J. Bradford DeLong on US Inflation, Redistribution, and More EJINSIGHT


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

J. Bradford DeLong: All confident predictions of a return to price stability were turned upside down by Russian President Vladimir Putin’s attack on Ukraine and the resulting shocks to energy and commodity prices. cereals. With the war very unlikely to end quickly, a soft landing may no longer be possible. But we should still try to have one.

Is the Fed’s latest interest rate hike the right move? My deep belief is that the central bank should 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 high the Fed thinks it will eventually go. This does not make markets, investors or companies confident.

As for the IRA, it will put a slight downward pressure on inflation in the short term and a slightly higher, but still small, amount in the medium term. It is valued far more for what it does to increase supply and wealth than for what it does to reduce inflation.

PS: You hailed the IRA and the Useful Semiconductor Production Incentives (CHIPS) Act as “major legislative wins” for the Democrats and “more than enough to turn the tide on [US President Joe] Biden’s first two years in office. If, boosted by these victories, the Democrats do well in November’s midterm elections, what should define their economic agenda?

JBD: “Supply-side progressiveness” is a very good brand, and given the chance, US Democrats should keep running with it. The United States still massively underinvests in the human capital of its non-wealthy residents. It is also massively behind in the transition to renewable energy and in building the resilience of supply chains. Catching up will, unsurprisingly, require massive investment.

PS: In your recent PS comment, you argue that four thinkers help explain why we haven’t “become as good at slicing and tasting the economic pie as previous generations were at making it bigger.” If the diagnosis is, as you say, “only half the battle (and probably less)”, what thinkers, ideas or proposals could lead us to solutions, in particular “understanding the politics of the redistribution of wealth” ?

JDB: Oh. If I knew the answer to this question, I would be a much happier man.

My view is that all distribution and usage issues become much, much easier with the relatively equal income distribution of a middle-class society. I am therefore inclined to devote all my energy to increasing the wages and productivity of the non-rich and to raising the taxes of the rich. If we get there, we’ll see. But if we can’t do that, I don’t see much scope for improvement.

Besides…

PS: In your new book, Slouching Towards Utopia: An Economic History of the Twentieth Century, your “grand narrative” of the “long 20th century” (1870-2010) is shaped – for better or worse, depending on who and where you are – by globalization and, more recently, neoliberalism. Now we have apparently entered an era of de-globalization, and neoliberal orthodoxy is being widely challenged. Do these trends give you hope, worry or something else? Are there any historical lessons we should heed to ensure that our current path does not take us in circles?

JBD: I think the major lesson is that in an age of rapid technological progress, trying to revive the institutions of the past is futile and counterproductive. The underlying structure of production and labor is radically different today from what it was a generation ago, so that any set of discount arrangements that were satisfactory then no longer have only a slim chance of being satisfied now.

Attempting to revive 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 away from FDR and Reagan is the confidence to undertake what the former calls “bold experimentation” – something we can certainly afford – and the belief from the latter that if we do, our best days are still ahead of us. .

PS: From the “Devil of Malthus” to “Marx the Prophet” via the “patron saints” Friedrich von Hayek and Karl Polanyi, you regularly use religious imagery in your book. Is this simply a stylistic choice or a comment on the dogmatic character of economic thought? Is the key to progress breaking dogma, or developing one that leads to better results than Hayek and Polanyi’s ‘forced marriage’ – ‘blessed’ by John Maynard Keynes – which you say brings us closer most of utopia?

JBD: It’s above all a stylistic choice. But there is this underlying message: people in the 20th century attributed to ideas the amount of respect and commitment that people of the past reserved for their gods. I don’t think that’s very healthy. Even Oliver Cromwell, when faced with a group of people he considered religious fanatics, said, “I beg you, in the womb of Christ, consider that you might be wrong…”.

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

JBD: I would say that until 2003, I thought that the end of the long 20th century had arrived, and that it was a kind of “end of the story” of Francis Fukuyama. In 2010, however, it became clear to me that the real end of the long 20th century had just arrived – and it was far less optimistic. We had been blessed 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 necessary institutions, we had wasted this opportunity.

In the meantime, I was confused as to what was going on.

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