The recent discussion between Paul Krugman, Brad DeLong and Dean Baker has got me thinking again about why wealthy people and the finance sector are so adamant in favor of hard money. The reality is not in dispute—this is really their position, in every country and all the time—only the explanation. The problem is that the components of wealth, mainly equities and bonds, do not always move in lockstep with hard money policies. In particular, during periods of depressed demand expansionary fiscal and accommodative monetary policy can be good for profits and therefore equity investments. In fact, this is exactly the political basis for Keynesianism, why it can be a viable political strategy and not just a theoretical curiosum.
Except that the Keynesian class compromise is quite dead. Big money doesn’t want to hear about any kind of stimulus; it wants hard money, period.
But why? Brad says big money is blind. Paul says it’s really the special interest of banks, whose spreads fall during times of low interest rates. Dean discounts the aggregate demand-profit link and lays the blame on the effect unexpected inflation has on real interest rates.
My scoring puts Brad and Dean slightly ahead. There is no getting around the fact that much of the argumentation coming from the hard money crowd is simply tendentious and ill-informed. That suggests an ideological process that interferes with rational, objective thinking. So: ideology has to be part of the story. Also, the hard money obsession is not just coming from banks; it seems to reflect the attitude of the very rich in general. It’s not very convincing to argue, as Krugman does, that non-bank money hardeners get that way by talking too much with bankers. Meanwhile, however, Baker’s (correct) point about the effect of changes in real interest rates on net creditors has to be put alongside consideration of aggregate demand and profits. It’s not simple.
I have two hypotheses. The first is that the Keynesian link between aggregate demand and profit has been attenuated by downward flexibility of the labor share of income. Profits are doing rather well across the advanced capitalist world despite substandard growth for this very reason. It isn’t certain that reflation would reverse the declining labor share, but it’s at least plausible that it could. In that case there is less material basis for a Keynesian cross-class coalition in favor of expansionary policy.
The second is that ideology really is a factor, but that we need to have a somewhat more sophisticated theory of ideology than one usually finds. The simplest view is that material interests directly drive beliefs, so hard money dogmatism should have its roots in an actual relationship between the value of portfolios and monetary policy. This appears to be the underlying assumption in the current debate. A somewhat more complex version, which I support, is that material interests give rise to characteristic problems, and that intellectual frameworks useful for addressing those problems are ideologically favored. It’s the hammer and nail thing. In this case, maintaining the value of portfolios, especially those with a significant component of bonds and money-like instruments, in the context of inflation is challenging. A low-inflation environment is a lot less difficult for wealthy people to cope with. (This also applies to the risk of devaluation if they have home country bias in their holdings.) Thus the intellectual tools that are useful in clarifying and minimizing these risks have greater salience and crowd out ways of thinking that address other kinds of problems (like economic growth and employment). Objectively, this can result in the sort of blindness DeLong describes, but it’s not randomly distributed across the population—it’s a big money thing. On the other hand, it doesn’t depend on demonstrating that specific soft money policies would be necessarily value-undermining for current portfolios.
These are simply hypotheses. Political economists should be devising clever ways to empirically test the various explanation.