Battered and beaten outlook for US economy and policy

Brad DeLong has a pretty depressing paper on the topic.

He says he is amazed to see US economy to reach such low levels despite having several tools in its policy kit to prevent this outcome. He could not imagine that politicians and policymakers will allow unemployment to reach 10% and do nothing about it.

After seeing the crisis breakthrough in 2008, he was sure US would get out with minor damages. The crisis was real bad but he was optimistic about final outcomes.

He begins saying how the crisis became this bad from small losses in sub-prime market to huge insolvency crisis. He points to regulatory arbitrage as the main reason. This led to increase in leverage  and investment in all kinds of so-called AAA assets.

Despite this fall, he says there were seven policies which could have prevented it from becoming so severe:

1. Govt pulling spending in future to present and shifting taxes from current to future
2. Fed does QE
3. Fed to raise inflation and price level targets and indulge in open mouth operations
4. Treasury promises that it would not allow banks to fail
5. Treasury nationalises banks
6.  Treasury takes private sector risk on its balance sheet
7. Treasury reorganises mortgage market by providing liquidity

In sum, both Fed and Treasury press the accelerator. But nothing really happened. Fed started in big fashion but got slow. Treasury and US Government spent very little and took none of the measures to take on more private sector risk.

He criticises Obama’s economic advisors for not giving him alternative plans in case eco situation worsens. They expected unemployment to reach 8% and not 10% which was the final figure. The economists also did not agree on what works making the whole thing much worse. He is surprised that neither Obama and his advisers could not make a plan which could appeal to Republicans. He adds only place where people do not find empty tables in restaurants is around Capital Hill and New York where recovery summer is a reality. Rest of the country has plunged in darkness.

In the end he draws insights from Friedrich Nietzsche, a German philosopher.

Friedrich Nietzsche talked about the losers, or about those who thought they were the losers. He discussed their tendency in various ways to transvalue their values–to say that what was thought to be bad was in fact good precisely because it was thought to be bad.

Three weeks ago I was talking to some activists from the California Tea Party. I was trying to explain the Keynesian perspective: Shouldn’t we keep public employment from falling,” I said, “because right the government can borrow at such extraordinarily good terms, and if we keep our teachers at work then they educate our students and our students can earn more in the future–and if teachers have incomes they spend money and that employs more people in private sector? And they said no.

They said: we have lost our jobs in the private sector. It is only fair for those who work in the government to run some risk of loosing their jobs as well. They are unionized. They have pensions. It is not fair that they should have jobs too. They need to lose their jobs as well. Thus unemployment becomes something to be valued. The fact that government austerity will increase unemployment becomes a transvalued virtue of the policy. 

In the end he says in previous two US recessions 1991 and 2001. Even then there was no sign of economy returning to full employment. But due to dotcom boom and housing boom both times this problem was resolved. So something can still come up but the future remains bleak. Or just battered and beaten,

Strong words and crisp analysis from DeLong.

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