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.Gulp.
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 terrified 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.I think he is largely right about this. The elite class in this country (and far, far more so in Europe) is maniacally obsessed with inflation, and exercises veto power over policy decisions. However I think there is a glimmer of hope here and there.
First, I think there is significant room for action without actually triggering significant inflation. That is to say I don't think most of the elite class (especially businessmen) actually have much understanding of the macroeconomy and their fears of inflation are largely irrational. A bit of inflation would help somewhat, but I think if the Fed could have significantly more expansionary policy without leading to a wage-price spiral.
Second, just to poach some more from Steve (this is another excellent post, sheesh), there are some tricks we could use to try and buy off some of the poor and middle class, via strictly guarded inflation-protected bank accounts. This might ease up some of the clutching anxiety of the retired class.
Third, and perhaps most importantly, though the plutocratic part of our democracy has effectively stymied action, we still have enough democratic character for long depressions to have serious electoral consequences. The Democrats got hammered in 2010, and probably because the economy was still in the toilet. The flipside of that coin is that there is enormous political power waiting for anyone who manages to break through the plutocratic deadlock and jam through some massive stimulus. Just imagine--if Obama had appointed Scott Sumner as Fed chair and he had engineered a strong recovery, the Democrats surely would have kept power in 2010.
That might sound naive, but I think it can be done. I'll explain why tomorrow.