Depressions, Morality, and the Early 80s
Chris Hayes has a good essay in TAP on the oddly resurgent view that recessions, and even depressions, are not just normal parts of the business cycle, but are even morally beneficial.
As his modern example of this school, he focuses on Robert Samuelson, who constantly gripes about too-high social spending, and wrote The Great Inflation and Its Aftermath, which is a history of how economic planners in the 60s and 70s believed that there was an inverse relationship between inflation and unemployment, and thus promoted inlfationary monetary policy for essentially political reasons. There was then the horrible wage-price spiral, bracket-creep and stagflation, which helped pave the way for the election of Ronald Reagan and Paul Volcker heroically plunging the economy into recession in the early 1980s to purge inflation out of the system.
That’s at least the mainstream center-left to center-right narrative. Here’s Hayes’ version of the story, which, since it’s Chris Hayes, is the smartest possible leftist/social democratic version of those events:
It’s unclear however, whether the persistent inflation of the time was the result of the nature of the social contract, or a confluence of factors: a very long debt-financed war in Vietnam, combined with a loose monetary policy. And it is almost certainly true (and hardly controversial) that stable prices, while necessary for strong economic growth, are certainly not sufficient: George W Bush presided over one of the lowest average inflation rates of any post-war American president, yet his term left average wage earners worse off while precipitating the worst financial crisis in 80 years.
But for Samuelson, inflation is enemy number one, so much so that wringing it out of a system makes recessions look not so bad. “Recessions also have often-overlooked benefits,” he wrote in his Newsweek column last year, echoing, in an albeit softer tone, Mellon and Schumpeter. “They dampen inflation. In weak markets, companies can’t easily raise prices or workers’ wages. Similarly, recessions punish reckless financial speculation and poor corporate investments. Bad bets don’t pay off.”
With the unemployment sword of Damocles hanging over their heads, workers will think twice about asking for a raise, and all of this will lead to a robust kind of capitalism for the capitalists: one with low inflation, low interest rates and very high return to capital. If that sounds familiar, it’s an apt description of the economy of at least the last two decades, a kind of capitalism recently proven far less stable than it may have appeared, but one for which Samuelson is an unapologetic partisan: “The new economic order,” Samuelson writes, “is indeed inferior to the imagined and romanticized version of the old order. But it’s superior to the old order as it actually operated.”
Chris’ larger point, at the end of the essay, is that economies require some sort of political management, and that the Chicago School/Mellonist account of depressions and recessions as natural parts of the business cycle is one that A. is simply incorrect and B. not coincidentally tends towards favoring those policies which benefit the wealthy, lending and poweful. I largely agree with him — and Paul Krugman, whose work on recessions he cites — but I think the episode Samuelson recounts is a truely exceptional case.
That’s because the recession of 1981 was, unlike the recessions and depressions that business cycle theorists and Mellonists occasionally laud, was deliberately engineered by Volcker to break the inflation that was crippling the economy. He intentionally drove interest rates up so that prices would finally fall, even if it meant a decrease in growth. Unlike other recessions, which aren’t good for the economy and simply lead to a lot of wasted capacity and unnecessary human suffereing, the 81-82 recession was specfically designed to achieve some long-term positive results for the national economy. Most recessions, needless to say, aren’t deliberately managed by financial wizards like Paul Volcker.
While Hayes is right to say that the inflation had more causes besides the obsession with keeping unemployment down, there is no denying that acertain ignorance of the micro-foundations of macro movements in the economy played a large part in the horrible mismanagement of the economy during that time. Of course, those seeking to explain everything in the macro economy by reference to micro-foundations haven’t been very sucessful, but the case of stagflation and the Phillips Curve wasn’t only a general vindication of this approach, but a very specific example of what happens when policymakers just look at historical relationships and totally ignore how individual participants in a market will respond to their policies.
Back to Hayes more general point — that “economies need management and policy to maintain some kind of equilibrium” and moreover “it will be politics, not technical expertise, which provides the principles and rules that regulate” — I think that the early 80s are probably the best example of this. Reagan’s inflation crushing had a whole lot to do with this overall political agenda, and Volcker was only able to pursue his monetary agenda because the political circumstances favored it.
