Econ 210a: Spring 2011: January 19, 12-1: Why We Study Economic History
How Many Economists You Know Can You Meet in Caribou Coffee on a Wednesday Morning?

DeLong Smackdown Watch: Paul Rosenberg Sings Talking Heads' "Once in a Lifetime" Department

How did we get here? Paul Rosenberg teases:

Open Left:: Same as it never was: Economics as if the 20th Century never happened.: Thanksgiving weekend I read a lot of stuff relating to economics that I wanted to write about... Brad DeLong's paper, Battered But Not and Beaten, prepared for a late October conference.  I still think it's valuable to consider as much for what it reveals as for what it's puzzled and confused by. In a later diary, this will stand in contrast to a much more lucid overview of our present confused state contained in a more recent paper presented last Wednesday at a Roosevelt Institute panel in NYC, "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson....

DeLong's problem is deceptively easy to solve from a distance, particularly by economic laypeople such as myself: he was deeply ensconced in a reality-based discourse, and reality had absolutely nothing to do with it.... DeLong was deeply ensconsed in a fantasy of economic rationality, and the crude realtiy of capitalist unreason smashed his poor little fantasy to bits. DeLong proceeds to give a reasonably lucid account of everything we've been through.... DeLong ticks off seven different types of action that the government could have taken--either fiscally, or monetarily (via the Federal Reserve).... DeLong goes on to note that yes, Senatorial obstruction (mostly, though not entirely from Republicans) was a big part of the problem.... Originally, I was going to offer some critique of DeLong's blind spots.  But... another paper has been published which does a remarkable job of making sense of what ultimately befuddles DeLong.  It's not centered on Obama's circle, but it encompasses that circle as it illuminates a much broader shift in the dynamics of economic hegemony.  I'll discuss that paper, "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson, in a diary later today or tomorrow.

But alas, I don't think he delivers:

Open Left:: "A World Upside Down?"--a field biology approach to economic chaos: "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson. It was not the primary purpose of this paper to provide therapy for DeLong, merely a side-benefit.... As I understand DeLong, he was summing up his prolonged experience of struggling against the rise of unreason in economic policy-making since late 2008, when the Wall Street crash precipitated the Great Recession. He was, in effect, trying to understand the rise of unreason using the tools of reason--always a dicey proposition, at best.... Ferguson and Johnson succeed... Ferguson's Investment theory of party competition, which focuses attention on economic blocks, rather than median voters....

In... investor-driven systems, the meaning of political competition is very different from its analogue in classical democratic theory: political parties dominated by large investors try to assemble the votes they need by making very limited appeals to particular segment of the potential electorate.... [O]n all issues affecting the vital interests that major investors have in common, no party competition will take place.... Unless significant portions of it are prepared to try to become major investors in their own right, through a substantial expenditure of time and (limited) income, there is nothing any group of voters can do to offset this collective investor dominance.... [T]hey focus attention on a financial crisis brought about in the context of a financial sector recently come to a state of such complete dominance over the rest of the world's largest economy that no one else's interests really count for anything when push comes to shove....

Earlier this summer, in the midst of the greatest economic crisis since the Great Depression, economic policy turned upside down. Instead of promoting recovery and expanding employment, central banks and political elites suddenly focused on cutting budget deficits and raising interest rates. Forget the famous "conservative counterrevolution" in policymaking since the late nineteen seventies - the break with past practice is real and dramatic. Save for a handful of exceptions, like Margaret Thatcher and, far more equivocally, Ronald Reagan, from the end of World War II until a few months ago, even conservative governments threw in the towel when they saw the Invisible Hand waving goodbye....

They have no grand unified theory of everything to explain how thinking has shifted.....But the point is, from Ferguson and Johnson's perspective there is no great mystery here to be unriddled.  The desire to reimpose the disastrous austerity economics of Hoover and Mellon precedes any theoretical foundations. It grabs whatever it can. So long as the need to explain itself can be rendered "inoperative", then who really cares, anyway?  Brad DeLong?  Who is he?  Some guy with a blog?  Paul Krugman?  Isn't he always cranky about something?

There is a good deal more that might be said about this--and that I plan to say, as soon as I've sorted out the clearest way of fitting them together...

Finance is a very powerful interest group, and finance is interested in deregulation. But finance is not interested in austerity.

Back before World War I finance was interested in austerity: their assets were primarily nominal debt, and relatively safe nominal debt as well. They wanted hard money. They did not care much about capacity utilization or employment. But nowadays finance's portfolios are as diversified as anybody's, and financiers lose as much from slack capacity and low demand as anybody.

So right now we have Austerians--our Pointless Pain Caucus--without there being any politically-powerful investor group that benefits from austerity.

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