“I cry out to boost aggregate demand — by banking policy, by monetary policy, by fiscal policy, by spending increases, by tax cuts, by anything — I don’t care what!”
— Brad DeLong
The stimulus wasn’t big enough! That’s the sum of DeLong’s argument, which is frustrating to read because, on the one hand, DeLong clearly sees many of the underlying problems, while on the other hand, he monomaniacally insists that the solution is to keep doing more of what hasn’t worked so far. DeLong’s opening paragraph is solid:
My friends Kevin O’Rourke and Barry Eichengreen in the office next door were chief among those economists warning at the start of 2009 that the shock to the world economy inflicted by the financial crisis was greater than the shock that had caused the Great Depression. They were right.
In 2008-09, a lot of people — including many of my conservative friends — seemed to believe that this was just another recession, and that the endlessly resilient American economy would snap out of it in a year or two. However, the collapse of the housing bubble and the resultant meltdown in the banking industry exposed serious weaknesses, as I explained in May 2009:
“The stimulus-and-bailout policies have not addressed the fundamental problems of the economy — namely, an excess of debt and a shortage of capital to spur job creation — while the entitlement trainwreck of Social Security and Medicare looms immediately ahead. By piling on new trillion-dollar deficits, at a time when the recession will result in significant tax revenue shortfalls, the Democrats are steering the economy into a stagflation trap.”
So far, we haven’t seen the inflation half of the “stagflation” problem. Deflationary pressures have been so severe that not even 18 months of monetary madness at the Federal Reserve has been enough to counteract them. This does not, however, justify greater inflationary intervention by the Fed. Unsound currency is always bad policy, and trying to “re-inflate the bubble” isn’t going to produce meaningful economic growth. If the bond market ever gets the idea that the Treasury and the Fed are running a swindle — deliberately devaluing the currency to cheat on debt repayment — we’ll be facing a real economic Armageddon.
Yet Brad DeLong’s got a neo-Keynesian fever and, in his telling of the tale, the only cure is more stimulus spending, the magic formula he believes can create “aggregate demand” from thin air:
Go back to December 16, 2008, when Ryan Lizza reported in The New Yorker on the Obama Administration’s thinking. Council of Economic Advisors Chair-Designate Christina Romer believed the following: that the appropriate total value for the American Recovery and Reinvestment Act fiscal stimulus was something more than $1.2 trillion, but that to ask for a stimulus that large would risk gridlock in the Senate. (The result was an ARRA of about $600 billion of real stimulus tax cuts and spending increases alongside ineffective ornaments dear to the hearts of legislators.)
Or go back earlier — to August of 2008, before the Lehman Brothers and the AIG bankruptcies, when Obama adviser Lawrence Summers was writing that “the remaining scope for monetary policy to stimulate the U.S. economy is surely very limited” and that “output and employment are likely to remain below their potential levels for several years in the best of circumstances.”
The output gap even then was some $300 billion per year. To address it, some called for a stimulus program of roughly $500 billion. Yet the problem ultimately turned out to be four to five times larger than what economists were forecasting at the time Summers wrote. . . .
Congress passed an ARRA on a scale that struck many of us who had done the numbers as worrisomely small . . .
I’m loath even to quote DeLong’s arguments, as they may delude anyone who isn’t already a hard-boiled opponent of Keynesianism, but it’s important to see the context of what Larry Summers was saying in August 2008: Monetary policy can’t fix this problem.
As Will Parker told the Oklahomans about Kansas City, “They’ve gone about as far as they can go” at the Federal Reserve.
If further monetary intervention is now futile — and it is — then neo-Keynesians naturally turn to fiscal policy, demanding more deficit spending to bolster the “aggregate demand” with which they are always obsessed. (Aggregate demand is to a Keynesian what windmills were to Don Quixote.)
Here, however, an ugly economic reality rears its head. The promissory notes of Social Security and Medicare are now coming due. Demographic trends, with millions of Baby Boomers reaching retirement age in the next 20 years, pose economic problems that will only be made worse by piling on additional federal debt.
When the only tool you’ve got is a hammer, every problem looks like a nail, and neo-Keynesians like DeLong keep pounding away with their insistence that more deficit spending is the solution. Yet I stand by what I wrote in December 2008, before the era of Hope and Change began:
The unfortunate truth, as sober economists freely admit, is that there is no easy cure for the financial mess caused by the collapse of the housing bubble. . . .
Whatever policy Washington pursues, a quick and painless recovery is not going to happen, and the only real question is whether Democrats will delay recovery by implementing liberal policies that make a very bad situation even worse.
The title of that article — “It Won’t Work” — remains the best argument against Obamanomics.
