Saturday Sermon: “[Economic] Depression Is a Choice”

Steve Randy Waldman makes a point probably familiar to regular readers (boldface mine):

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

And the underlying mechanism:

…the revealed preference of the polity is not balanced. It is not some cartoonish capitalist-class conspiracy story, where the goal is to maximize the wealth of exploiters. The revealed preference of the polity is to resist losses for incumbent creditors much more than it is to seek gains. In a world of perfect certainty, given a choice between recession and boom, the polity would choose boom. But in the real world, the polity faces great uncertainty. The policies that might engender a boom are not guaranteed to succeed. They carry with them a short-to-medium-term risk of inflation, perhaps even a significant inflation if things don’t go as planned. The polity prefers inaction to bearing this risk.

This preference is not at all difficult to understand. The ailing developed economies are plutocratic democracies. “The people” do have power, but influence is weighted in a manner correlated with wealth. The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is panicked by the prospect of becoming poorer. For such a person, the depression status quo is unfortunate but tolerable. The risks associated with expansionary policy, on the other hand, are absolutely terrifying.

Consider this the fear of the petite bourgeoisie. Perhaps to succeed, we need to replace one fear with another:

The median influencer may change her views if tight supply makes goods costly despite fiscomonetary conservatism. Or if her neighborhood is on fire.

It really is a matter of priorities.

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2 Responses to Saturday Sermon: “[Economic] Depression Is a Choice”

  1. Min says:

    I was with him until this:

    “The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is panicked by the prospect of becoming poorer.”

    Notice the modifier, “median”. It is probably the case that the median creditor is a granny with some money. But it does not follow that she has much influence, either directly or indirectly. Nor does it follow that her main concern is her own consumption. The grannies that I know in such situations want to preserve their present wealth so that they can pass it on to their children and grand-children. Granny would not impoverish them so that they can inherit her wealth. She would rather starve.

    The ones with real influence are not those in the middle of the creditor heap, but those on top. Many of them, not all, are concerned with maintaining their relative position with regard to the average person, or increasing their relative wealth and power.

  2. Auburn Parks says:

    Demand-pull inflation isn’t even a problem to nip in the bud if its even possible to generate in our current political climate. People who understand macroeconomics are not worried about demand pull inflation.

    Lets think about an exceedingly simple example to demonstrate:

    What if the Congress followed the advice of MMTers and suspended FICA indefinitely in order to increase aggregate demand by a potential $1.2 trillion per year. What would be the expected results?

    Increased demand, employment and output.

    And so if employment and output increase beyond the point of our capacity (as if that were even possible given the fact that the entire world is effectively on the US supply side of the equation) and we started to see inflation become a problem. How hard is it to stop that inflation by sequentially re-instituting FICA higher and higher until inflation stops rising. This stuff is not that complicated.

    If unemployment is too high => the deficit is too small
    If inflation is too high => the deficit MAY be too large

    This isn’t rocket science, its macroeconomics.

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