Duncan Black Thinks Eric Cantor Has Heard Some Remarkable Religious Insults from His House Republican Colleagues
Olivier Blanchard: The Mediocre Growth and High Risk Economic Future

We Are Choosing Continued Depression


Depression is a choice: I think that Avent has the better of the argument when he characterizes our current policy impotence as reflecting behavioral rather than technical constraints. We don’t lack for technical means to counter people’s self-defeating impulse to hoard cash and safe financial assets. On the contrary, we have a whole cornucopia of options! The squabbling that has preoccupied me lately, between market monetarists and post-Keynesians and mainstream saltwater economists, is an argument over which of many not-necessarily-mutually-exclusive options would most perfectly address address this not-really-challenging problem.

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives….

[T]he preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.

I am often told that this is absurd because, after all, wouldn’t creditors be better off in a booming economy than in a depressed one?… In a boom, they would enjoy positive interest rates. That’s true. But the revealed preference of the polity is not balanced. It is not some cartoonish capitalist-class conspiracy story, where the goal is to maximize the wealth of exploiters. The revealed preference of the polity is to resist losses for incumbent creditors much more than it is to seek gains….

[I]f we want to change the behavior of the polity, it’s not enough to argue over clever policies that, if implemented, might do the trick. We’ve got to change its preferences, which means either buying off the median influencer, or changing her identity via political struggle…. In the meantime, we have to recognize that what we are experiencing is not a technical failure. It is not “magneto trouble”. We, collectively, are making a choice. The task before us is to change our mind.