delong247_BettmannGetty Images_Paul Volcker

Economics

A History of Economic Whac-A-Mole

Nov 2, 2022 J. Bradford DeLong

In an insightful new history of US economic policymaking since 1961, Fortuna emerges as the primary narrative engine. While there has been little “progress” in figuring out how to manage modern economies in the interest of macroeconomic stability, there have been useful lessons for today's policymakers.

BERKELEY – The big lesson of the past 60 years of US economic policy, according to former vice chair of the US Federal Reserve and current Princeton University economist Alan S. Blinder’s new book, A Monetary and Fiscal History of the United States, 1961-2021, is that there is no big lesson.

There has been neither linear development nor much “progress” in figuring out how to manage modern economies in the interest of macroeconomic stability. Instead, Blinder describes “wheels within wheels, spinning endlessly in time and space … [with] certain themes … waxing and waning … monetary versus fiscal … the intellectual realm … the world of practical policy making … the repeated ascendance and descendance of Keynesianism ….”

The underlying story is driven, ultimately, by historical contingency. Problems appear and are either solved or not solved. Either way, the response sets the stage for a new and different problem to emerge, because the actions taken in the recent past left the economy more vulnerable in some way. But by the end of the story, one gets the sense that some of the problems were quite similar to one another, and that economic policymakers have been playing a never-ending game of Whac-A-Mole.

To continue reading, register now.

Subscribe now for unlimited access to everything PS has to offer.

As a registered user, you can enjoy more PS content every month – for free.

Already have an account? Log in

Subscribe to PS Digital

Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.

Subscribe Now

J. Bradford DeLong

Writing for PS since 2002
249 Commentaries

J. Bradford DeLong, Professor of Economics at the University of California, Berkeley, is a research associate at the National Bureau of Economic Research and the author of Slouching Towards Utopia: An Economic History of the Twentieth Century (Basic Books, 2022). He was Deputy Assistant US Treasury Secretary during the Clinton Administration, where he was heavily involved in budget and trade negotiations. His role in designing the bailout of Mexico during the 1994 peso crisis placed him at the forefront of Latin America’s transformation into a region of open economies, and cemented his stature as a leading voice in economic-policy debates.

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 10 Comments on this article

Per Kurowski Dec 29, 2022

Does Alan S. Blinder’s “A Monetary and Fiscal History of the United States, 1961-2021” analyze the distortions of central bank’s monetary policy and interest rates produced by the introduction on risk weighted bank capital requirements?
https://subprimeregulations.blogspot.com/2013/01/the-subsidized-risk-free-rate.html
A new reply to this comment has been posted.
Colin Haller Nov 5, 2022

Where an article outlining the damage and failure of Monetarism is followed by unreconstructed Monetarist comments. We are doomed …
A new reply to this comment has been posted.
vic lai Nov 3, 2022

Today's US Fed has just been whacking the country's runaway inflation mole with the good-old interest-rate-hiking (and QT) hammer, without paying any attention to the country's money supply, say measured by M2.
It's like a pilot flying blind without ever looking at the altimeter of the plane.
---
According to Steve Hanke, Milton Friedman's Quantity Theory of Money says that, if you want to hit the Fed's inflation target of 2%, you should be growing the money supply around 5%.
But what did the Fed do ?
The Fed has increased the money supply cumulatively since February of 2020 by 41%, and that's roughly an annual rate of around 15%, a rate that's 3 times the rate consistent with hitting the Fed's inflation target of 2%, through goosing the money supply to finance the federal government's suddenly much-propped-up and well-intentioned deficit spending in the aftermath of the country's pandemic breakout.
If the federal government's stimulus checks had instead been financed by the Treasury's selling bonds to the general public, and not to the Fed through a new round of QE, as suggested by the MMTers, there would have been no sudden and big money supply increase, and the growth of the money supply wouldn't have been as high as 15%.
---
Adding insult to injury, in the last 6 months, the US's money supply has not grown, which means the country will get screwed for the second time, and this time in the form of (time-lagged) economic recession, which, contrary to popular belief, will not be mainly caused by the Fed's non-stop rate-hiking contractionary cycle.
The US Fed must start looking also at the country's money supply, making sure that it grows at around 5%, then the country would not have a whopper of a recession, and doing so they would drag out the inflation that was caused by excess money supply, even though this will take a little longer to get out.
---
- vic lai Nov 3, 2022
  
  According to Steve Hanke, the Fed, together with many people in the US, are currently wrongly thinking that they have to have a hell of a big economic recession to reduce the country's domestic inflation, but this is just utter nonsense.
  What they should be doing to avoid the recession (or stagflation), and let the inflation work out of the system over time, is to watch the money supply, hit its golden growth rate by keeping the money supply to grow at around 5 or 6 percent, which is the rate consistent with a 2 percent inflation target.
  If they did that, we wouldn't be talking about a recession at all.
  ---
  But, instead of looking at the front mirrors of the train, the US-Fed drivers are now looking mainly backward at the rear-view mirrors, by studying the past now-time-lagged labor market data of the country, meaning that, without a serious financial crisis unfolding in the country sometime in the future, the US Fed will never truly start pivoting, and so the US Fed is now essentially and unintentionally creating a train crash in slow motion.
  ---
  - vic lai Nov 4, 2022
    
    The two latest articles at the "Economics & Finance" section of Project Syndicate both claim exactly the same wrong economic idea : today's inflation is a global phenomenon.
    ---
    No, it isn't.
    Recently, in Japan, the inflation rate is 3 percent per year.
    In Switzerland, the inflation rate is 3.4 percent.
    China's inflation rate is just 2.5%.
    These countries have shared one thing in common, which is that they have not produced excess money.
    It's the quantity of money that creates inflation, pure and simple.
    Period.
    ---
    "Prof. Steve Hanke: Looking for Inflation in All the Wrong Places"
    https://www.youtube.com/watch?v=WN-YkZ8YTlM
    ---
    - vic lai Nov 5, 2022
      
      It's said by some people in the US that the best way to get iinflation down is a reverse wealth effect, say through some sort of non-trivial or significant reversal of the country's booming stock and real-estate markets, perhaps with the help of the Fed's policy interest rate, which has yet to rise to at least equality with the slowly falling y-o-y CPI monthly inflation rate to help evaporate the inflation-prone negative-real-interest-rate macroeconomic environment of the country.
      ---
      Well, for one thing, the ongoing bear bond market in the country has failed to quickly dampen the runaway inflation in the country, perhaps partly owing to the rising interest-rate corridors which is constantly providing more and more interest incomes to both the MMFs and the commercial banks.
      For another, the relatively healthy overall balance sheets of both the US households and the private corporations there means that the propensity to spend of the US private sector is still quite high, or will not drop too much, despite the (temporary) significant fall also in the prices of stocks and real estates they are now holding.
      ---
      To fight inflation, instead of crashing the country's virtual economy, the US authority could instead
      (i) enlarge and accelerate the Fed's ongoing QT program, to help repatriate the excess money supply now circulating in the real (and virtual) economy,
      (ii) issue much more new government treasuries to the market (the exact opposite of Yellen's suggested Treasury QE), to help sanitize the inflationary effect of the Fed's new-money-printing MMT experiment induced well-intentionally by both the republican and the democratic administrations in the aftermath of the pandemic-breakout in the country.
      The funds so raised by the federal government should be stored temporarily in the government's TGA account at the Fed's balance sheet, and remains unspent there in the foreseeable future, and to be spent (productively) when the domestic macroeconomy develops signs of entering a non-trivial economic recession.
      (iii) Meanwhile, the country's commercial banks should be encouraged to keep lending to the country's productive SMEs or state governments, to reverse the country's precarious negative money supply growth realized in the past months, so as to minimize the chance of a coming economic recession in the country.
      ---
      This time is quite different, and so the US should no longer rely solely on the US Fed's interest-rate-hiking (and QT) cycle alone to prevent the arrival of stagflation in the country in the coming quarters.
      ---
      - vic lai Nov 6, 2022
        
        The US's coming more aggressive selling of US treasuries to the market (not to the Fed), suggested in the last comment, which
        (i) should already and correctly have been done in the aftermath of the country's pandemic breakout by both administrations, and
        (ii) is now done to correct the Fed's previous mistake of performing her first big-scale inflation-prone MMT experiment after the pandemic breakout,
        is predicated on the assumption that the world's other major central banks never sell their held US treasuries in sync and en masse in order to help defend their currencies' quickly depreciating exchange rates in the global FX markets, like Japan's current very weak yen.
        ---
        Each of those foreign central banks has tried to avoid practising an interest-rate-hiking cycle as aggressive as that of the US, even though its domestic inflation rate is as high as, or even higher than, that of the US, to avoid much propping up the coming interest expenses of their own highly-indebted central governments.
        The resulting profitable global carry trades led to quite significant and persistent capital flights out of those countries and into the US, causing a much strengthening US-dollar DXY and their respective much weakening currencies as a result, thereby (potentially) requiring those foreign central banks, especially the Bank of Japan, to more aggressively sell US treasuries to get enough US dollars, to help defend their currencies' exchange rate through selling those US dollars to buy their own currencies in the FX markets.
        Doing so, those countries are contracting their countries' domestic money supplies, and so are importing both inflation and recession from the US.
        ---
        In other words, the quickest way to "force" the Fed to pivot and start a new round of inflation-prone QE program is for the major central banks of many foreign countries to act in sync and start massively selling their owned US treasuries in the market, in the name of defending their quickly depreciating currencies vis-a-vis the US dollar, thereby forcing the US Fed to act as the market dealer of last resort and counteract by providing the necessary liquidity in the US treasury market, to prevent a potential quick and serious melt-down of the US treasury market like that in Britain's recent gilt market, despite the fact that the US's domestic inflation rate is still lingering at a relatively too-high level.
        ---
        If so, the US will have to regurgitate some of her tremendous gains in the current US-dollar-strengthening cycle back to the other harmed countries.
        ---
        
        vic lai Nov 7, 2022
        
        It seems to me that, today’s US Fed should act not only as the country’s traditional wholesale lender of last resort, but also as the country’s brand-new retail lender of last resort (in addition to her becoming the country's relatively-new dealer of last resort), since, after the GFC of 2007-09, and in the aftermath of the pandemic breakout, the country’s private commercial banking system could no longer effectively help transmit the Fed’s intended monetary policies to the domestic real macroeconomy both satisfactorily and in a timely manner (think the "secular stagnation" since the GFC, and the precarious negative growth of the country's money supply in the past months).
        ---
        As a brand-new retail lender of last resort, the Fed can more directly lend to the country's always-money-thirsty SMEs and many of the state governments (to finance their coming sorely-needed infrastructure developments of all kinds), instead of the private commercial banks' lending mostly to the big enterprises with good collaterals, and to the speculative financial markets in the virtual economy.
        Doing so will help
        (i) reduce the widening income and wealth gap between the rich and the rest,
        (ii) subdue the ongoing trend of disturbing rising political populism, and
        (ii) increase further the overall productivity and external competitiveness of the country.
        ---
        Instead of setting up new physical (no- or low-profit-making) public commercial banks in each state and all over the country, as suggested by Ellen Brown, much less-costly online internet public commercial banking networks can instead be established to do the same lending job.
        ---
        If real-economy inflation is really caused by too much money chasing too few goods and services, then the Fed should not only reduce the aggregate demand through her present rate-hiking and QT cycle, which will create many collateral damages not only to the US but to the rest of the world as well, but also increase the aggregate supply of the domestic macroeconomy, by lending lavishly to the country's SMEs, which are the backbone of the productive economy, and which need bank credits to survive and prosper.
        Just ask Germany.
        This way, the US dollar need not strengthen too much relative to most other currencies to export domestic inflation to most other countries, and so the US's coming rate-hiking cycle, if any, will no longer be a beggar-thy-neighbor policy.
        ---
        
        vic lai Nov 7, 2022
        
        According to Ellen Brown, "that new money can be injected year after year (productively, through the public banking system) without triggering price inflation is evident from a look at China.
        In the last 20 years, its M2 money supply has grown from just over 10 trillion yuan to 180 trillion yuan, a nearly 1800% increase.
        Yet the inflation rate of its consumer Price Index (CPI) remains a modest 2.2%.
        Why has all that excess money not driven prices up ?
        The answer is that China's Gross Domestic Product has grown at the same fast clip as its money supply.
        When supply (GDP) and demand (money) increase together, prices remain stable."
        ---
        
        A new reply to this comment has been posted.
        
        A new reply to this comment has been posted.
        
        A new reply to this comment has been posted.
      A new reply to this comment has been posted.
    A new reply to this comment has been posted.
  A new reply to this comment has been posted.
A new reply to this comment has been posted.