Another Disaster at Political-Economic Policy Analysis by Brad DeLong!
I had thought we were well-past the interwar watershed in economic policy. The interwar watershed had three parts:
- The winning of the franchise by the working class.
- The portfolio rebalancing of the non-entrepreneurial wealthy.
- And the recognition that the gold standard was not unbreakable.
The last of these robbed the gold standard and its cousins of much if not all of its practical policy virtue. The second of these moved the extremely powerful interest group of accumulated wealth away from the hard-money side, for their wealth was no longer overwhelmingly concentrated in nominal bonds and land let out for long terms at fixed nominal rents. The first brought into a politics a very large group for whom high employment was a great good and high inflation at most a minor substantive injury.
We were thus supposed, after the interwar watershed, to be in John Maynard Keynes’s world: the world of practical and pragmatic demand management in order to balance aggregate demand and assist in structural adjustment. As he put it in his 1924 Tract on Monetary Reform:
Thus inflation is unjust and deflation is inexpedient. Of the two, perhaps deflation is, if we rule out exaggerated inflation as in places such as that of Germany, the worse; because it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier. But it is not necessary that we should weigh one evil against the other. It is easier to agree that both are evils to be shunned.
The individualistic capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, resumes a stable measuring rod of value, and cannot be efficient–perhaps cannot survive–without one.
For these great causes the most free ourselves from the deep distrust which exists against allowing the regulation of the standard of value to be the subject of deliberate decision. We can no longer afford to leave it in the category of which distinguishing characteristics are possessed, in different degrees, by the weather, the birth rate, and the Constitution–matters which are settled by natural causes, or are the resultant of the separate action of many individuals acting independently, or require a revolution to change them…
When the Greek crisis hit in 2010, my reaction was that this could well be a great blessing in disguise: Greece was so small that only trivial commitments at the scale of the eurozone in terms of real money would be necessary to resolve its entire debt, and hold the Greek economy harmless–relative to any alternative policy–while adjustment took place.
The obvious alternative was the standard IMF package: A mix of restructuring and write down coupled with substantial depreciation and a loan to keep imports flowing as long as policy reform was taking place successfully.
The absence of exchange rate depreciation was going to make adjustment very hard for the Greek economy. That absence of depreciation was something Greece was giving up in return for the bargain that was the euro. In return, if the euro bargain was to survive, Brussels and Frankfurt had to be willing to offer things of equivalent value. And it seemed very clear in 2010 what those things of equivalent value were: extra transfers over and above those that would follow from a normal IMF program, in order to to offset the extra harm from the lack of depreciation; and extra help in terms of expanding demand for Greek products from northern Europe. That meant that Brussels and Frankford would push the envelope on eurozone inflation, and within the eurozone the bulk of that inflation would be concentrated in northern Europe, where the fundamental cost disequilibrium vis-à-vis Greece was greatest…
I was, once again, very wrong…