That is the gloss of Steve Waldman over at interfludity and when I first heard about it over at Scott's I more or less glossed over it. However, I hadn't read it first hand. Noah Smith over at Noahpinion again made a plea for Steve:
"Steve Randy Waldman continues to call for an alliance between Keynesians, market monetarists, and New Keynesians. His post, unfortunately, is probably way too smart, erudite, and sensible to receive much attention."
For some reason the way Noah put it made me feel like actually reading. For one thing the idea of an alliance-I like the word "detente" and am thrilled to finally have the excuse to use it. On the depression preference, reading it makes it seem much more plausible.
"We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives."
"Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable."
"But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational."
Waldman is not making the usual gloss that we have become a plutocracy controlled by the banks and wealthy donors. That is actually a welcome breath of fresh air. At least it's novel. His point that choosing depression over the alternatives is the choice of the people not simply the banks against the will of these very same people.
Yes are country is in many ways plutocratic. But:it is a plutocratic democracy.
"I am often told that this is absurd because, after all, wouldn’t creditors be better off in a booming economy than in a depressed one? In a depression, creditors may not face unexpected inflation, sure. But they also earn next to nothing on their money, sometimes even a bit less than nothing in real terms. “Financial repression! Savers are being squeezed!” In a boom, they would enjoy positive interest rates."
"That’s true. But the revealed preference of the polity is not balanced. It is not some cartoonish capitalist-class conspiracy story, where the goal is to maximize the wealth of exploiters. The revealed preference of the polity is to resist losses for incumbent creditors much more than it is to seek gains. In a world of perfect certainty, given a choice between recession and boom, the polity would choose boom. But in the real world, the polity faces great uncertainty. The policies that might engender a boom are not guaranteed to succeed. They carry with them a short-to-medium-term risk of inflation, perhaps even a significant inflation if things don’t go as planned. The polity prefers inaction to bearing this risk".
"This preference is not at all difficult to understand. The ailing developed economies are plutocratic democracies. “The people” do have power, but influence is weighted in a manner correlated with wealth. The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is panicked by the prospect of becoming poorer. For such a person, the depression status quo is unfortunate but tolerable. The risks associated with expansionary policy, on the other hand, are absolutely terrifying."
"The revealed preference of my polity is not my personal preference. Perhaps that is because I’m an idealist, and I actually care about the misery provoked by precarity and unemployment. Perhaps it’s simply because I’ve not yet endowed my own future consumption, and I’m scared. Regardless, I object. Although I understand where it comes from, I detest the preference for depression revealed by my polity. Perhaps you do too.
"But if we want to change the behavior of the polity, it’s not enough to argue over clever policies that, if implemented, might do the trick. We’ve got to change its preferences, which means either buying off the median influencer, or changing her identity via political struggle. Alternatively, we can wait until what are now problems of aggregate demand morph into supply problems (after people become unemployable and capital decays), or into threats of political and social unrest. The median influencer may change her views if tight supply makes goods costly despite fiscomonetary conservatism. Or if her neighborhood is on fire. But I’d prefer we avoid all that, and take a more proactive route."
"In the meantime, we have to recognize that what we are experiencing is not a technical failure. It is not “magneto trouble”. We, collectively, are making a choice. The task before us is to change our mind."
I think this is a very thought provoking take. In many ways this is the take of Morgan Warstler-this "plutocratic polity" is according to him what the tea party is all about. I like it because it reminds me of what Michael Kinsley once said-after Bush the First blew out Dukakis-his and my choice though I couldn't vote then.
"Democracy can goof."
The idea of a polity that is older and risk adverse makes a lot of sense. Basically the older retiring generation who has it's savings figures out is very risk adverse. They'd rather lock in here though it is not optimizing than risk for the chance of actually getting richer. Given a choice between being guaranteed a certain level that is even somewhat declining to a chance of doing much better but also with considerable uncertainty they'll choose the lest adventurous option I would say it certainly describes accurately Japan since the 90s and Europe today.
I think with the US there is still a chance we can go a different way-we are such a young country-just over 200 years old and our image is not of being conservative like Japan and Europe.
What I like though is Steve makes a great point. By simply blaming the banks as most left populists do they absolve the people of any responsibility in the current outcome. It fails to admit that the people themselves are sometimes the real problem. In a democracy they may want an unworthy thing. Morgan Warstler's American may not be attractive but I think we have to really take Steve's hypothesis to heart.
In a way it means that liberals like me and Steve can't just presume as too many liberals do that the people of course agree with us. I also agree with him about the stakes. It would be nice if we can persuade our "median inluencer" before the supply problem or her neighborhood is on fire-a real threat. Essentially that we have to either "buy her off" or "change her identity through political struggle.
How might we buy her off? Steve has some ideas-like a "starter savings account."