How to destroy the "neoliberal consensus"

C'mon guys. If you are going to put forward a lefty conspiracy theory to explain why monetary policy is tighter than you (and I) think it should be, you at least need to get your story straight.

How many times have I heard the lefty argument that it was "Keynesian policies" (understood very loosely, the way the PoliSci (mis)understand that term) that saved capitalism from itself? And it's not a totally stupid argument either, because when unemployment is very high, like it was in the 1930's, people don't like it. And if they think the government can do something about it, and isn't doing something about it, that government won't be very popular, and people will be more likely to want some sort of change.

How many times have I heard the argument, both from lefties and non-lefties, that it was primarily high unemployment that brought Hitler to power? And that seems like a sensible argument to me. And Hitler was many things, but he was not a neoliberal.

Or just look at those Eurozone countries which have very high unemployment today. Which political parties have gained votes? The communists and near-communists; and the fascists and near-fascists. Not the neoliberals, or near-neoliberals.

The most damaging and dangerous time for the "neoliberal consensus" (or what we would anachronistically call the "neoliberal consensus") was the 1930's. Because unemployment was very high, and the "neoliberal consensus" didn't seem to have a cure (because they were stuck on the Gold Standard, which was the problem). The intellectuals veered towards communism, and the middle classes veered towards fascism.

Simon Wren-Lewis says:

"So if you wanted to critique my (and Kalecki’s) characterisation of the views of the wealthy, you might say that keeping unemployment above its natural rate is not a sustainable strategy (and therefore not rational). To which I would respond maybe, but there could be a reason why now, like the 1980s, is a particularly important time to keep unemployment high for a while.

 

The reason for this is that the aftermath of financial crisis is extremely threatening to the neoliberal political consensus and the position of the 1%. I remember saying shortly after the crisis that the neoliberal position that government regulation was always bad and unregulated markets always good had been blown out of the water by the crisis. This was politically naive, in part because a crisis caused by unregulated markets was morphed by the right into a crisis caused by too much government debt, or too many immigrants. But that fiction will not be sustainable once a strong recovery has reduced both government debt and unemployment. For the 1%, these are very dangerous times, and they want to be on favourable territory for the battles ahead."(bold added)

 

I say: < sarc > Right. So the aftermath of the financial crisis is an especially dangerous time for the "neoliberal consensus". OK. So to save the neoliberal consensus, let's make unemployment temporarily even higher to make it even more dangerous for the neoliberal consensus??? < /sarc >

 

This makes no sense whatsoever. If you are trying to avoid having an accident, while keeping your average speed the same, you don't increase your speed on the dangerous bits of the road, and slow down on the safer bits.

 

C'mon guys. These daft conspiracy theories are getting dafter and dafter. They aren't even internally coherent.

 

Look. We think that monetary policy is too tight. And some other people disagree with us. You don't need to cook up some daft conspiracy theory to explain why people disagree with us. They just do. They have their reasons for thinking they are right, just like we have our reasons for thinking we are right. They are wrong and we are right (I think), but they don't know that. Those disagreements are what happen all the time in a free society. Get over it. Conspiracy theories are a cop-out.

 

H/T Kevin Donoghue

 

P.S. When I hear the word "neoliberal", I normally reach for my shovel. If you want to read something sensible about "neoliberalism" (about both the concept and the thing itself), read Lorenzo from Oz.

Comments

[Ron Waller]

"How many times have I heard the lefty argument that it was "Keynesian policies" (understood very loosely, the way the PoliSci (mis)understand that term) that saved capitalism from itself?"

The Keynesian mixed-market system is in the center of the left-right economic spectrum. (100% left is full government control over the economy; 100% right is no government interference in the economy - libertarianism.)

During the Keynesian era (1945-1980) even Republicans and Conservatives were centrists. (Now Democrats and Liberals largely embrace neo-liberalism despite the financial meltdown caused by neo-liberal ideology.)

The Keynesian model is to use government policy — fiscal, monetary and regulatory — countercyclical to the business cycle. Today, we use monetary policy alone which is controlled by central banks. Clearly it is not enough to produce an adequate recovery.

The Keynesian model, despite its inefficiencies, was enormously successful: high GDP and productivity growth, low inequality, declining debt/GDP, etc. The two free-market eras on either side of it were colossal failures by comparison. The last caused skyrocketing inequality and debt (private and public); sharp decline in GDP growth; economic instability. Both periods culminated in global economic meltdowns (1929 and 2008.)

[Ron Waller]

"And Hitler was many things, but he was not a neoliberal."

Economic depression caused the political instability that led to the rise of fascism in Europe. Hitler was a centrist, economically. He essentially ran a war-time economy (military build up.) It was a war-time economy that pulled the US out of the Great Depression.

In the post-war era, government spending on infrastructure projects created jobs and high GDP growth. Fiscal stimulus works whether you are creating things of use, or blowing things up.

If you want examples of neo-liberal fascist dictatorships, you have to look to 1970s South America — Uncle Milty's free-market miracles…

[Steve]

So Ron which countries actually reduced govt spending in the boom times? Not many, both left and right bought favours from their base.

[Nick Rowe]

So Ron, you are agreeing with me. If the "neoliberal political consensus" creates very high unemployment, that will be dangerous for the "neoliberal political consensus". Right.

[W. Peden]

Nick Rowe,

I considered firing off a series of assertions about 20th century economic and political history, but instead I think I'll engage with your post and say that I tend to agree, but I'm worried about big generalisations here. For example, the UK coalition government has gone to considerable lengths to get unemployment down through microeconomic policies, but I'm not aware of any similar great concern among the American right. That may just be my ignorance of American politics; I'm not ignorant that I am ignorant about the Canadian right's employment policies!

[W. Peden]

And obviously high unemployment is bad news for the centre-right (and centre-left, and the centre generally), and for the rich. In the UK, during the post-war period, the cost of the state (= net public spending) has been lowest for longest in the late '50s/early '60s, a period of Conservative dominance deriving in large part from the very low unemployment numbers in that period.

[gastro george]

Actually the coaltion has gone to considerable lengths to get unemployment down by radically increasing sanctions on the unemployed (hence the rapid rise of food banks), part-privatisation of get-into-work schemes (payment by results) and low but significant in-work benefits, which means that we now have an army of self-employed on the breadline.

[W. Peden]

"the coaltion has gone to considerable lengths to get unemployment down"

That's what I said.

[gastro george]

My minor quibbble was with the "through microeconomic policies" part. But I agree with the thread of what you were saying. Neglecting high unemployment, pace Thatcher (although her government eventually caved in and transferred many of the unemployed onto sickness benefits), is never popular in the long term.

[Ron Waller]

The neo-liberal consensus appears to back the expansionary austerity model. This is promoted by the Cameron government in the UK, the Republicans in the US and in the EU (the socialist government in France was strong-armed into adopting the policy which, there, is called "fiscal consolidation.") All groups base expansionary austerity on the idea that deficit reduction will inspire confidence in the markets which will produce a recovery.

The flip-side of this model is that loose monetary policy ("artificially low" interest rates and "printing money" QE) will lead to runaway inflation.

It appears the conservative news media is adopting the hard money position (which promotes the neo-liberal agenda.) Krugman mentions the WSJ and CNBC. I've read articles critical of Poloz in the FP and G&M for keeping interest rates low "despite rising inflation."

Only the Keynesians are logically consistent supporting both fiscal and monetary stimulus. They have shown that expansionary austerity and the risk of high inflation was nonsense from the start.

Are the vast majority of neo-liberals/neo-cons giving neo-liberalism a bad name? It's long overdue.

[W. Peden]

Gastro George,

That was just an apposite short phrase for a very wide range of policies.

Thatcher's government worried about high unemployment; they just didn't know how to deal with it, and were surprised by how persistent it was after the early '80s recession. Part of the problem was that the UK figures were badly wrong in that period: they underestimated the level of unemployment in 1979-1981 and masked the fall in unemployment during 1983-1986, which was one of the reasons why the hysteresis hypothesis was quite popular for a while in the UK. And high unemployment was disastrous for the UK right in the longer-term; Thatcherism would have presumably gone much much further if it hadn't been associated with the bust & boom & bust macroeconomic mess of the 1979-1992 period.

Anyway, we all seem to be repeating Nick Rowe's basic point, albeit from different perspectives.

[Nick Rowe]

W Peden: "I'm not ignorant that I am ignorant about the Canadian right's employment policies!"

Short answer: the Conservative government is more right wing than any government in recent Canadian history (though nowhere near as right-wing as its lefty critics say). It raised no objections to the Bank of Canada cutting to the ZLB and using forward guidance. I strongly suspect they think the Bank of Canada under Carney tightened too much too soon, but they didn't say that publicly. (And despite Carney being courted to head the Liberal Party while he was still Governor, which was seen as very dodgy here. And if I wanted to put forward a conspiracy theory, it would be that Carney, as a Liberal, tightened too much too soon to try to screw over the Conservatives. Caesar's wife, and all that.) Plus, they increased G and ran a biggish deficit during the worst of the recession. Mostly infrastructure investment stuff. And now they are tightening again. Standard New Keynesian stuff.

[Majromax]

Wait, just what do we mean by neoliberal consensus here? Especially when used pejoratively, it seems so broad as to be useless. NGDP targeting might be "neoliberal," but so is reinstituting workhouses and feeding the lower classes Soylent Poor.

If we're at all to have a meaningful discussion, we have to do it on concrete (and specific!) policy items. The root post here talks specifically about those advocating for tighter monetary policy; are they necessarily neoliberal? Or are they the anti-neoliberals arguing against the neoliberalism of NGDP targeting and quantitative easing? I'm confused.

[Nick Rowe]

Majromax: Yep! Exactly! It means whatever the critic wants it to mean. I was very careful in my post. All I need when I use the word is that, whatever "neoliberal" means, those parties which gained power and votes during times of high unemployment in the 1930's, and in the Eurozone now, are not "neoliberal".

[W. Peden]

Majromax,

All one needs to know is that Ron Paul is a neoliberal, and so was Clement Attlee. So if you're in that spectrum (and probably outwith it as well) then you're a neoliberal.

[Peter K.]

I'm coming at it as an yankee leftist conspiracy theorist who agrees with Wren-Lewis, but who also wants an NGDP path level target. I don't think the central bank should be left off the hook.

I think his theory is coherent and it's really just a combo Kalecki and Marxist notion of the reserved army of unemployed. But it's tricky because it relates economics - employment and income levels - with power and politics. It's political economy. The housing bubble and financial crisis was a large blow to the neoliberal theory of demand management which began with Reagan/Thatcher and was hegemonic in the 90s onwards after the Cold War ended. It was the "Washington Consensus." Minimize government, privatize, cut taxes and regulations, destroy unions via globalization and legislation, and the central bank will keep demand up via investment. But it didn't provide prosperity, just stagnant wages, increasing inequality and the wild swings of bubbles popping.

With the economy bad and unemployment high, people are going to be more grateful for having a job and not going to want to make waves. You won't get much in the way of wage inflation nor people organizing for political change, especially with the corporate media muddying the issues. I think you saw a lot of social change in the U.S. in the 50s, 60s and 70s - civil rights, feminism, anti-war - because there was full employment and the economy was booming. If things are really bad for too long, like in Weimar Germany, then the population divvies up into the far left and far right. By the way a lot of the middle and working class go to the left as well, not just the intellectuals. But the history is that in Germany, the business leaders line up with the right. And the Nazis broke the unions who were more aligned with the left.

[W. Peden]

"You won't get much in the way of wage inflation nor people organizing for political change"

Were the 1930s a period of political apathy and lack of change in the US? Because they weren't in the UK. Or France.

"I think you saw a lot of social change in the U.S. in the 50s, 60s and 70s - civil rights, feminism, anti-war - because there was full employment and the economy was booming."

???

[Lorenzo from Oz]

Thanks for the link! And what you said.

[W. Peden]

Also, isn't the idea that mass prosperity produces dramatic change an inversion of Marxist theory? Instead of the Marxist idea of big changes in society being produced by economic crises, you're talking about big changes in society being produced by economic booms...

[Peter K.]

@Majormax: it is confusing as DeLong claims he is a Neoliberal who wants a full employment NGDP path level target. In my mind that wouldn't be that bad but you need to rely too much on good central bankers and a government which doesn't pursue austerity at the wrong times. In my mind that's a liberal/progessive/Keynesian as well.

I see neoliberalism as basically the IMF's advice to emerging economies until they recently moderated their stance since the financial crisis. Enticing foreign investors is the goal and all policies revolve around that. Capital controls, environmental and labor regulations are a hindrance. Democracy is a hindrance. Basically you want to provide a good return to foreign investors so they invest. Wren-Lewis mentions Kalecki and this is what he's talking about.

My favorite story is how Clinton gave his middle class spending bill campaign promise because Greenspan blackmailed him over raising rates. DeLong claimes it worked given who the late 90s turned out but I believe it led to the Tech Stock and Housing Bubbles. Of course it wouldn't have been so bad if the central banks had acted better in recent years or even if the Republicans hadn't forced austerity on the economy.

[Nick Rowe]

Peter K: "By the way a lot of the middle and working class go to the left as well, not just the intellectuals."

True. My wording was a bit sloppy. I didn't intend to deny that. Just that the intellectuals tended to go disproportionately left.

Shameful admission: I failed O-level History (that's "Owls" to non-Brits). Two questions (for anyone):

1. Didn't the UK Labour party do well in the 20's and 30's, when unemployment was high (until Ramsey MacDonald got "co-opted")? Not exactly a "neoliberal" party.

2. What about Canada in the 1930's? Which parties did well when unemployment was high? CCF clearly not neoliberal. And can "neoliberal" be defined sensibly and tightly enough to say whether Social Credit was or was not "neoliberal"?

[Tom Brown]

"I failed O-level History (that's "Owls" to non-Brits)."

Is that a translation from Brit to Canadian? What's that mean south of the border? Neither makes sense to me. Is it untranslatable? :D

[Nick Rowe]

Tom: If you aren't a Brit (or from some other places that also did them), and if you haven't read Harry Potter, you wouldn't understand either. O-levels are externally graded exams that some British kids used to take when they were about 15 or 16.

[John Chant]

"How many times have I heard the argument, both from lefties and non-lefties, that it was primarily high unemployment that brought Hitler to power? And that seems like a sensible argument to me. And Hitler was many things, but he was not a neoliberal."

I question "primarily." What about the role of hyperinflation during the Weimar Republic that wiped out the middle class? Owners of real property, industrialists included, probably did quite well. The hyperinflation of the 1920s leaves a footprint that can still be seen in German policy today.

To cover all bases we probably need a conspiracy theory to the effect that the 1% also favor high inflation because it wipes out their debts. If we had high inflation such a theory would surely emerge.

Keep up the good work, Nick.

[W. Peden]

Nick Rowe,

It was during the 1920s and 1930s that Labour eventually defeated the more moderate Liberal party in the battle to become the main party of the left. (The Liberals splitting into no fewer than four different parties at various points didn't hurt Labour either.) Labour's victory in 1929 was particularly due to persistent unemployment. And the 1926 General Strike is still the biggest moment in UK trade union history; it was a fever pitch of class warfare that has never been matched before or since. The 1930s, meanwhile, was the peak of the UK Communist Party, who won their first and only UK seat in 1935 in West Fife.

The Tories dominated 1930s politics, but that was largely because (a) in 1931 the Labour party was split and there was a broad-based political alliance behind the Tories, and (b) in 1935 Britain was enjoying what is now widely regarded as our best recovery from a recession ever. Unemployment remained high, but then it was regarded as primarily structural. (And economic historians, for now, seem to have generally concluded that the 1930s 'Classical' economists were right about the UK's unemployment in that period after all...)

The 1920s and 1930s were also the period when women entered politics, southern Ireland gradually moved to full independence, a tremendous cultural backlash against pre-1914 British culture occured, and notions of authority underwent a crisis e.g. the Oxford Union debating society concluded that "This House would not fight for King and Country" in the 1930s, which can partly be put down to Oxford being what it is and partly to the crisis of authority that occured after the post-WWI slump and before the World War II shored up the deferential side of British society again (for a time).

Above all else, it's the General Strike that made my eyes pop out of my head when the association between high unemployment and political apathy was brought up-

http://en.wikipedia.org/wiki/1926_United_Kingdom_general_strike

To put it into some perspective, there were more workers on strike in 1926 than there are people alive in Wales or Northern Ireland today!

As far as historical "moments" goes, one could also refer to the Jarrow Marches, which were just as essential as "The General Theory" in shaping Conservative economic policy in the golden years of British Keynesianism in 1951-1964.

On the other hand, high unemployment was less politically disruptive in the 1930s and especially in the 1980s and 1990s, because being unemployed became a less awful experience as the welfare state and the real value of unemployment benefits grew.

[W. Peden]

(Incidentally, that Wikipedia article doesn't mention the problems of indexation of workers' wages. Workers were understandably more happy to link their wages to prices when prices were rising with wartime inflation than when they were falling after a recession...)

[Nick Rowe]

Thanks John! There was a big debate in the econoblogosphere recently over why Germans currently want tight money. The standard German answer is "We remember the Weimar hyperinflation, and look what that caused!". But many econobloggers pointed to the data, and the timing, and argued convincingly (to me) that it was the later high unemployment, and not the earlier hyperinflation, that gave Hitler popular support. And they used this as an argument to try to convince the Germans that they were wrong to fear inflation more than unemployment. (I don't think the Germans were listening, but I was.)

[W. Peden]

I was wrong on the commies: they actually had three MPs at various points, apparently. Willie Gallacher is the only one who has stuck in my imagination.

[Nick Rowe]

John: "To cover all bases we probably need a conspiracy theory to the effect that the 1% also favor high inflation because it wipes out their debts. If we had high inflation such a theory would surely emerge."

Yep! And you will remember what conspiracy theorists were saying about the high interest rates in the early 1980's -- that they helped rich lenders. Nowadays I hear the opposite argument, that low interest rates cause high asset prices which makes the rich richer. My recent post on that.

[Nick Rowe]

W. Peden: thanks for a very good answer to my first question!
Any Canadians want to tackle the second?

[Ron Waller]

John: "To cover all bases we probably need a conspiracy theory to the effect that the 1% also favor high inflation because it wipes out their debts. If we had high inflation such a theory would surely emerge."

Yep! And you will remember what conspiracy theorists were saying about the high interest rates in the early 1980's -- that they helped rich lenders. Nowadays I hear the opposite argument, that low interest rates cause high asset prices which makes the rich richer.
====

This is an interesting cult you've started. If ever wealthy investors, corporate executives, or shadow bankers act in their own self-interest and affect government policy (through lavish political donations), anyone who criticizes them is a "conspiracy theorist."

So I guess it's just a conspiracy theory that the financial sector influenced politicians (both Democrats and Republicans) to deregulate the banks and keep regulations away from the myriad of paper-stretcher financial innovations that turned Wall Street into a casino built on synthetic assets given AAA ratings which referenced junk mortgages. And one must be a conspiracy theorist to believe it was a house of cards that collapsed, when it's obvious the Community Reinvestment Act of 1977 caused all the problems.

It must also be a conspiracy theory that both Bush and Obama bailed out "too-big-to-restructure" investment banks with sweetheart deals buying up toxic assets (bad bets) with taxpayer money and QE money printing purchases without any influence from parties involved who awarded themselves billions in bonuses for the hard work receiving the free money. It was actually taxpayers themselves, who through their votes, demanded that Obama create a social safety net for freewheeling investment banks who contributed nothing to the real economy (aside from a housing bubble that collapsed putting the mortgages of a third of homeowners underwater.)

[Kevin Donoghue]

I had a look at your exchanges with Simon Wren-Lewis in comments to his post. He's a very patient man.

[Bud Meyers]

When someone just says "government", it includes two political parties. To blame "government", rather than the policies of one party or another, doesn't tell the whole story. When someone says "neoliberal", they are speaking of those who advocate for "free markets", which have mostly been "fraudulent markets".

Why Capitalism Requires Government
http://www.governmentisgood.com/articles.php?aid=13

Free Markets are Fraudulent Markets
http://www.economicpopulist.org/content/free-markets-are-fraudulent-markets-5360

And there is NEVER "a particularly important time to keep unemployment high" -- not when "people" need to eke out a living. We don't need LESS government, just BETTER government. We might actually need MORE government, but not more CORRUPT government (like we currently have in BOTH political parties). If more people voted for Progressives (like most of us did for 4 terms with FDR), we might have much BETTER government --- a government for "the people" (for both rich and poor). But without any government at all (like with libertarianism), we'd only have chaos and anarchy.

[Nick Rowe]

Kevin: yes, he is. But normally/always he's a very sensible theorist too, except in this case.

Bud: I am not so patient. You clearly have not read the post.

[Dan]

YES! This speculation on why the rich like hard money is utterly incoherent.
Who are "the rich"? completely undefined.
Why do "the rich" in Southern Europe, Zimbabwe, Venezuela and etc favor inflation?
For that matter why did the rich in this country favor inflation in the 70s, and not today.

Why did the rich favor the financial crisis for that matter.

This is about as sensible as the arguments that unemployment is due to people being lazy as if suddenly a whole bunch of people got lazy in 2009.

oh well...

I like the paradox of thrift explanation: people are advocating policies which make a lot of sense for them individually, and what makes sense individually doesn't always end up adding up to a policy that makes sense even for that same individual when everyone does it.

[ianlee]

Nick - to return to your question, 1. Didn't the UK Labour party do well in the 20's and 30's, when unemployment was high (until Ramsey MacDonald got "co-opted")? Not exactly a "neoliberal" party.

Your question brought back memories of a remarkable 1981 BBC docu-drama 8 part series, Churchill: The Wilderness Years, 1929-39, based on a book of same title.

The magnificent Robert Hardy played Churchill while the equally talented Sian Phillips played his wife.

My late Brit father, had vivid memories of the interwar years in UK. He told me that this BBC series focused on the second decade of the interwar years was "spot-on" in capturing the debates and issues, the tenor, the accents and attitudes of the political class.

Indeed, throughout this series, the leaders were debating the issues Nick raised in this post.

It is well worth watching for those with an interest in the period leading up to the second world war, when the liberal party was pushed aside by the Labour Party.

Now the BBC needs to complete a documentary on the slow steady decline of the UK under Labour in the 1950s through 1970s to the Winter of Discontent that motivated so many to emigrate to Canada and other English speaking countries

[Majromax]

@Peter K.
> @Majormax: it is confusing as DeLong claims he is a Neoliberal who wants a full employment NGDP path level target.

Wait, just what does this mean?

As Nick here has pointed out, long-term money neutrality means that the CB can target any criterion it wants, provided it has currency in the numerator (making it nominal-terms). It sounds like this phrasing is arguing for a continued "dual mandate," where the Central Bank tries to target both NDGP growth and full employment simultaneously.

I suppose this could mean targeting what NGDP would be if the economy had full employment, ignoring the output gap, but that seems counterproductive.

@Bud, Ron:

Fine, governments are corrupt, 1%, conspiracy, etc, but what does that mean for monetary policy? We're talking about inflation and money targets, rather than regulations about what people in suits can do.

[Peter K.]

@Majromax

"As Nick here has pointed out, long-term money neutrality means that the CB can target any criterion it wants, provided it has currency in the numerator (making it nominal-terms). It sounds like this phrasing is arguing for a continued "dual mandate," where the Central Bank tries to target both NDGP growth and full employment simultaneously."

How or why is a, say, 5 percent NGDP level path chosen or say a 2 percent inflation target?

[Peter K.]

"Look. We think that monetary policy is too tight. And some other people disagree with us. You don't need to cook up some daft conspiracy theory to explain why people disagree with us. They just do. They have their reasons for thinking they are right, just like we have our reasons for thinking we are right. "

What Krugman and DeLong are getting at is that the Right has been winning policy-wise since Volcker/Reagan/Thatcher. Clinton pulled the Democrats to the right. The Neoliberals (or conservatives) say their policies will deliver prosperity. We've had a real-time experiment. They've have had 30 or so years and they've delivered stagnant wages and growing inequality. What are the reasons for thinking they are right? Just because the hippies on the left are always wrong?

Krugman and DeLong are wondering why the scare over inflation? Why not at least get monetary policy correct so that the whole Neoliberal brand isn't even more tarnished than it was over the housing bubble and financial crisis? And don't the market monetarists point out that getting monetary policy wrong helped set off the crisis and current malaise? Do they not wonder why conservatives have returned to Dark Age thinking? I think Simon Wren-Lewis could be right.

[Peter K.]

@ W Peden:

"You won't get much in the way of wage inflation nor people organizing for political change"

Were the 1930s a period of political apathy and lack of change in the US? Because they weren't in the UK. Or France.

"I think you saw a lot of social change in the U.S. in the 50s, 60s and 70s - civil rights, feminism, anti-war - because there was full employment and the economy was booming."

???"

I anticipated your objections with they line you ignored: "If things are really bad for too long, like in Weimar Germany, then the population divvies up into the far left and far right."

So you don't believe the civil rights movement, feminism, the peace movement, and gay marraige, etc. were helped by a good economy and rises in real wages?

[Nick Rowe]

Peter K: well, we could just ask the conservatives why they want to do what they want to do. And I very much doubt that any of them will reply, even in private, "well, it's because we have read Kalecki, and we think he's right, so we need higher unemployment to help preserve neoliberalism".

[Peter K.]

"Were the 1930s a period of political apathy and lack of change in the US? Because they weren't in the UK. Or France."

I wonder how much was a result of the threat of the Soviet Union.

[Peter K.]

If we are successful and an NGDP path level target becomes the norm for central bankers across advanced nations, the question for conservatives and their patrons in the wealthy creditor/donor class will become what's your preferred target? 4 percent? 5 percent? 6 percent? Partly that's why I find it better than a 2 percent inflation target.

In the U.S. context, I agree with Bernstein and Baker that labor should share in productivity gains. "…for workers to get their fair share of the economy’s growth, real wages should keep pace with productivity growth. Productivity growth has been weak recently, most economists put the underlying trend at close to 1.5 percent. This means that wage growth at a 3.5 percent annual rate (2 percent inflation plus 1.5 percent productivity growth) would be consistent with the Fed’s inflation target."

So I'd argue for a NGDP path level target that allows for wage growth at 3.5 percent given productivity gains. Inflationistas would probably argue for 2 percent wage growth and no share in productivity gains as we've seen in recent decades. So are they doing that specifically to help preserve neoliberalism? No I believe the reasoning is more murky but that's the effect. Why not share productivity gains equally with labor? Why do so if they don't have to? More for them? And there's something to the notion that loose labor markets make employees more pliant and less uppity.

[Majromax]

@Nick:

> Peter K: well, we could just ask the conservatives why they want to do what they want to do.

If we do that in the US, then I think we're back to preferences regarding the level of government spending and deficit, irrespective of macroeconomics.

A prescription of tighter money here isn't necessarily opposition to inflation, but instead it may be best seen as a prescription for punishing deficit spending through increases in the real interest rate. This is the same idea behind the legislated Taylor Rule, I think.

If the government cannot finance a deficit, the thinking would go that the government must then implement the preferred spending reductions. Low interest rates and especially quantitative easing are in this environment seen as the CB enabling undesired government profligacy. Concerns about inflation (and/or hyperinflation) are legitimately felt, but this inflation is to be caused by a debt crisis arising from the status quo.

[Majromax]

@Peter K:
> So I'd argue for a NGDP path level target that allows for wage growth at 3.5 percent given productivity gains.

Be careful, your units are inconsistent.

No NGDP level can allow for wage growth to match productivity, because productivity is in real terms and wages are in nominal terms.

Even more problematically, the CB gets to target a single criterion. If it's targeting NGDP, then it can't target labour income. If it's targeting labour income, then it can't control NGDP. It's *especially* impossible to target the labour *share* of income, since that requires controlling both labour and capital income. Worse yet CB tools are specifically designed to be as non-distortionary as possible, but deciding on income shares requires distortion.

If maintaining the labour share of national income is a desirable policy, then it must be implemented at the government level rather than the CB level, through regulation and deliberate distortion for socially-desirable ends.

[W. Peden]

Peter K,

(1) How bad is too bad? How long is too long?

(2) I don't know of any evidence for the assertion that these social movements were a result of rising real wages, and I'm suddenly struggling to even find someone who defends the claim that they occured "because there was full employment and the economy was booming".

[Matt]

Hi Nick. Regarding question: 2. What about Canada in the 1930's? Which parties did well when unemployment was high? CCF clearly not neoliberal. And can "neoliberal" be defined sensibly and tightly enough to say whether Social Credit was or was not "neoliberal"?

As most folks know our federation is decidedly regional in practice...and has been since the days of Sir John A. The CCF and Social Credit were both "Western" parties. Saskatchewan and Alberta respectively. Neither had any real impact with provinces Ontario-East either provincially or federally. Both grew out of the Progressive Party of Canada (circa 1921). Federally, from 1930 to 1935, it was Conservative (R.B. Bennett and his version of the New Deal) and then Liberal from 1935 all the way to Diefenbaker 1957.

I think I know what your first question is, but like the U.S., Canada has truly been a two-party system for much of its history, and this was still true in the 1930s. I'd argue the NDP became a truly legitimate 3rd party only nationally in the 1980s. As to whether Social Credit was "neoliberal" or not...my thought is no. But that is only if we define "neoliberal" in post-1970s kind of way...and as you already alluded to, the definition itself is hard to nail down.

[Peter K.]

W Peden,

Perhaps you can list the social changes the occurred in the 30s? From my point of view, yes there was political activity but the only result was world war. The changes came after the war, like universal health care in the UK. But it makes sense that the civil rights movement, feminism, peace movement, gay rights were were successful during good economic times because people could be activists without worrying about their jobs. They could push the envelope. Or if they were fired they could find some other job.

@ Nick, I have some thoughts that would weigh against my argument. Waldman brings up the organized renrier conspiracy against William Jennings Bryan and Krugman mentions it in his column. In a blog post DeLong writes he believed that was a historical peculiarity with the creditor rentier class being more dominant back then when after WWII their was a broader consensus for a "high-pressure" economy. Nixon wanted one. Greenspan allowed unemployment to reach 4 percent in the late 90s as people advised that he raise rates. Inlation didn't appear. But since the Great Recession it may be that the Fed doesn't like QE and wanted to taper as soon as possible. Perhaps if rates had been higher when the recession hit, they would have kept rates lower longer and we would have had a better recovery.

[Nick Rowe]

Matt: thanks for that answer. It seems to roughly correspond to my view. Especially since, IIRC, Saskatchewan and Alberta were among the hardest hit in the Great Depression? So, for Canada too, high unemployment/low aggregate demand in the 1930's created the CCF and Social Credit parties, that were opposed to what some might nowadays call the "neoliberal consensus" of the Conservative and Liberal parties.

Peter K: That makes sense to me. If you are going to do a class interest analysis of inflation, dividing people into creditors and debtors looks like a sensible thing to try.

[Frances Woolley]

Great post and interesting discussion.

On your question about the 1930s, Nick, our colleagues Steve Ferris or Stan Winer would be good people to talk to about this. Here's a paper of Steve's that you might find interesting if you haven't seen it before http://www.carleton.ca/economics/wp-content/uploads/cep10-10.pdf. My sense is that typically one sees conservative governments towards the start of a recession and liberal governments towards the end, hence one sees a positive relationship between liberal governments and economic growth rates in Canada (and annoyingly I can't find the reference for that factoid).

I had thought that income and wealth inequality tended to rise during recessions, but can't find a reference for this factoid either, so I might just be making things up.

[W. Peden]

Peter K,

"Perhaps you can list the social changes the occurred in the 30s?"

Surely according to your thesis it would be the 1920s in Britain that weren't radical, not the 1930s, as unemployment was worse and had been more protracted by then? Anyway, your request is either absurd (an entire list of the social changes in any decade of the 20th century would be long, boring, and outwith my competance) or something I've already done (give a few examples of the radical elements in the period).

[Lorenzo from Oz]

The view from the Antipodes--where "neoliberalism" was primarily implemented by centre-left governments--makes many of the generalisations being bandied around in the comments seem somewhat inadequate.

Globalisation (competition from low wage countries), migration (especially of low-skill folk) and rising female labour force participation were always going to make rising real wages a big ask. It would require significant productivity increases: difficult when labour substitution is easier.

Alternatively, one could engage in careful "social wage" policies (tax the winners and transfer benefits further down). That would be Antipodean "neoliberalism".

Either way, it is not a coincidence that the policy turn to "neoliberalism" occurred after productivity growth dropped dramatically.

I also get impatient with the "financial deregulation meant X" as, in the Antipodes, it did nothing of the kind. We managed our bank bargain better than the US. As did Canada. But Canada have been managing their bank bargain better than the US for well over a century. Hard to blame that continuing pattern on "neoliberalism". At best, "neoliberalism" provided the Yanks with a new way of screwing up their bank bargain, as per their long term historical pattern.

And no, the hyperinflation did not bring the Nazis to power. The NSDAP vote went down after the hyperinflation and the Weimar Republic stabilised, both politically and economically. It was gold standard central banks "kicking the world economy into unconsciousness" -- the collapse of incomes and output, hence surge in unemployment -- which brought Hitler to power. Just as the 1926 General Strike was a consequence of the UK going back on the gold standard in 1925 at the pre-war parity.

[Nick Rowe]

Lovely comment Lorenzo. Far far too many economics blogs, and comments on economics blogs, speak as if the US experience, and the US perspective, is the only one there is. Even though it's a big and important country, it's still only a sample of one. And Australia is so much more like Canada, in many ways, even though it's such a long way away.

[Thornton Hall]

Oh good God. The disagreement among mainstream economists about monetary policy proves exactly nothing. Players of Dungeons and Dragons often disagree about how the game should play out. And yet it remains the case that they are living in a fantasy world. I have no idea what conspiracy you are referring to and don't believe in one. I just know you're all doing it wrong.

[Tony de Sousa]

Tempest in a teapot. I'm university educated and I still have no idea what a neoliberal is or isn't. I know Marxism is a failed belief. All I know is high unemployment means lots of idle people sitting around angry and jealous that others are getting ahead and living life. In this scenario the ruling class is the "other".