May 18, 2013

Saturday Morning Essay: Liberalism Lives on in Berkeley: Brad DeLong, the Krugman of the West

Brought to you by Trader Joe's Dark Roast blend...

Brad DeLong of the Berkeley economics faculty tends to mirror his Princetonian mentor, Paul Krugman, in a somewhat sycophantic way, as the following passage suggests:

I would say that six years ago something like 80% of economists and commentators, certainly including me, shared Niall Ferguson's belief that the debt capacity of the United States government was limited and that rising debt would produce rising interest rates and rising inflation rates, and that old-fashioned Keynesian expansionary fiscal policies were of very limited utility in achieving economic prosperity. Today the 20% minority six years ago are all saying "we told you so"; We 60% in the middle are trying to figure out whether we were always wrong or whether simply the world changed in 2008 in a major way; And there are 20% dead-enders--including Niall Ferguson--who from my perspective at least continue to fail to mark their beliefs to market, in part because they think that doing so would require them to declare some form of intellectual bankruptcy.

Mr. DeLong, on his "Grasping Reality With Both Invisible Hands" blog (this, which I didn't think possible, is actually worse than "The Conscience of a Liberal"), often spills a lot of cyber-ink defending Paul Krugman from his many detractors.  He's kind of Mr. Krugman's bulldog or palace guard.  They share other tendencies, such as a fascination with America's military history.  Krugman's obsession is Ulysses S. Grant and the Civil War, and Delong is mad about World War II.  Right away, this tends to make me sympathetic to the Berkeley guy, aside from the connection to my alma mater.

DeLong's defenses of Krugman are vociferous and tendentious, in general, although the above quoted passage from a couple of days ago, which I quite like, is a welcome exception.  Here Mr. DeLong is admitting, in an appealing way, that he used to base his economic analyses of fiscal and monetary policy on the "Weimar" principle that you can't simply finance the federal government with printed money without running the risk of runaway inflation, rising Treasury rates, and budgetary breakdown, so that the government should not attempt a full-tilt Keynesian recovery (increasing the budget deficits in an effort to stimulate "aggregate demand").

What I think Mr. DeLong is forgetting is that Mr. Krugman was himself more or less of this school in the days when George W. Bush was President. I quoted the relevant passage in my "Mr. Krugman's Science" series.  From March 11, 2003, in his column "A Fiscal Train Wreck":

My prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt.  And as that temptation becomes obvious, interest rates will soar.

Well, in a "science" as flexible as economics, one can always dance away from such an analysis, if it later proves embarrassing, as it probably did, since Mr. Krugman based his decision to switch to a fixed rate mortgage at 2003 rates from whatever he had before.  I'm sure Mr. Krugman would point out that in 2003, America was not in a "liquidity trap," or something along those lines.  (I may take over the West Bay position of Mr. Krugman's Praetorian Guard, or Chief Eunuch at the Harem.)

But back to the estimable Mr. DeLong, who, in general, is a far more fluent and incisive writer than the economist he worships.  I suspect, given the clarity of his expositions, that Mr. DeLong is a very good teacher, with the only limitation on this accolade the recognition that the subject he teaches is complete and utter nonsense. He muses about an important point: did the "world change in some major way in 2008" ?

At first blush, that seems like a pretty dumb thing to say.  As in, what does it even mean?  What does "way" mean, for example?  Huh?  The world changed in a major way.  Did the Earth assume a cube shape, for example?  Did it begin revolving around the sun in the opposite direction?  Did it become 70% land and 30% ocean?  I would regard these changes as major. 

Mr. Krugman, going way back to 2009, defended his thesis by an instrumental argument; that is, he analyzed the way that quantitative easing actually worked and concluded that it could not be inflationary because the Federal Reserve's money creation simply plumped up the excess reserve accounts of the Primary Dealers. It did not find its way into the real economy (that's where you and I live). This was a very intelligent insight.  So what was the difference between Mr. Krugman's 2003 "banana republic" warning and his 2009 position, other than the fact that it was no longer Mr. Bush's ox he was goring?   I suspect the answer's simple: his Princeton colleague, Ben Bernanke, sat Mr. Krugman down and explained how quantitative easing actually worked.  It's good to have friends in high places.

This is not idle speculation, really.  Mr. Krugman is capable of missing the most obvious things in the world, such as the effect of modern automation (robots, etc.) on unemployment, and (the howler to top all howlers) that Americans used the fictional equity in their homes during the housing bubble to sustain the massive "aggregate demand" that Mr. Krugman now insists on using as a trend line for determining whether the economy is under performing.  Yes, Mr. Krugman missed that.

Quantitative easing is for the purpose of helping the federal government service its massive debt at manageable interest rates.  The Federal Reserve provides a giant secondary market for Treasuries and for junk debt such as mortgage-backed securities, so that Primary Dealers can buy this sketchy paper at very low rates knowing that the Fed will take it off their hands and submerge it into the enormous debt sink of the Fed's balance sheet if the paper promises begin to lose their face value.

Nothing "changed" in the world in 2008.  Something, instead, was revealed once again.  The great industrial economies of the Western world and in Japan have run out of steam because they're up against real world limitations brought on by the Limits to Growth.  The housing bubble game masked this reality for a while by allowing massive inflation in equities.  Now we're lumbering along in more or less the same fashion as a Disney brontosaurus stuck in a tar pit in "Fantasia," with similar prospects.  But party on, Garth & Wayne Paul & Brad, and keep writing like it really matters.

No comments:

Post a Comment