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PS Say More


J. Bradford DeLong
Says More…

This week, Project Syndicate catches up with J. Bradford DeLong, Professor of Economics at the University of California, Berkeley, and a research associate at the National Bureau of Economic Research.

Project Syndicate: One forgotten lesson of the Great Depression, you wrote last month, is that “persistent ultra-low interest rates mean the economy is still short of safe, liquid stores of value, and thus in need of further monetary expansion.” Since then, the US Federal Reserve has cut the federal funds rate – a move that you argued in March could either stave off a recession or drastically undermine the Fed’s capacity to respond to one. What steps should the Fed take to help encourage the former and prevent the latter? At a time of growing political pressure on the Fed, what approach is it likely to take?

Brad DeLong: Back in 1992, Larry Summers and I warned participants at the Fed’s annual symposium in Jackson Hole, Wyoming, that low inflation and high equity-return and bond-risk premiums did not play well together. Dealing with a typical recession had, historically, required that the Fed cut the federal funds rate by five full percentage points. A large recession would require even larger cuts.

How could macroeconomic stability be maintained in a world where the real federal funds rate was 3% at the peak of the business cycle and the inflation rate was 2% or less? It was a very good question then. It is an even better question today, when we are mired in what Summers calls “an era of secular stagnation”; the real federal funds rate tops out at just 1.5% at the peak of the business cycle; and the Fed is struggling to keep the break-even inflation rate (that is, investors’ inflation expectations) from falling to or below 1.5%.

So, there are three possible answers to your question. First, the Fed could raise the inflation target significantly above 2%. But it has decided not to do that.

Second, the Fed could substantially reduce equity-return and bond-risk premiums, say, by undertaking asset transformation on a large enough scale to satisfy the market demand for safe, liquid stores of value. It could also conceivably lobby for other policies that might accomplish this. But it has decided not to do any of that, either.

Third, the Fed could abandon its post-World War II commitment to maintain near-full employment whenever doing so does not spur excessive inflation. As it stands, the Fed is choosing this option by default. It should recognize this and change course, pursuing the first or second option. But I see no signs that it will.

PS: Just two months after you argued (in June) that “America’s attempt to ‘get tough’ with China could accelerate its own relative decline,” the US Treasury has officially designated that country a currency manipulator. America, you’ve said, “will never reclaim the standing it had in 2000, and it probably cannot even recover the tenuous but still solid geopolitical position it enjoyed in 2016.” With this latest move, has the US reached the point of no return?

BD: As Adam Smith once wrote, “there is a great deal of ruin in a nation.” There are rarely true points of no return. Moreover, in this case, China faces serious problems of its own, relating to governance, inequality, and development. It is also on the frontlines of the slow-moving but dire climate crisis, in a way that the US is not.

That said, the US will not recapture its position as the triumphant leader and guide of global progress that it was at the end of Bill Clinton’s presidency, or even as the wounded but still-preeminent global power it was at the end of Barack Obama’s presidency. This will be true, even if the forces that elected Donald Trump are as scotched as the supporters of Republican California Governor Pete Wilson were after he declared Hispanics the state’s Public Enemy #1 back in the 1990s. It will be true, even if Trump’s successor goes on a global apology and listening tour, and the US works very hard to become its best self.

Whatever happens, the US can hope only to be one power among several. The world is in desperate need of mechanisms that can underpin the provision of global public goods in such a multipolar world.

PS: China’s response to the Trump administration’s latest escalation of the bilateral trade and currency dispute suggests that its leaders’ patience may be wearing thin. What steps could they take now, and how is Chinese policy likely to shape US economic performance in the coming months and years?

BD: If China’s leaders have not already recognized that the Trump administration cannot be regarded as a rational negotiating partner, it is time that they do. In eight months, Trump will be focused entirely on his re-election campaign, taking whatever actions he believes will improve his chances of victory.

From China’s perspective, those actions will probably be extremely difficult to anticipate. In that context, its best strategy is to conciliate, defer, and delay, preventing the conflict – and its associated damage – from escalating further. Then, after the November 2020 US presidential election, it will need to reevaluate the situation.

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DeLong recommends

We ask all our Say More contributors to tell our readers about a few books that have impressed them recently. Here are DeLong's picks:

  • Manias, Panics, and Crashes

    Manias, Panics, and Crashes

    The renowned economic historian Kindleberger shows how the mismanagement of money and credit has produced financial upheaval over the centuries.

  • Essays in Persuasion

    Essays in Persuasion

    A collection of insightful essays and articles written between 1919 and 1931, intended for a general audience.

  • The Great Transformation

    The Great Transformation

    In this classic work of economic history and social theory, Polanyi analyzes the economic and social changes brought about by the Industrial Revolution.

From the PS Archive

From 2018
A year after Trump and his fellow Republicans rammed their massive corporate tax cut through Congress, DeLong pointed out that the policy had not fulfilled its promise – which the conservative economists who backed it always knew was false – substantially to boost productivity and investment. Read his commentary.

From 2013
Nearly three years before a political backlash by those who felt they had been “left behind” by globalization got Trump elected, DeLong pointed out that a reaction to sharply rising inequality in the US was overdue. Read his commentary.

Around the web

In a comprehensive overview of US economic history, DeLong explains how the Hamiltonian economic principles of pragmatism and experimentation have repeatedly worked. Listen to the podcast.

DeLong joins the debate over whether US Democrats should lean away from market-friendly stances and embrace progressive presidential candidates and policies like the Green New Deal. Read the interview.

DeLong argues that, at a time when there is very little room to loosen US monetary policy, the Fed should be buying recession insurance. But it is not. Listen to the podcast.;

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