In my earlier diary, "Same as it never was: Economics as if the 20th Century never happened", I examined Brad DeLong's paper, Batterd But Not and Beaten, in which he confessed his utter bewilderment at the apparently incoherent path taken by Obama in failure to respond effectively to the Great Recession. (At one point, he even wrote, "This is the part of the talk where I go from simply needing therapy to actually asking for therapy.") And I promised:
In a later diary, this will stand in contrast to a much more lucid overview of our present confused state contained in a more recent paper presented last Wednesday at a Roosevelt Institute panel in NYC, "A World Upside Down? Deficit Fantasies in the Great Recession" by Thomas Ferguson and Robert Johnson.
It was not the primary purpose of this paper to provide therapy for DeLong, merely a side-benefit, which might well go unnoticed. So let me explain. As I understand DeLong, he was summing up his prolonged experience of struggling against the rise of unreason in economic policy-making since late 2008, when the Wall Street crash precipitated the Great Recession. He was, in effect, trying to understand the rise of unreason using the tools of reason--always a dicey proposition, at best. Dicey, but not impossible, particularly if the reasoned study of unreason is part of your pre-existing portfolio--a point that DeLong implicitly touched on when invoking Nietzschean ressentiment. And here is where
Ferguson and Johnson succeed, simply by virtue of their orientation from past work, particularly Ferguson's Investment theory of party competition, which focuses attention on economic blocks, rather than median voters as the crucial determinants in politicaly systems such as the US. Wikipedia provides a brief summary from Ferguson himself:
Ferguson summarizes the investment theory as the following:
The investment theory essay presents a general case: pressures of time, limited information, financial constraints, and transaction costs (including many imposed by political systems, such as direct repression) are more burdensome to ordinary voters than classical democratic theorists allow. As a consequence, political parties in countries such as the United States are not what...most American election analyses...treat them as, viz,...the political analogues of "entrepreneurs in a profit-seeking economy" who "act to maximize votes."...Instead, the fundamental market for political parties usually is not voters...most of these possess desperately limited resources and - especially in the United States - exiguous information and interest in politics. The real market for political parties is defined by major investors, who generally have good and clear reason for investing to control the state...Blocs of major investors define the core of political parties and are responsible for most of the signals the party sends to the electorate.[5]
Ferguson also summarizes some of the dynamics:
In such investor-driven systems, the meaning of political competition is very different from its analogue in classical democratic theory: political parties dominated by large investors try to assemble the votes they need by making very limited appeals to particular segment of the potential electorate. If it pays some other bloc of major investors to advertise and mobilize, these appeals can be vigorously contested, but...on all issues affecting the vital interests that major investors have in common, no party competition will take place. Instead, all that will occur will be a proliferation of marginal appeals to voters - and if all major investors happen to share an interest in ignoring issues vital to the electors, such as social welfare, hours of work, or collective bargaining, so much the worse for the electorate. Unless significant portions of it are prepared to try to become major investors in their own right, through a substantial expenditure of time and (limited) income, there is nothing any group of voters can do to offset this collective investor dominance.[6]
While Ferguson and Johnson do not explicitly invoke this framework in so many words, they don't have to....
Rather, they focus attention on a financial crisis brought about in the context of a financial sector recently come to a state of such complete dominance over the rest of the world's largest economy that no one else's interests really count for anything when push comes to shove. From this perspective, the niceties of economic science and policy portfolios derived therefrom are decorative embellishments at best. There was, of course, a time when Wall Street was nowhere near as politicaly powerful, and people really took Washington policymakers quite seriously. This situation ebbed away over time, until, when the chickens came home to roost in September, 2008, Secretary Paulson arrived as Wall Street's agent and declared, "Hand over the money, no questions asked. And certainly no piffling about why." People like DeLong--and he was far from alone--simply assumed this was a temporary situation. Once things stabilized somewhat, rational deliberation about what to do next would surely resume. It might not be perfect, it might even be fairly problematic, but it would resume.
But Ferguson and Johnson's perspective is, "not so much." So long as the biggest of big finance's concerns diverge from what economists have considered "normal" in the past--and this covers a fairly broad range--then they are not the least bit surprised to observe a somewhat different game afoot, and rather than register shock and confusion, they simply seek to describe and understand the process of a political investor group going about its business as it normally does, even though the times themselves be not so normal.
In short, they "retreat" as it were from the fantasy of economics as a laboratory science, running tests with its models and such, and instead look on like good field biologists (studying rambunctious meerkats, perhaps) observing developments as they unfold.
And so they wrote, in a sweeping summary of what they observed:
Earlier this summer, in the midst of the greatest economic crisis since the Great Depression, economic policy turned upside down. Instead of promoting recovery and expanding employment, central banks and political elites suddenly focused on cutting budget deficits and raising interest rates.
Forget the famous "conservative counterrevolution" in policymaking since the late nineteen seventies - the break with past practice is real and dramatic. Save for a handful of exceptions, like Margaret Thatcher and, far more equivocally, Ronald Reagan, from the end of World War II until a few months ago, even conservative governments threw in the towel when they saw the Invisible Hand waving goodbye....
The declaration that accompanied the 2009 G20 summit in Pittsburgh stood squarely in this tradition. The only surprise was that the summiteers dispensed with atonement rites and frankly admi#ed what they were doing - doubtless a reflection of how deeply the financial crisis had tarnished the prestige of
conventional economics: "We pledge today to sustain our strong policy response until a durable recovery is secured. We will act to ensure that when growth returns, jobs do too. We will avoid any premature withdrawal of stimulus."4
At the Toronto summit in early July 2010, though, all this suddenly became, in the legendary words of Richard Nixon's press secretary, "inoperative." The G20 radically changed course. Leaders decided to act as if prosperity were just around the corner. Endorsing calls for macroeconomic austerity promoted by Germany, the European Central Bank and the International Monetary Fund, the group abandoned focusing on employment in favor of curbing deficits, raising interest rates, and reeling in special central bank programs for monetary ease.5
They have no grand unified theory of everything to explain how thinking has shifted. At bottom, it need be no more complicated than this: Different actors want different things, and have different opportunities to take advantage of. But they do note that a few shards of thought have emerged to seemingly justify a shift toward austerity that has nothing in standard economic thought to justify it. And so they devote substantial attention to showing why these shards of thought are misleading. In their abstract, they foreshadow:
We critically examine claims put forward by Rinehart and Rogoff, the International Monetary Fund, and others about the"dangers of rising debt to GDP ratios. We also scrutinize assertions by Alesina and Ardagno that cutting deficits is likely to be stimulatory.
I will get into that in a future diary. But the point is, from Ferguson and Johnson's perspective there is no great mystery here to be unriddled. The desire to reimpose the disastrous austerity economics of Hoover and Mellon preceeds any theoretical foundations. It grabs whatever it can. So long as the need to explain itself can be rendered "inoperative", then who really cares, anyway? Brad DeLong? Who is he? Some guy with a blog? Paul Krugman? Isn't he always cranky about something?
There is a good deal more that might be said about this--and that I plan to say, as soon as I've sorted out the clearest way of fitting them together. Much of it concerns the question of "is economics a science?" and what that question means, as well as the question of how the mixture of reason and unreason in the subject matter of economics spills over into the discipline itself. But for now, this will have to do as an introductory explanation of why I think DeLong is looking in the wrong place for the answers he wants to find. It's all a good deal simpler than he thinks, if he would just think of Meekat Manor as his epistemic model.
