J. Bradford DeLong
Axis of Depression J. Bradford DeLong U.C. Berkeley November 20, 2010
Paul Krugman: Axis of Depression: What do the government of China, the government of Germany and the Republican Party have in common? They’re all trying to bully the Federal Reserve into calling off its efforts to create jobs.... It’s not as if the Fed is doing anything radical. It’s true that the Fed normally conducts monetary policy by buying short-term U.S. government debt, whereas now, under the unhelpful name of “quantitative easing,” it’s buying longer-term debt. (Buying more shortterm debt is pointless because the interest rate on that debt is near zero.) But Ben Bernanke, the Fed chairman, had it right when he protested that this is “just monetary policy.” The Fed is trying to reduce interest rates, as it always does when unemployment is high and inflation is low.... So the case for Fed action is overwhelming.... But there are reasonable people — and then there’s the ChinaGermany-G.O.P. axis of depression. It’s no mystery why China and Germany are on the warpath.... Both nations are accustomed to running huge trade surpluses.... The Fed’s expansionary policies... have the side effect of somewhat weakening the dollar... paving the way for a smaller U.S. deficit. And the Chinese and Germans don’t want to see that happen....
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J. Bradford DeLong
But why are Republicans joining in this attack? Mr. Bernanke and his colleagues seem stunned to find themselves in the cross hairs. They thought they were acting in the spirit of none other than Milton Friedman, who blamed the Fed for not acting more forcefully during the Great Depression — and who, in 1998, called on the Bank of Japan to “buy government bonds on the open market,” exactly what the Fed is now doing. Republicans, however, will have none of it, raising objections that range from the odd to the incoherent. The odd: on Monday, a somewhat strange group of Republican figures — who knew that William Kristol was an expert on monetary policy? — released an open letter to the Fed warning that its policies “risk currency debasement and inflation”... [not[ explain[ing] why we should fear inflation when the reality is that inflation keeps hitting record lows.... Two Republicans, Mike Pence in the House and Bob Corker in the Senate, have called on the Fed to abandon all efforts to achieve full employment and focus solely on price stability. Why? Because unemployment remains so high. No, I don’t understand the logic either. So what’s really motivating the G.O.P. attack on the Fed? Mr. Bernanke and his colleagues were clearly caught by surprise, but the budget expert Stan Collender predicted it all. Back in August, he warned Mr. Bernanke that “with Republican policy makers seeing economic hardship as the path to election glory,” they would be “opposed to any actions taken by the Federal Reserve that would make the economy better.” In short, their real fear is not that Fed actions will be harmful, it is that they might succeed. Hence the axis of depression.... China and Germany want America to stay uncompetitive; Republicans want the economy to stay weak as long as there’s a Democrat in the White House...
Indeed, it is now clear that the right-wing objection to the policies of the Obama administration was not an objection to fiscal policy as an inappropriate policy modality for stabilizing nominal spending. It was,
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J. Bradford DeLong
instead, an objection to the very idea that the government should try to serve as a stabilizing macroeconomic balance wheel. The flow of economy-wide spending is low. Thus Ben Bernanke's Federal Reserve is moving to boost the flow. It is doing so by changing the mix of privately-held assets as it buys government bonds that pay interest in exchange for for cash that does not. That is totally standard. There is only slightly nonstandard thing. The bonds that pay interest the Fed is buying are not the usual three-month Treasury bills but seven-year Treasury notes instead. The Federal Reserve has to do this, because those are the shortest-duration Treasury bonds that now pay interest. It cannot reduce short-term interest rates below zero, and so it is attempting via this policy of “quantitative easing� to reduce longer-term interest rates. And the right wing objects to this. For decades I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. Governments pre-WWI and even more so pre-WWI did not take on the mission of keeping unemployment from rising high in economic downturns. Why not? There were three reasons, all of which vanished by the end of WWII. There was then a hard-money lobby: a substantial number of very rich, socially influential, and politically powerful people whose investments were overwhelmingly in bonds. They had little--personally--at stake in a high level of capacity utilization and a low level of unemployment. They had a great deal at stake in stable prices. They wanted hard money above everything. Back in those days the working classes that was hardest-hit by high unemployment did not generally have the vote. Where they did have the vote, they and their representatives had no good way to think about how they could benefit from stimulative government policies to moderate
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J. Bradford DeLong
economic downturns, and they had no way to reach the levers of power in any event. Knowledge about the economy was in its adolescence. Knowledge of how different government policies could affect the overall level of spending was closely held. It was--the American Free Silver Movement excepted-not the subject of general political and public intellectual discussion. Today we have next to no hard-money lobby, for nearly everybody has a substantially diversified portfolio and suffers mightily when unemployment is high and capacity utilization and spending are low. Economists today know a great deal--albeit not as much as we would like--about how monetary, banking, and fiscal policies affect the flow of nominal spending, and their findings are the topic of a great deal of open and deep political and public intellectual discussion. And the working classes all have the vote. But here we are, with Austerians. So cui bono? Who benefits from austerity in the U.S.? How in the North Atlantic can we have a large political movement pushing for the hardest of hard-money policies when there is no hard-money lobby with its wealth on the line? How is it that the unemployed, and those who fear they might be the next wave of unemployed, do not register at the electoral polls? Why are politicians not terrified of their displeasure? And why are principles of nominal income determination that I thought had been largely settled since 1829 now not settled? Why is the idea, common to John Maynard Keynes, Milton Friedman, Knut Wicksell, Irving Fisher, and Walter Bagehot alike, that the first task of the government is to undertake strategic interventions in financial markets to stabilize the flow of economy-wide spending now a contested one? Paul sees a material interest link: he sees German and Chinese governments that seek a continued large U.S. trade deficit to allow their export surpluses, Republican politicians who think trashing the economy is the way to majorities, and economists who think that supporting Republican politicians is the road to influence. I don't think that can be a
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complete explanation: very few people are comfortable living with the idea that they are villains wreaking destruction on the world for their own narrow advantage. Thus I read Charles Calomiris's claim that it is inappropriate for the Federal Reserve to aim for a short-term nominal GDP growth rate above 5% per year no matter how high the unemployment rate, and I am simply bewildered...
November 20, 2010: 1302 words
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