Tuesday, April 17, 2012

The Median Influencer

This blog post is being largely outsourced from this Interfluidity post Depression is a Choice by the often brilliantly insightful Steve Randy Waldman:
Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable.

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything. All other considerations are secondary. These preferences are reflected in what the polities do, how they behave. They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary. The same preferences are reflected in what the polities omit to do. They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation. They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation. The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation. The purchasing power of holders of nominal debt must not be put at risk. That is the overriding preference, in context of which observed behavior is rational.
I am often told that this is absurd because, after all, wouldn’t creditors be better off in a booming economy than in a depressed one? In a depression, creditors may not face unexpected inflation, sure. But they also earn next to nothing on their money, sometimes even a bit less than nothing in real terms. “Financial repression! Savers are being squeezed!” In a boom, they would enjoy positive interest rates.

That’s true. But the revealed preference of the polity is not balanced. It is not some cartoonish capitalist-class conspiracy story, where the goal is to maximize the wealth of exploiters. The revealed preference of the polity is to resist losses for incumbent creditors much more than it is to seek gains. In a world of perfect certainty, given a choice between recession and boom, the polity would choose boom. But in the real world, the polity faces great uncertainty. The policies that might engender a boom are not guaranteed to succeed. They carry with them a short-to-medium-term risk of inflation, perhaps even a significant inflation if things don’t go as planned. The polity prefers inaction to bearing this risk.

This preference is not at all difficult to understand. The ailing developed economies are plutocratic democracies. “The people” do have power, but influence is weighted in a manner correlated with wealth. The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is terrified of becoming poorer. For such a person, the depression status quo is unfortunate but tolerable. The risks associated with expansionary policy, on the other hand, are absolutely terrifying.
This is true, isn't it? This simple story explains all the major features of fiscal and monetary policy over the last five years in the US and Europe.

The implications for energy and climate policy are left as an exercise for commenters.


William M. Connolley said...

Doesn't explain the boom-n-bust and high inflation of the 70's, or whenever. So if this is supposed to reveal a long-term preference, it fails.

Seth said...

I agree with Waldman.

There might be a silver lining where energy and climate are concerned. The plateau in oil production and subsequent decline will generate a succession of severe energy price spikes. Eventually these will add up to enough of a 'training signal' to force some adjustment in the thinking of the 'slow learners' among both the kleptocracy and the broader public who are easily persuaded by Koch propaganda.

Our Representative Plutocracy has been running very smoothly -- even surprisingly smoothly -- so far given the stress on most of the population. But given enough noise in energy prices, some political space may open up for more left eco-populist reformers. The 'regime change' (in the sense of Time Series Analysis) in prices might yet yield some of the political kind.

Greg said...

Belette, on the contrary. Using Waldman's method of revealed preference, we can construct this story:-

In the 1970s there was much less inequality of income and wealth than there is today - CEOs were paid only six to ten times the median wage in their organisations, not several hundred times.

The median influencer of the time was much more concerned with material progress, having experienced rationing in WWII and its aftermath. And he (the median influencer was a he, then) wanted it for everybody, because he was much more like everybody else than today's median influencer is.

The Baby Boomers were just coming into the workforce in the late 60s and early 70s, driving down productivity as they did so. (At the time, young workers were less productive than older workers.)

It was fear of the resulting slowdown in the rate of growth and of a rise in unemployment that caused governments to persistently over-stimulate their economies, which in turn caused the high inflation.

Anonymous said...

Bellette, of course this is a generational thing as the boomers in power control the wealth they have so that they can maintain it as the world goes into a post peak oil and debt death spiral they must be cautious.

Carol Ann said...

This is part of the ongoing attempt to spur intergenerational war. Blame the depressions on old folks who hoard (how many old folks do you know who are wealthy enough to hoard? I personally know none). This takes the focus away from the wealthy of all ages who have sucked up all the wealth and increased the inequality. If you can get the yahoos to fight amongst themselves, you can laugh all the way to the bank.

A Quaker in a Strange Land said...

Yes, this simple story is true and accurately describes the fiscal and monetary policy of the past 5 years...

painfully so.

Stuart Staniford said...


Fair point - I see this in the context of the long pendulum arc of power across the twentieth century. The combination of the communist revolution in Russia and the great depression broke the power of the financial elites - the depression radicalized the population, and the presence of Russia presented a (then) credible alternative to capitalism. Under the circumstances, elites felt they had little choice but to make major concessions to the lower classes of society. So from the thirties to the seventies you see the long arc of the political structure increasingly benefitting ordinary people - welfare state, etc, and benefitting elites far less than in the past (high tax brackets and high inflation).

However, since the Thatcher/Reagan era starting in 1979 (when it seemed to many people that things had gone much too far to the left) we've been going in the other direction with elites gaining more power, taxes on the rich being lowered, and inflation being seen as intolerable. The great recession has, so far, not had much impact on this (though the Occupy movement is perhaps the first harbinger of something).

VitalSmarts India said...

The truth is, we all need to be better influencers. In spite of the fact that we are continually trying to help ourselves and others to alter behavior, only a few of us can articulate a model of what it takes to do so.Regards,Priyanka