Video especially: an arresting medium--but audio too. We humans are programmed by millions of years of evolution to be arrested by human faces and voices. Can I use audio and video to entertain, to inform, to raise the level of the debate on economic policy? Stay tuned. We will see...
The Senate committee for Banking, Housing, and Urban Affairs held a hearing today on "Lessons from the New Deal": Panel 1: The Hon. Christina D. Romer, Chair, President's Council of Economic Advisors. Panel 2: Dr. James K. Galbraith, University of Texas at Austin; Dr. J. Bradford DeLong, University of California at Berkeley; Dr. Allan M. Winkler, Miami (Ohio) University; Dr. Lee E. Ohanian, University of California at Los Angeles.
Good morning. I'm Brad DeLong. And this is my morning coffee.
Stage I of a financial crisis involves a financial market that could be in a good equilibrium--with lots of capital committed to sane and sound financial intermediaries, a healthy flow of finance from savers to businesses, relatively high asset prices, and relatively low unemployment--or a bad equilibrium--with financial intermediaries near bankrupt or worse and untrusted, little flow of finance from savers to businesses, relatively low asset pices, and relatively high unemployment. It is the task of a central bank to (a) diminish the chances that we will ever get into a stage I financial crisis by providing incentives that motivate by punishing those who overleverage their businesses and induce moral hazard, and (b) to keep us at the good equilibrium by providing liquidity when a financial crisis strikes even if this goes against the requirement that overleverage and moral hazard be punished, not rewarded, in normal times. As long as we are in Stage I, however, a good central bank will provide liquidity--lend cash--at a penalty rate in order to diminish and punish moral hazard
Stage II of a financial crisis sees a financial market in which the good equilibrium has disappeared--but in which the good equilibrium can be brought back into existence by not just providing but flooding the system with liquidity, pushing safe interest rates way down and so pushing asset prices up. In this case, the idea that a good central bank should only lend cash at a penalty rate goes out the window. The stakes are too high. As Don Kohn said, it is not good to hold the jobs of tens of millions hostage in order to make sure a few feckless financiers get their just deserts.
Stage III of a financial crisis is when a central bank runs out of ammunition--when pushing interest rates too the floor and swapping out all of its assets does not restore the good equilibrium. Then you face a threefold choice: depression, inflation, or public intervention. Depression is to be avoided. Inflation--resolving the financial crisis by printing enough money to boost the price level far enough that all of a sudden everyone's incomes and real asset values are high enough to pay off their nominal debts--is generally best avoided too. As John Maynard Keynes wrote more than eighty years ago: "The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one."
And this leaves public action. If the good equilibrium has vanished because the supply of risky assets is too large for financial intermediaries to want to hold them given their capital, then the central government has to take action: to boost or to make financial intermediaries boost their capital so that they will demand more risky assets at high prices, and to diminish the supply of risky assets offered on the financial markets by guaranteeing some of them or by buying up some of them itself.
It's time to start thinking. If we don't want to wind up in a deep depression or a big inflation, it is time to think what kind of government action we do want to see, and how quickly we can set in in motion.
My name is Brad DeLong. And this is my morning coffee.
That's Karl Marx, not Groucho, I'm talking about today. I am Brad DeLong, and this is my afternoon coffee...
This week I asked my graduate students to write on the following question: whether--and how--Karl Marx is relevant to a twenty-first century neoclassical economist. They turned it around, and asked me to answer the same question. So here goes...
First, let me say that I am here to talk about Marx the economist. Marx did not divide himself into Marx the moralist-prophet, Marx the political activist, and Marx the economist. But we do. I'll talk about Marx the moralist-prophet and Marx the political activist some other time. But today I am interested only in Marx the economist, who I think is worth studying for five reasons:
First, Marx the economist was among the very first to get the industrial revolution right: to understand what it meant for human possibilities and the human destiny in a sense that people like Adam Smith did not.
Second, Marx the economist got a lot about the economic history of the development of modern capitalism in England right--not everything, but he is still very much worth grappling with as an economic historian of 1500-1850.
Third, fourth, and fifth, Marx made a three-fold critique of the capitalist economy he say developing. He believed, third, that a system that reduced everybody to some form of prostitute working for wages and wages alone--in which people viewed their jobs not as ways to gain honor or professions that they were born into or as ways to serve their fellow-man or expressions of their inmost essence as a species-being but as ways to earn money so that you can begin your real life when the five o'clock whistle blows--that such an economy is an insult, delivering low utility, and also sociologically and psychologically unsustainable in the long run.
Fourth, Marx believed that the capitalist economy was incapable of delivering an acceptable distribution of income for anything but the briefest historical epochs.
Fifth, Marx was among the very first to recognize that the fever-fits of financial crisis and depression that afflict modern market economies were not a passing phase or something that could be easily cured, but rather a deep disability of the system--as we are being reminded once again right now, this time with Ben Bernanke in the Hot Seat.
Now we modern neoliberals have parries to these latter three critiques.
On the business cycle, we respond that Keynesianism--or monetarism, if you prefer--gives us the tools to transform the business cycle from a life-threatening economic yellow fever of the society into the occasional night sweats and fevers: that with economic policy quinine we can manage if not banish the disease.
On the distribution of income, we respond that Beveridgism or Myrdahlism--social democracy, progressive income taxes, a very large and well-established safety net, public education to a high standard, channels for upward mobility, and all the panoply of the twentieth-century social-democratic mixed-economy democratic state can banish like bad dreams all Marx's fears that capitalist prosperity must be accompanied by great inequality and great misery.
On the cash nexus, we modern neoliberals shrug our shoulders and say that we are in favor of a market economy but not of a market society, and that there is no reason why people cannot find jobs they like or insist on differentials that compensate them for jobs they don't. And we go on to say that the demand for and forecast of utopia--that jumped-up monkeys with big brains be perfectly happy--is a demand and forecast that belongs in the Book of Daniel or of the Apocalypse, not something that has any place in a work of political economy relevant to this fallen world.
I am Brad DeLong. And this is my afternoon coffee.
Courtesy of Eric Rauchway and the U.C. Davis History Department:
Historical Scholarship and the New Media: A History Colloquium event sponsored by the UC Davis Department of History, the Institute of Governmental Affairs, and the Center for History, Society and Culture, with Brad DeLong, Scott Eric Kaufman, Tedra Osell, and Ari Kelman, held May 23, 2007, at 12:10 in the Andrews Room of the Social Sciences and Humanities Building.
Downloadable .mp4 podcast (82.2M, slightly over 50 minutes of video): http://history.ucdavis.edu/podd.php
The ongoing industrial revolutions in China and India are the most extraordinary, hopeful, and exciting things happening in the world economy today. Moreover, the future for both countries looks relatively bright: odds are economic success will continue.
Income inequality in America has taken an enormous leap upwards since the mid-1980s, leaving us today with a society that is as unequal as America was in the pre-Great Depression Gilded Age.
Did the Federal Reserve fall down on the job and fail to do what it could to stem the Great Depression? Yes. Would things have been better if had there been no Federal Reserve at all? Definitely not.
Morning Coffee Videocast: The Five Factions of the Republican Party: AND why no honest policy can keep all five of them on board and win elections in America today...
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