Tuesday, March 8, 2011

DeLong Bemoans Policy Failures

UC Berkeley economist Brad DeLong has written an article where he reviews the known remedies for the Great Recession we are in. As he notes, these were not taken or were insufficiently undertaken. He ends the article bemoaning the failure of policy:
Yet, somehow, all three of these cures are now off the table. There is no likelihood of reforms of Wall Street and Canary Wharf aimed at diminishing the likelihood and severity of any future financial panic, and no likelihood of government intervention to restore the normal flow of risky finance through the banking system. Nor is there any political pressure to expand or even extend the anemic government stimulus measures that have been undertaken.

Meanwhile, the European Central Bank is actively looking for ways to shrink the supply of financial assets that it provides to the private sector, and the US Federal Reserve is under pressure to do the same. In both cases, it is claimed that further expansionary asset-provision policies run the risk of igniting inflation.

Yet no likelihood of inflation can be seen when tracking price indexes or financial-market readings of forecast expectations. And no approaching government debt crisis in the core economies can be seen when tracking government interest rates.

Nevertheless, when you listen to the speeches of policymakers on both sides of the Atlantic, you hear presidents and prime ministers say things like: “Just as families and companies have had to be cautious about spending, government must tighten its belt as well.”

And here we reach the limits of my mental horizons as a neoliberal, as a technocrat, and as a mainstream neoclassical economist. Right now, the global economy is suffering a grand mal seizure of slack demand and high unemployment. We know the cures. Yet we seem determined to inflict further suffering on the patient.
The tragedy is that a poisonous right wing, libertarian "economics" has seized a great part of academic (the "fresh water" economists) and the whole of the Republican party. This is exactly what John Maynard Keynes bemoaned during the Great Recession:
The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

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