J. Bradford DeLong on US inflation, redistribution, economic dogma, and more

J. Bradford DeLong Says More…

Project Syndicate: In March, you wrote that higher inflation was “inevitable and therefore not regrettable”, because it was “a side effect and a consequence of the robust recovery”, which amounts to a “massive policy victory”. You also predicted that price stability would return in the medium term, though you also noted in June that the US Federal Reserve’s ability to raise interest rates sufficiently was constrained by forward guidance. Are you still relatively sanguine about US inflation, and was the Fed’s latest interest-rate hike the right call? How effective will the Inflation Reduction Act (IRA) be in supporting the Fed’s efforts to ease inflation?

J. Bradford DeLong: All confident predictions of a return to price stability have been upset by Russian President Vladimir Putin’s attack on Ukraine and the resulting shocks to energy and grain prices. With the war extremely unlikely to be brought to a rapid conclusion, a soft landing may no longer be possible. But we should still try for one.

Is the Fed’s latest interest-rate hike the right call? My strong belief is that the central bank ought to have moved its short-term policy rate to the appropriate level, and then paused. Instead, rates are below what the Fed thinks is the appropriate level, but there is uncertainty about how much higher the Fed believes it will end up going. That does not make for confident markets, investors, or businesses.

As for the IRA, it will put a small amount of downward pressure on inflation in the short term and a slightly larger, but still small, amount in the medium term. It is welcome much more for what it does to expand supply and wealth than for what it does to reduce inflation.

PS: You have praised the IRA and the Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act as “major legislative victories” for the Democrats and “more than enough to flip the narrative about [US President Joe] Biden’s first two years in office”. If, boosted by these victories, the Democrats perform well in November’s midterm elections, what should define their economic agenda?

JBD: “Supply-side progressivism” is a very good brand, and if given the chance, US Democrats should keep running with it. The United States is still massively underinvesting in the human capital of its non-rich residents. It is also massively behind the curve in the transition to renewables and in boosting the resilience of supply chains. Catching up will require, no surprise, massive amounts of investment.

PS: In your recent PS commentary, you argue that four thinkers help explain why we have not “become as good at slicing and tasting the economic pie as previous generations were at making it bigger”. If diagnosis is, as you put it, “only half the battle (and probably less)”, which thinkers, ideas, or proposals might be able to lead us toward solutions, especially “figuring out the politics of wealth redistribution”?

JBD: Ah. If I knew the answer to that question, I would be a much happier man.

My view is that all of the problems of distribution and utilisation become much, much easier with the relatively equal income distribution of a middle-class society. So, I am inclined to put all of my energy into boosting the wages and productivity of the not-rich, and increasing taxes on the rich. If we manage to accomplish that, then we will see. But if we do not accomplish that, I do not see much prospect for improvement.

By the Way…

PS: In your new book, “Slouching Towards Utopia: An Economic History of the Twentieth Century”, your “grand narrative” of the “long twentieth century” (1870-2010) is shaped, for better or worse, depending on who and where you are, by globalisation and, more recently, neoliberalism. Now, we have seemingly entered an age of deglobalisation, and the neoliberal orthodoxy is being widely challenged. Do these trends make you hopeful, worried, or something else? Are there historical lessons we should be heeding to ensure that our current path doesn’t take us in circles?

JBD: I think that the major lesson is that, at a time of rapid technological advancement, it is vain and counterproductive to try to revive institutions from the past. The underlying structure of production and work is drastically different now than it was a generation ago, so whatever rough-bargain set of arrangements was satisfactory then has no more than a minuscule chance of being satisfactory now.

Attempting to revive any past solutions or approaches, whether those of Franklin D. Roosevelt or Ronald Reagan, is likely to be a huge waste of effort. What we should take from the likes of FDR and Reagan is the confidence to undertake what the former called “bold experimentation”, something we can certainly afford, and the latter’s conviction that if we do so, our best days are still in front of us.

PS: From the “Devil of Malthus” to “Marx the prophet” and the “patron saints” Friedrich von Hayek and Karl Polanyi, you regularly use religious imagery in your book. Is this merely a stylistic choice, or a comment on the dogmatic nature of economic thought? Is the key to progress to break the dogma, or to develop one that leads to better outcomes than the “shotgun marriage” of Hayek and Polanyi, “blessed” by John Maynard Keynes, that you argue got us the closest to utopia?

JBD: It is mostly a stylistic choice. But there is this underlying message: People in the twentieth century have been attributing to ideas the amount of respect and commitment that people in the past reserved for their gods. I do not think that is terribly healthy. Even Oliver Cromwell, when confronted with a bunch of people whom he regarded as religious fanatics, said: “I beseech you, in the bowels of Christ, consider that you might be mistaken...”

PS: You began Slouching Towards Utopia before the “long twentieth century” ended, and wrote tens of thousands [hundreds of thousands?] of words that never made it into the book. When did it become clear to you that the end had arrived? Was there an idea, event, or anecdote that was particularly difficult to cut?

JBD: I would say that up until 2003, I thought that the end of the long twentieth century had arrived, and it was a Francis Fukuyama “end of history” kind of ending. In 2010, however, it became clear to me that the real end of the long twentieth century had just arrived, and it was much less optimistic. We had had the chance not only to create an economy capable of producing great wealth, but also to distribute and use that wealth effectively. But, unable to build the needed institutions, we had squandered that opportunity.

In between, I was confused about what was going on.

J. Bradford DeLong, professor of Economics at the University of California, Berkeley, and the author of Slouching Towards Utopia: An Economic “History of the Twentieth Century”. Copyright: Project Syndicate, 2022. 

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