J. Bradford DeLong
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DEC 31, 2014
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BERKELEY – When it became clear in late 2008 that the global economy was headed toward a crash at least as dangerous as the one that had initiated the Great Depression, I was alarmed, but also hopeful. We had, after all, seen this before. And we also had a model for how to mitigate the damage; unfortunately, policymakers left it on the shelf.
For three and a half years following the start of the Great Depression, US President Herbert Hoover’s top priority was to balance the budget, trying – but ultimately failing – to restore business confidence. In 1933, newly elected President Franklin D. Roosevelt changed course, adopting a simple yet radical strategy: try everything that might boost demand, increase production, or reduce unemployment – and then keep doing the things that work.
Roosevelt abandoned attempts to balance the budget, increased the money supply, and initiated deficit spending. He took the United States off the gold standard, had the government hire workers directly, and offered loan guarantees to those in danger of losing their homes. He cartelized the oil industry and instituted aggressive antitrust policies to break up monopolies.
To be sure, Roosevelt’s New Deal policies sometimes conflicted with one another, and quite a few of them were counterproductive. But, by trying everything, and then scaling up the most successful policies, Roosevelt was ultimately able to turn the economy around.
And so, in late 2008, the way forward seemed obvious: recapitalize the banks, guarantee loans, use the government-backed housing lenders Fannie Mae and Freddie Mac to resolve underwater mortgages, drop short-term interest rates to zero and use quantitative easing to prevent deflation or dangerously low inflation, and embrace deficit spending. Then, as events evolved, we would reinforce those policies that seemed to be working and gradually drop those that seemed to be ineffective or counterproductive.
But that was not what we did. Instead, each proposal faced its own opposition. Some worried that recapitalizing the banks would reward the very institutions that had caused the problem.
Others fretted that resolving underwater mortgages would reward feckless borrowers. Still others raised concerns about expansionary fiscal and monetary policy. And some favored one set of polices (say, resolving underwater mortgages and recapitalizing the banks), while opposing all the others (for example, deficit spending and raising inflation expectations).
Others fretted that resolving underwater mortgages would reward feckless borrowers. Still others raised concerns about expansionary fiscal and monetary policy. And some favored one set of polices (say, resolving underwater mortgages and recapitalizing the banks), while opposing all the others (for example, deficit spending and raising inflation expectations).
Six years on, the economy has yet to fully recover and the problem persists. In an article published on Christmas Day in the Wall Street Journal, the usually wise economist Martin Feldstein makes the case for a set of policies designed to stimulate demand, including increasing investment tax credits and shifting the corporate-tax burden to firms that do not spend very much.
Feldstein’s ideas are promising; and, in line with the lessons of the Great Depression, they are definitely worth trying. The trouble is the rhetoric surrounding his proposals. The article’s headline, “The Fed’s Needless Flirtation With Danger,” is followed by warnings that quantitative easing could “increase the risk of financial instability.” Instead of simply promoting his policies, Feldstein presents them as a “safe and effective alternative” to other approaches. His proposals, he argues, are not an additional arrow in the quiver, but replacements for “traditional Keynesian policies…[that] increase budget deficits and national debt.”
The result is that Feldstein’s contribution to solving our economic difficulties is, at best, unproductive. Though he presumably hopes that his commentary will increase the likelihood that his preferred policies are adopted, the more likely real-world effect will be to diminish support for existing policies without marshaling support for a coalition that can implement effective replacements.
I would be remiss if I did not note that I have sometimes been part of the problem. When I look back at everything I have written since 2008, I find that I, too, have sometimes been too ready to push my favorite recipes at the expense of others.
As policymakers continue to seek a path out of the ongoing malaise, it would be wise to remember Roosevelt’s words before he led the US out of a very similar crisis. “The country needs and…demands bold, persistent experimentation,” he said in 1932. “Take a method and try it. If it fails, admit it frankly, and try another. But above all, try something.”
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