Across the North Atlantic region, central bankers and governments seem, for the most part, helpless to restore full employment to their economies. Europe has slipped back into recession without ever really recovering from the financial/sovereign-debt crisis that began in 2008. The US economy is currently growing at 1.5 percent per year (about a full percentage point less than potential), and growth may slow, owing to a small fiscal contraction this year.
Industrial market economies have been suffering from periodic financial crises, followed by high unemployment, at least since the Panic of 1825 nearly caused the Bank of England to collapse. Such episodes are bad for everybody — workers who lose their jobs, entrepreneurs and equity holders who lose their profits, governments that lose their tax revenue and bondholders who suffer the consequences of bankruptcy — and we have had nearly two centuries to figure out how to deal with them. So why have governments and central banks failed?
There are three reasons why the authorities might fail to restore full employment rapidly after a downturn. For starters, unanchored inflation expectations and structural difficulties might mean that efforts to boost demand show up almost entirely in faster price growth and only minimally in higher employment. That was the problem in the 1970s, but it is not the problem now.
The second reason might be that even with anchored inflation expectations (and thus price stability), policymakers do not know how to keep them anchored while boosting the flow of spending in the economy.
And here one stops, flummoxed. By 1829, Western Europe’s technocratic economists had figured out why these periodic grand mal economic seizures occurred. That year, Jean-Baptiste Say published his Cours Complet d’Economie Politique Pratique, admitting that Thomas Malthus had been at least half right in arguing that an economy could suffer for years from a “general glut” of commodities, with nearly everybody trying to reduce spending below income — in today’s jargon, to deleverage. And, because one person’s spending is another’s income, universal deleveraging produces only depression and high unemployment.
Over the following century, economists like John Stuart Mill, Walter Bagehot, Irving Fisher, Knut Wicksell and John Maynard Keynes devised a list of steps to take to avoid or cure a depression.
One, do not go there in the first place: Avoid whatever it is — whether external pressure under the gold standard, asset-price bubbles or leverage-and-panic cycles, such as that of 2003-2009 — that creates the desire to deleverage.
Two, if you do find yourself there, stop the desire to deleverage by having the central bank buy bonds for cash, thereby pushing down interest rates, so that holding debt becomes more attractive than holding cash.
Three, if you still find yourself there, stop the desire to deleverage by having the Treasury guarantee risky assets, or issue safe ones, to raise the quality of debt in the market; this, too, will make holding debt more attractive.
Four, if that fails, stop the desire to deleverage by promising to print more money in the future, which would raise the rate of inflation and make holding cash less attractive than spending it.
Five, in the worst case, have the government step in, borrow money and buy stuff, thereby rebalancing the economy as the private sector deleverages.
There are many subtleties in how governments and central banks should attempt to accomplish these steps. And, indeed, the North Atlantic region’s governments and central banks have tried to some degree. However, it is clear that they have not tried enough: The “stop” signal of unanchored inflation expectations, accelerating price growth and spiking long-term interest rates — all of which tell us that we have reached the structural and expectational limits of expansionary policy — has not yet been flashed.
So we remain far short of full employment for the third reason. The issue is not that governments and central banks cannot restore employment, or do not know how; it is that governments and central banks will not take expansionary policy steps on a large enough scale to restore full employment rapidly.
And here it is worth reflecting on the 1930s, and on how historical events recur, appearing first as tragedy and then, pace Karl Marx, as yet another tragedy. Keynes begged the policymakers of his time to ignore the “austere and puritanical souls” who argue for “what they politely call a ‘prolonged liquidation’ to put us right,” and professed that he could “not understand how universal bankruptcy can do any good or bring us nearer to prosperity.”
Today’s policymakers, so eager to draw a bold line under expansionary measures, should pause and consider the same question.
J. Bradford DeLong, a former deputy assistant secretary of the US Treasury, is a professor of economics at the University of California at Berkeley and a research associate at the National Bureau for Economic Research.
Copyright: Project Syndicate
Recently, China launched another diplomatic offensive against Taiwan, improperly linking its “one China principle” with UN General Assembly Resolution 2758 to constrain Taiwan’s diplomatic space. After Taiwan’s presidential election on Jan. 13, China persuaded Nauru to sever diplomatic ties with Taiwan. Nauru cited Resolution 2758 in its declaration of the diplomatic break. Subsequently, during the WHO Executive Board meeting that month, Beijing rallied countries including Venezuela, Zimbabwe, Belarus, Egypt, Nicaragua, Sri Lanka, Laos, Russia, Syria and Pakistan to reiterate the “one China principle” in their statements, and assert that “Resolution 2758 has settled the status of Taiwan” to hinder Taiwan’s
Can US dialogue and cooperation with the communist dictatorship in Beijing help avert a Taiwan Strait crisis? Or is US President Joe Biden playing into Chinese President Xi Jinping’s (習近平) hands? With America preoccupied with the wars in Europe and the Middle East, Biden is seeking better relations with Xi’s regime. The goal is to responsibly manage US-China competition and prevent unintended conflict, thereby hoping to create greater space for the two countries to work together in areas where their interests align. The existing wars have already stretched US military resources thin, and the last thing Biden wants is yet another war.
As Maldivian President Mohamed Muizzu’s party won by a landslide in Sunday’s parliamentary election, it is a good time to take another look at recent developments in the Maldivian foreign policy. While Muizzu has been promoting his “Maldives First” policy, the agenda seems to have lost sight of a number of factors. Contemporary Maldivian policy serves as a stark illustration of how a blend of missteps in public posturing, populist agendas and inattentive leadership can lead to diplomatic setbacks and damage a country’s long-term foreign policy priorities. Over the past few months, Maldivian foreign policy has entangled itself in playing
A group of Chinese Nationalist Party (KMT) lawmakers led by the party’s legislative caucus whip Fu Kun-chi (?) are to visit Beijing for four days this week, but some have questioned the timing and purpose of the visit, which demonstrates the KMT caucus’ increasing arrogance. Fu on Wednesday last week confirmed that following an invitation by Beijing, he would lead a group of lawmakers to China from Thursday to Sunday to discuss tourism and agricultural exports, but he refused to say whether they would meet with Chinese officials. That the visit is taking place during the legislative session and in the aftermath