Brad DeLong has posted a draft of an entertaining piece on recent macroeconomic thought. Most of the second part of this is involved with a discussion of what DeLong calls the ‘nihilists’ — a category which broadly speaking applies to the group of economists that Paul Krugman was thinking of when he referred to a Dark Age of Macroeconomics. For me, however, the more interesting part was the opening section which sets out three different positions on US macroeconomic policy.
First there are what DeLong calls the Greenspanists. They are the product of Alan Greenspan’s 18-year tenure at the Fed and a shorthand view of their position would describe an emphasis on expansionist monetary policies designed to keep employment as high as possible while avoiding an inflationary spiral, a largely hands-off approach to financial regulation intended to maximise the benefits of financial innovation, and a ready willingness to mop up after the bursting of any bubbles. The GFC, of course, has presented this particular view of the world with a major challenge.
Then there are the Punchbowlers. Punchbowlers — so-named in honour of William McChesney Martin — would tend to agree with the Greenspanists on regulatory issues but would argue that monetary policy should focus not just on keeping interest rates high enough to avoid inflationary spirals, but also high enough to avoid asset market bubbles. For an interesting recent view on the need for monetary policy to lean against the upswing of credit booms, see this paper by William White. [fold]
Finally, there are the Producerists. They would line up with the Greenspanists on the use of monetary policy to support economic activity in the real sector of the economy, but profoundly disagree on financial regulation, arguing that 'finance ought to be regulated within an inch of its life to minimize the prospects for bubbles, crashes and crises...' Adair Turner, chairman of the UK’s Financial Services Authority with his view that 'some financial activities which proliferated over the last ten years were "socially useless", and some parts of the system were swollen beyond their optimal size' could be seen as channelling producerist views.
For his part, DeLong notes that up until the start of 2007 he was a Greenspanist, arguing that while one impact of lax financial sector regulation may have been to produce near-crises in the US in 1987, 1991, 1998 and 2000, most of this financial turmoil had in fact generated little real cost to the US economy. Indeed, these bubbles may even have had positive consequences, as DeLong, taking a position similar to that advanced in 2007 by Daniel Gross, argues:
It was true some of the greedy, rash and wealthy had lost some of their money in ill-judged investments and lost some more to the even-richer card sharps of Midtown Manhattan. But had the rich who invested in the dot-com bubble decided instead to give $1 trillion to universities that promised to spend it rapidly on research into applied computing and communications technology we would have applauded — and that’s what they did during the dot-com bubble.
And had the rich who invested in subprime mortgage securities instead given $500 billion to charities to upgrade America’s housing stock we would have applauded — and that what they did during the real estate bubble. Admittedly, charities seeking to improve America’s housing stock would have built three-story multi-unit buildings near shopping and transit rather than five bedroom houses with swimming pools hours from everywhere in the desert between Los Angeles and Albuquerque, but you cannot have everything.
Post-GFC, Delong says, he is 'undergoing an agonizing reappraisal.'
Photo by Flickr user Mal Cubed's photostream, used under a Creative Commons license.