Brad DeLong's column

[Jim Devine <jdevine@xxxxxxxxxxxxxxx>]

In today's NY TIMES, Brad DeLong (an erstwhile participant in pen-l and an
editor of the prestigious JOURNAL OF ECONOMIC PERSPECTIVES) has a column,
on page 2 of the business section. It's interesting and useful in some
ways, but suffers from some basic economic mistakes.

He writes that in the 1980s: "The [government] deficit meant reduced money
for [private fixed] investment, which meant lower income growth, which
meant lower [tax] revenue growth."

This follows the pre-Keynesian (and discredited) view that saving drives
investment, so that government dissaving (deficits) hurts private
investment. It ignores how government deficits create markets for business
output, raise capacity utilization rates, and thus business profitability,
which _encourages_ investment ("crowding in").

Further, it ignores the role of Paul Volcker's monetary policy, which hiked
interest rates dramatically and thus crowded out private investment,
especially in exporting or import-competing sectors, which suffered from
the high dollar exchange rates which resulted from his policies. (I know
that the term "crowding out" is supposed to refer only to the government
budget's negative effect on private investment, but that shows a residual
Monetarist bias: the government's budget deficit -- which leads to high
interest rates (at least in theory) -- is _bad_, while tight monetary
policy -- which leads to high interest rates -- is _good_.)

Finally, it ignores the role of low profit rates -- akin to Keynes'
marginal efficiency of capital -- in discouraging private investment, along
with the corporate debt load of the time. Low capacity utilization -- a
result of Volcker's policies, not Reagan's fiscal policies -- and the
persistence of high labor costs and energy costs (high from a capitalist's
viewpoint) kept the profit rate low.

Later, he writes that "Lowered interest rates [in the 1990s] driven in part
by the shrinking of annual budget deficits..."

According to the usual sources on interest rates, the 1990s real interest
rates were high, not low. (And it's the real interest rate that counts
here.) For example, on page 19 of the 8th edition of RJ Gordon's
MACROECONOMICS textbook, the real interest rate during the 1990s has been
significantly higher than during the 1960s and especially the 1970s. It's
true that the rates were higher in the 1980s -- mostly due to tight
monetary policy -- than in the 1990s.  But that was part of the Volcker
anti-inflation campaign, which should have returned real interest rates to
levels seen in the 1960s, no?

Why did private investment do okay during the 1990s? Because the Reagan era
smashed labor and eventually cut wage costs, while until recently energy
costs were down, so that the profit rate rose steeply until at least 1998.
This encouraged private investment, as the (expected) benefit from it
exceeded interest costs. The explosion of consumer debt in the late 1990s
also allowed full capacity utilization, encouraging private fixed investment.

(It's interesting, by the way, that economists who decry the negative
effects of government deficits (as Brad did in the first quote) don't
mention the negative effects of consumer deficits. After all, consumers,
unlike the U.S. Federal government, can go bankrupt, encouraging a steep
recession. Maybe the U.S. government could go bankrupt, but not until we
have a civil war or similar event.)

Finally, he refers to "social democratic adversaries" of the Reagan
program. Who are these? In U.S. parlance, "social democracy" means nothing
to anyone except intellectuals who study Western Europe. That's because
social democracy never made it as a political movement in the U.S. and the
glimmerings of social democracy never had deep roots in organized labor.
Instead, we had anemic New Deal liberalism (a weak welfare state tied
intimately to the warfare state), which is to social democracy the way a
painting on black velvet is to a Rembrandt. While there are social
democrats out there (I could name a few), they do not represent a major
force that opposed Reaganism.

Jim Devine jdevine@xxxxxxx &  http://liberalarts.lmu.edu/~jdevine