Brad DeLong for PS Say More

The PS Say More Newsletter | [View this message in a web browser]( Welcome to Say More, a new weekly newsletter that brings Project Syndicate's renowned contributors closer to readers. Each issue invites a selected contributor to expand on topics covered in their commentaries, delve into new ones, and share recommendations, offering readers exclusive insights into the ideas, interests, and personalities of the world's leading thinkers. This week, [Project Syndicate]( catches up with [Brad DeLong]( Professor of Economics at the University of California, Berkeley, and a research associate at the National Bureau of Economic Research. In [last week's edition]( of Say More, [Barry Eichengreen]( Professor of Economics at the University of California, Berkeley, offered advice to everyone from emerging-economy governments to the European Central Bank to Facebook. [What do you think? Help us improve Say More by taking this short survey. ]( Brad DeLong Says More... Project Synd One forgotten lesson of the Great Depression, you [wrote]( last month, is that “persistent ultra-low interest rates mean the economy is still short of safe, liquid stores of value, and thus in need of further monetary expansion.” Since then, the US Federal Reserve has cut the federal funds rate – a move that you [argued]( in March could either stave off a recession or drastically undermine the Fed’s capacity to respond to one. What steps should the Fed take to help encourage the former and prevent the latter? At a time of growing [political pressure]( on the Fed, what approach is it likely to take? Brad DeLong: Back in 1992, [Larry Summers]( and I [warned]( participants at the Fed’s annual symposium in Jackson Hole, Wyoming, that low inflation and high equity-return and bond-risk premiums do not play well together. Dealing with a typical recession had, historically, required that the Fed cut the federal funds rate by five full percentage points. A large recession would require even larger cuts. How could macroeconomic stability be maintained in a world where the real federal funds rate was 3% at the peak of the business cycle, and the inflation rate was 2% or less? It was a very good question then. It is an even better question today, when we are mired in what Summers calls “an era of secular stagnation”; the real federal funds rate tops out at just 1.5% at the peak of the business cycle; and the Fed is struggling to keep the break-even inflation rate (that is, investors’ inflation expectations) from falling to or below 1.5%. There are three possible answers to your question. First, the Fed could raise the inflation target significantly above 2%. But it has decided not to do that. Second, the Fed could substantially reduce equity-return and bond-risk premiums, say, by undertaking asset transformation on a large enough scale to satisfy the market demand for safe, liquid stores of value. It could also conceivably lobby for other policies that might accomplish this. But it has decided not to do any of that, either. Third, the Fed could abandon its post-World War II commitment to maintain near-full employment whenever doing so does not spur excessive inflation. As it stands, the Fed is choosing this option by default. It should recognize this and change course, pursuing the first or second option. But I see no signs that it will. PS: Just two months after you [argued]( (in June) that “America’s attempt to ‘get tough’ with China could accelerate its own relative decline,” the US Treasury has officially designated that country a currency manipulator. America, you’ve said, “will never reclaim the standing it had in 2000, and it probably cannot even recover the tenuous but still solid geopolitical position it enjoyed in 2016.” With this latest move, has the US reached the point of no return? BD: As Adam Smith once wrote, “there is a great deal of ruin in a nation.” There are rarely true points of no return. Moreover, in this case, China faces serious problems of its own, relating to governance, inequality, and development. It is also on the frontlines of the slow-moving but dire climate crisis, in a way that the US is not. That said, the US will not recapture its position as the triumphant leader and guide of global progress that it was at the end of Bill Clinton’s presidency, or even as the wounded but still-preeminent global power it was at the end of Barack Obama’s presidency. This will be true, even if the forces that elected Donald Trump are as scotched as the supporters of Republican California Governor Pete Wilson were after he declared Hispanics the state’s Public Enemy #1 back in the 1990s. It will be true, even if Trump’s successor goes on a global apology and listening tour, and the US works very hard to become its best self. Whatever happens, the US can hope only to be one power among several. The world is in desperate need of mechanisms that can underpin the provision of global public goods in such a multipolar world. PS: China’s response to the Trump administration’s latest escalation of the bilateral trade and currency dispute suggests that its leaders’ patience may be wearing thin. What steps could they take now, and how is Chinese policy likely to shape US economic performance in the coming months and years? BD: If China’s leaders have not already recognized that the Trump administration cannot be regarded as a rational negotiating partner, it is time that they do. In eight months, Trump will be focused entirely on his re-election campaign, taking whatever actions he believes will improve his chances of victory. From China’s perspective, those actions will probably be extremely difficult to anticipate. In that context, its best strategy is to conciliate, defer, and delay, preventing the conflict – and its associated damage – from escalating further. Then, after the November 2020 US presidential election, it will need to reevaluate the situation. PS: In 2015, you wrote that economic models should not be regarded as unassailable, given their flawed assumption, for example, that individual decision-making is always characterized by rational expectations. How should economic modeling be adapted to a world characterized by dynamics such as “shrinkflation” and “monopsony,” in which the Phillips curve no longer seems to apply and monetary stimulus has lost its effectiveness? BD: Well, as I see it, the Phillips curve is as reliable as it ever was. The difference is simply that the Fed has succeeded in anchoring inflation expectations, and we have been lucky to avoid major supply shocks. In fact, I think that economic modeling is adapting very well to the changing world. We have a good grasp on market success and the modes of market failure, and we are getting better at doing properly robust empirical work. Our models are not microfounded in any real sense, and that makes doing good welfare economics very hard. But it will take at least another century to establish those microfoundations. Our real problems are political and ideological. There are those who keep insisting that markets are perfectly competitive, when they are not. There are those who keep insisting that models need to be based on representative agents and “rational” expectations (in the very limited Robert Lucas sense), when they do not. And there are those who will change their positions on a dime to please their political or other masters. This is where we run into trouble. By the Way... PS: You recently retweeted a [thread]( in which Dan Froomkin of White House Watch (@froomkin) asked his fellow journalists what headline would have been both realistic and appropriate for coverage of Trump’s speech earlier this month following the second of two mass shootings within 24 hours. If you were a journalist, what headline would you propose? BD: Trump Endorses the National Rifle Association Again PS: Which US Democratic presidential candidates would you say have the strongest economic credentials? BD: All of them. Considering the utter lack of economic credentials of Trump and the now-Trumpian Republican Party, differences in competence and policy orientation among the Democrats are trivial. The baseline has moved, so the question is no longer worth asking. What really matters is electability. PS: You were Deputy Assistant Secretary of the US Treasury under President Bill Clinton. What was the most important or valuable lesson you learned from government service, and would you do it again? BD: That US politicians – and, even more so, the US public – are much better served by their dedicated, optimistic, and public-spirited bureaucrats than they know, or than they deserve. Of course I would do it again. PS: What achievement – personal or professional – are you most proud of, and which decision would you most like to take back? BD: On the negative side, I would significantly subdue my confidence in late 2008 and early 2009 that then-Fed Chair Ben Bernanke, Treasury Secretary Tim Geithner, and Obama understood the situation they faced. The world could have used a lot more yelling, and a lot fewer claims of, “it’s being properly managed.” On the positive side, my #1 achievement has to be my work on the Omnibus Budget Reconciliation Act of 1993, which made the 1990s a much better and more prosperous decade than it would have been otherwise. At #2, I would place providing some support to Paul Krugman when he decided in 2000 that he needed to use his platform at The New York Times to speak truth to power, ideology, and wealth. This drove far more economists to do the same. DeLong Recommends The following four books are, in my view, foundational. If you can think like these authors, you will be much better equipped to make sense of social science and social policy issues. In fact, someday, I plan to write a PS commentary – or several – exploring why these are the key thinkers for understanding the human societies of yesterday, today, and tomorrow. [Essays in Persuasion]( By John Maynard Keynes A collection of insightful essays and articles written between 1919 and 1931, intended for a general audience. Like a State: How Certain Schemes to Improve the Human Condition Have Failed]( By James Scott Scott analyzes failed cases of large-scale authoritarian plans in a variety of fields, in order to determine why well-intentioned strategies for improving the human condition go so tragically awry. Great Transformation]( By Karl Polanyi In this classic work of economic history and social theory, Polanyi analyzes the economic and social changes brought about by the Industrial Revolution. Panics, and Crashes]( By Charles Kindleberger The renowned economic historian Kindleberger shows how the mismanagement of money and credit has produced financial upheaval over the centuries. From the PS Archive From 2018 A year after Trump and his fellow Republicans rammed their massive corporate tax cut through Congress, DeLong pointed out that the policy had not fulfilled its promise – which the conservative economists who backed it always knew was false – substantially to boost productivity and investment. Read his [commentary](. From 2013 Nearly three years before a political backlash by those who felt they had been “left behind” by globalization got Trump elected, DeLong pointed out that a reaction to sharply rising inequality in the US was overdue. Read his [commentary](. Around the Web In case you missed it, here are some other places around the web where DeLong's work or ideas have appeared recently. In a comprehensive overview of US economic history, DeLong explains how the Hamiltonian economic principles of pragmatism and experimentation have repeatedly worked. Listen to the [podcast](. DeLong joins the debate over whether US Democrats should lean away from market-friendly stances and embrace progressive presidential candidates and policies like the Green New Deal. Read the [interview](. DeLong argues that, at a time when there is very little room to loosen US monetary policy, the Fed should be buying recession insurance. But it is not. Listen to the [podcast](. [Informed. Insightful. Inspiring.]( Project Syndicate publishes and provides, on a not-for-profit basis, original commentary by the world's leading thinkers to more than 500 media outlets in over 150 countries. This newsletter is a service of [project-syndicate.org](. © Project Syndicate, all rights reserved. [Unsubscribe from this list](