Quote:
Originally Posted by sebastian_dangerfield
|
I am trying to figure out where we disagree most fundamentally, and I think it is this:
In my world, we have had more less steady economic progress for years, broken by the Great Recession. Thus, we've had a radically departure from what was basically working OK -- from a macroeconomic perspective, that is -- and we need to figure out how to get back on track.
In your world, things have been going to hell for years, in a handbasket, and we have been in denial, papering over problems and trying to avoid the inevitable day of reckoning. Things need to get even worse before they can get better, and anything that doesn't involve grappling with our most fundamental problems and making some radical changes is counterproductive because it distracts us from the deep shit we're in.
Now, I don't really think there's much point in arguing about whether things were basically good or basically bad before the Great Recession, partly because I've overstated our differences above and we surely both will agree that there was some good and some bad and the truth lies somewhere in the middle, but more fundamentally because to me the important question is not whether we're all swimming our way to heaven in gravy or riding the shitter down to hell, but what we can do on the margin, right now, to improve things as we go. Which is to say, I'm more focused on the question of how we respond to the specific economic problem we have now.
What I hear you saying is, there's no demand, but everyone is broke so there isn't going to be any demand anyway, so let's talk about spurring investment. (At a macro level, this is silly. We are richer than we have ever been before.) But that's not an explanation for why things are different the last few years.
Here is Krugman's story, which makes a lot of sense to me:
Quote:
What, after all, is the story of this crisis? The simple take many of us have now adopted, which I think gets at most of it, runs along the lines of my Sam and Janet story. At any given time there are some people who would like to borrow more at current interest rates, but are constrained by norms about how much debt is too much. If these norms are loosened, they will borrow more — which is in fact what happened between around 1980 and 2007, as deregulation, financial innovations nobody understood, and general complacency led to a broad willingness to accept higher leverage.
Now, if people are borrowing, other people must be lending. What induced the necessary lending? Higher real interest rates, which encouraged “patient” economic agents to spend less than their incomes while the impatient spent more.
OK, so that’s what happens when an economy is engaged in increased leveraging. Then something makes people remember the dangers of debt, and leveraging gives way to deleveraging.
You might think that the process would be symmetric: debtors pay down their debt, while creditors are correspondingly induced to spend more by low real interest rates. And it would be symmetric if the shock were small enough. In fact, however, the deleveraging shock has been so large that we’re hard up against the zero lower bound; interest rates can’t go low enough. And so we have a persistent excess of desired saving over desired investment, which is to say persistently inadequate demand, which is to say a depression.
By the way, this is in a fundamental sense a market failure: there is a price mechanism, the real interest rate, that because of the zero lower bound can’t do its job under certain circumstances, namely the circumstances we face now.
What to do? One answer is fiscal policy: let governments temporarily run big enough deficits to maintain more or less full employment, while the private sector repairs its balance sheets. The other answer is unconventional monetary policy to get around the problem of the zero lower bound: maybe unconventional asset purchases, but the obvious answer is to try to create expected inflation, so as to reduce real rates.
Now look at what the serious people say: we must have fiscal austerity, not stimulus, because debt is bad; we must not have unconventional monetary policy, because that would endanger “credibility” (where it’s not at all clear what that means).
So basically, we must do nothing to fix this horrific market failure, and allow unemployment to fester instead.
It’s really awesome, when you think about — not just that we’re committing this massive act of folly, but that it’s all being done in the name of sound policy.
|
Why is that not right?
