This is a critical moment for economic policy in the industrialized countries. After a year and a half of emergency rescue, with large fiscal deficits and rock-bottom interest rates, governments are beginning to pull back. Especially in countries with large current account deficits, stimulus spending is being withdrawn, and central banks are under pressure to begin raising rates and tightening money. The threat of deflation and cascading insolvencies in the financial system are so yesterday; today’s threat is said to be inflation and sovereign default.
If you survey the center-to-left economics blogs, including this one—economists who see the world at least in part through Keynesian eyes—you will find howls of protest. It is simply irrational, we say, to allow this slump to run its course. There is no threat of inflation at all, which is actually a problem, since a bit of inflation would be medicine against effectively high nominal interest rates at the zero lower bound. And every indication is that the recovery under way owes its feeble pulse to the lingering effects of last year’s stimulus.
But is this just a problem of economic analysis? Is it only that New, Post and other Keynesians haven’t been persuasive enough? Does economic argument and evidence drive policy?
In a sense yes: those who make the decisions summon economic arguments to justify their actions. But who gets to make the decisions and what arguments they find appealing is not the outcome of academic seminars. What got us into this mess in the first place, and what now threatens to throw us back into the maelstrom, is the political hegemony of the “finance perspective”, the interests and outlook of those whose main concern is maximizing (and now simply protecting) the value of their financial assets.
Within the world of elite interests, this is almost a mass constituency. While the bulk of such assets are held by an infinitesimal few, perhaps the top 10-20% of the population in the industrialized countries have significant financial wealth and actively monitor their returns. Their understanding of how economies work and what priorities policy-makers should adhere to follow from their personal position. Inflation is a constant threat to asset-holders. They fear the laxity of central banks as well as the buildup of government debt, which can serve as an incentive to future inflation. They want their portfolios to have a component of absolutely risk-free government securities, and the very whisper of sovereign default chills them to the core. They believe in the inherent reasonableness of financial markets and believe that anyone who wishes to borrow from them should demonstrate their prudence and fiscal rectitude. They were willing to relax their principles temporarily during the panic, but now that they have caught their breath they want to see a return to “sound” practices. Governments will bend to their wishes not because they have better arguments, but because they hold power.
Don’t get me wrong. I am not making the crude claim that policy is driven directly by interests. In fact, I believe that, if they get their way, holders of financial assets will suffer along with the rest of us. (Not as much, of course: succumbing to a haircut because of debt deflation cannot be compared to losing one’s job and not being able to meet basic needs.) The process is more complicated: where one sits in society and the kinds of problems one typically has to solve leads to a way of thinking, and this manner of thinking then informs politics. For centuries, the finance perspective has played a central role in economic theorizing, and there is ordinarily a body of research to support it. What I am proposing is this: economic orthodoxy is regaining control over policy because it reflects the outlook of those who occupy the upper reaches of government and business.
Up to this point, the Great Economic Event we are passing through has not caused even a hint of political realignment, and that is why policy is returning to the old normal.
9 comments:
"I am not making the crude claim that policy is driven directly by interests. In fact, I believe that, if they get their way, holders of financial assets will suffer along with the rest of us."
I am not so sure that the holders of financial assets are the driving force, at present. Looking at the behavior of the U. S. stock market, it looks like Wall Street does not like unemployment as high as it is. Nonetheless, Congress only passed an anemic jobs bill, and failed to unemployment benefits last week.
I'm not sure what other blogs you read, or in particular the comments but it seems as though most non-economists (particularly younger onees) and even many who present themselves to the world as economists have completely distorted what Keynes advocated. I don't know if it's intentional or not but the worst are the 'Austrian School' types who have been unfortunately brilliant at spreading their ideology around. Read the COMMENTS of any article by Marshall Auerback or Paul Krugman, etc. on clusterstock.com for example and you'll see what I mean. For a while too, the WIKI entry for ZIRP claimed the policy was 'Keynesian' though it's been changed.
A terrifying number of people equate Keynes with simply all government spending and claim he advocates running deficits in perpetuity.
So yes, there needs to be a far greater effort to explain to the general public what Keynesian policies actually are and to counteract the ignorance that has been spread so far and wide on both TV and the internt by Ron Paul, Peter Schiff and they myriad followers and supporters.
Some good points here. One misgiving, though. Peter writes: "Where one sits in society and the kinds of problems one typically has to solve leads to a way of thinking, and this manner of thinking then informs politics." That observation might apply not just to "the financial class," or to one's opponents, you know. It might also apply to ... oneself. Ie., you, me, even Peter ... Or are we meant to understand that only Keynesians are truth-driven, while everyone else is a mere slave to their class interest?
This is an opportunity for the uneducated to enter the fray with our unbiased observations. Keynes was a slave to gold who though government should borrow from rich people to create jobs. The Austrians believe in feudalism and poverty for all but the guys with the swords.
Some of us are looking at THE REAL new deal represented by Chartalism as backed by a truly representative "republican form of government". It all gets down to control of the money and whether the Wall Street weasels get to do that or the elected government get to do that. So yes. It's a "political economy" moment and it looks like the weasels are winning.
The long, long road to recovery has to start in the K12 system. That system where Texas is removing Jefferson from the history books in preference to Phyllis Schlafly. If there is ever going to be an enlightenment in government it will have to begin by properly educating the _real_ public. The people of the left and the people of economics will forever ignore the fact that most people do not attend college and that the conservative members of this group vote as much or more than the college people.
In that environment _real_ economics has no chance. _real_ economics properly identifies government as an elected insurance company. That concept should be part of the K12 system if _reality_ is to ever prevail in our society.
Blog posts like this have in the past led me to link to J.Schmitt's little paper "Inequality as Policy" on the CEPR site:
http://www.cepr.net/index.php/publications/reports/inequality-policy/
I don't really understand chartalism, though I have tried to read one or two articles on it. It reminds me of the hut tax imposed by white colonialists in Africa, whereby blacks had to work for whites for cash payment because the hut tax was payable only in money. If the tax wasn't paid, the colonialists would burn down your hut (and steal your cattle while they were at it).
Or are we meant to understand that only Keynesians are truth-driven, while everyone else is a mere slave to their class interest?
Ray -
That is an awfully crude way of putting it, and while it's mostly correct it's not totally correct.
Progressives make a serious attempt to live in the real world, get data, and draw conclusions that the data drives.
What everyone else is a slave to is an ideology, which is sometimes at total odds with one's class interest. That is why they cherry pick data mine for anything that will support their preconceived notions. That's how you explain the tea-baggers who so desperately desire what will be horrible for them, and for everyone else when the get it.
And Anon is right. Regressives of all stripes act as if Keynes promoted idiotic fiscal irresponsibility. That's why they react to Krugman and Delong
the way they do.
Bottom line - we're screwed.
JzB
gordon: "I don't really understand chartalism, though I have tried to read one or two articles on it. It reminds me of the hut tax imposed by white colonialists in Africa, whereby blacks had to work for whites for cash payment because the hut tax was payable only in money. If the tax wasn't paid, the colonialists would burn down your hut (and steal your cattle while they were at it)."
For a perhaps more relevant example of chartalism, see the paper currencies of the American Colonies, the bills of credit of Massachusetts and others. Benjamin Franklin was instrumental in getting a currency based on lending by Pennsylvania. When Franklin was in England he was asked why the American Colonies were experiencing such prosperity, and he replied that it was because of Colonial Scrip.
The Hut Tax of which Gordon speaks is an example of IMPOSED government. "Political Economy" is precisely what it claims to be; the "Hut Tax" a marvelous example of taxation without representation. The British were always very fond of it.
If, however, there is a truly representative government, then chartalism is the quintessential form and substance of solid and honest fiat money. The people elect representatives that "govern" with due regard for the wishes of the people. In the process of doing so they appropriate moneys to carry out the duties and directives of government. They create the tokens (money) that are spent into existence as a __**LOAN**__ to the people. The taxation is the repayment of the loans that were used to build roads and aircraft carriers. It really is quite similar to banking.
To compare this to a "Hut Tax" is to claim an authoritarian Stalinist government. I do protest, yet I am also aware of the severe lack of representation in our government.
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gordon: "I don't really understand chartalism, though I have tried to read one or two articles on it. It reminds me of the hut tax imposed by white colonialists in Africa"
I checked. That was in 1898, when Great Britain (the colonial power which imposed the hut tax) was on the gold standard. So it has no direct bearing on chartalism. Chartalism is what we have now in the U. S., where our currency is not backed by gold or any commodity, but by the "full faith and credit" of the U. S.
It seems like completely unbacked currency is prone to hyperinflation. In practice, fiat currencies are backed by the government acceptance of them in payment of taxes. So if you want to start a fiat currency, it is a good idea for the gov't to accept it in payment of taxes. Massachusetts and other colonies did that when they started their fiat currencies.
The hut tax is an example of how you can get people to accept a currency by having them pay taxes in it. The fact that the hut tax was an instrument of repression is unfortunate, but has nothing to do with chartalism as we know it.
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