Relieve the excess demand for safe high-quality assets and you remove the pressure on people to spend less than they earn as they try to build up their stocks of safe assets, and you get a virtuous circle of strong recovery. So, I said, the right thing to do is the Bagehot rule: lend freely at a penalty rate. The government should throw huge amounts of money at the financial markets and in the process take a large chunk of the upside in equities and options.
Their Response SOCIALISM, they said. We don't want SOCIALISM. But it's not socialism, I said. It's an attempt to avoid socialism—it's an attempt to conduct a strategic intervention into the market economy so that it can rebalance itself.
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J. Bradford DeLong
SOCIALISM, they said. Well, I said, how about lending freely to the financial sector but forget Bagehot's "penalty rate" stuff? BAILOUT, they said. BAILOUT OF CORRUPT FINANCIERS WITH WASHINGTON CONNECTIONS, they said. WE LIKE THAT EVEN LESS. Well, I said, how about pushing off taxes into the future, bringing forward infrastructure spending we know that we will want to do, and financing it by issuing more government debt? The spending should put some people to work, and the extra government bonds we print up will increase the supply of safe assets, decrease the excess demand, and so remove some of the downward pressure that is inducing people to spend less than they earn/ DEFICIT, they said. DEFICIT BAD. MUST REDUCE THE DEFICIT. GOVERNMENT MUST LIVE WITHIN ITS MEANS. But, I said, the U.S. government now can borrow at unbelievable terms. If you could borrow at such terms, you would bust out the top of your house and add a second story immediately. GOVERNMENT MUST LIVE WITHIN ITS MEANS. OK, I said. How about having the federal government aid the states. We want to keep our police and our fire and our road maintenance and our schools running at their efficient levels, don't we? It's stupid to cut back on the long-term foundations of our economy and its growth because of recession, isn't it. How about a large program of federal aid to the states so that teachers, sewer workers, police officers, and firefighters can keep their jobs, keep protecting us—and keep spending and so provide employment for the rest of us?
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J. Bradford DeLong
ARE YOU KIDDING? THEY HAVE KEPT THEIR UNIONS. WE HAVE LOST OUR UNIONS. WE HAVE LOST OUR JOBS. THEY HAVE GONE TO CHINA. THEY HAVE VANISHED. WE ARE UNEMPLOYED. IF WE ARE EMPLOYED WE HAVE NO BARGAINING POWER WITH OUR BOSSES. IT IS NOT FAIR FOR STATE WORKERS TO NOT ONLY HAVE UNIONS, BARGAINING POWER, AND PENSIONS, BUT FOR THEM TO HAVE THEIR JOBS TOO. SINCE WE ARE LOSING OUR JOBS THEY SHOULD LOSE THEIR JOBS TOO. IT IS NOT FAIR. Oh. EVERYTHING YOU PROPOSE TAKES OUR HARD-EARNED MONEY, TAXES IT AWAY FROM US, AND GIVES IT TO SOMEBODY ELSE. Oh. BERKELEY SOCIALIST. So what do you think we should do? GET US JOBS! But you have just rejected every idea I have for boosting unemployment— short of nationalizing the means of production and employing everybody by the government, that is. What are your ideas? CUT TAXES. ABOLISH THE EPA. REPEAL HEALTH CARE REFORM. KEEP GOVERNMENT'S HANDS OFF OF MEDICARE. RAISE SOCIAL SECURITY PAYMENTS. CUT THE DEFICIT. October 13, 2010: 956 words
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