Krugman’s blog, 9/2/14

There were two posts yesterday.  The first was “Class Interests and Monetary Policy, Take II:”

Steve Randy Waldman has a long, thoughtful take on my speculations about the hard-money preferences of the wealthy. Basically I confessed myself somewhat confused: I get why creditors should hate inflation, but aggressive monetary responses to the Lesser Depression have been good for asset prices, and hence for the wealthy. Why, then, the vociferous protests?

Waldman raises a historical point I neglected: if your view is that it’s all about the 1970s (by the way, “septaphobia” is Kevin Drum’s coinage, not mine), you have to ask not just about defense of the gold standard in the 30s but about the truly massive rallying of the propertied classes against William Jennings Bryan.

As I understand part of his argument, it is that while monetary expansion might be expected on average to be a good thing in a weak economy, that’s a risky proposition for wealth holders, and they hate risk. I might put it a bit differently: someone like me could argue that loose money, despite its direct adverse effects on creditors, will produce large gains indirectly; but those indirect effects are less certain than the direct effects, and assessing them depends on your model of the economy. So wealthy creditors may go for the direct stuff: they want low inflation and higher interest rates, and never mind the consequences.

But I’m not entirely prepared to give up on the false consciousness notion, in part because I keep being struck by the enormous appetite of the one percent for really bad economic analysis. Think about CNBC economics (aka Santellinomics, aka the finance macro canon). This stuff, with its prediction of soaring inflation and interest rates, has been utterly wrong for more than five years. Yet it remains very popular among wealthy investors.

I think this may in part reflect the problem that always comes with wealth and power: people tell you what you want to hear. CNBC economics stays on the air, despite its awesomely bad track record, because it caters to the prejudices of the target audience. Politicians who buy into this stuff also reap large rewards, in the form of campaign contributions when running and a very plus safety net when they leave. Eric Cantor is moving into investment banking — surprise — and the firm offering him the position explicitly says that it’s in part because he “has proven himself to be a pro-business advocate”.

Now, Waldman says that the elite loves the 70s — I’d say they hated them when they were happening, but love the morality play they’ve been turned into. For yes, the 70s can be portrayed (inaccurately) as the decade when it was proved that terrible things happen unless you cater to the interests and beliefs of the 0.01 percent.

Meanwhile, what I’m doing here is groping toward a story about why policy botched the Lesser Depression so badly. More in subsequent posts.

Yesterday’s second post was “Three Roads to Hard Money:”

So, a hedge fund manager, a right-wing politician, and a freshwater economist walk into a restaurant and order wine. No, this isn’t the setup for a joke — it’s a real story. We don’t actually know what they talked about, but all three have been prominent in warning that the Fed is embarked on a dangerously inflationary path. And as I have written many many times, this inflation paranoia has proved remarkably resilient, enduring despite five-plus years of utter empirical failure. Why?

What strikes me here is that we have three seemingly different stories about the roots of hard-money mania, which happen to be embodied in the persons of the three diners. One is that the wealthy hate monetary expansion because they fear that it will reduce their returns and erode their wealth, and money buys influence. One is that movement conservatism has become a closed intellectual space, within which leading political figures can and do imagine that the truth about economics can be found in Atlas Shrugged. And one stresses the internal evolution (or devolution) of the economics profession, in which the rise of rational expectations led to a great forgetting of even the most basic macroeconomic concepts.

On the face of it, these seem like disjoint stories, with their convergence at precisely the moment they could do the most harm a coincidence. But there has to be more.

I’m thinking, I’m thinking. Maybe some wine will help.

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