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Economist’s View – “The Retreat of Macroeconomic Policy”

From the Economist’s View:

“The Retreat of Macroeconomic Policy”

Brad DeLong:

The Retreat of Macroeconomic Policy, by J. Bradford DeLong, Project Syndicate: One disturbing thing about studying economic history is how things that happen in the present change … our understanding of the past. For decades, I have confidently taught my students about the rise of governments that take on responsibility for the state of the economy. But the political reaction to the Great Recession has changed the way we should think about this issue.

Governments before World War I – and even more so before WWII – did not embrace the mission of minimizing unemployment during economic downturns. There were three reasons…

First, there was a hard-money lobby… Second, the working classes that were hardest-hit by high unemployment generally did not have the vote. … Third, knowledge about the economy was in its adolescence. …

All three of these factors vanished between the world wars. … Today, we have next to no hard-money lobby, almost all investors have substantially diversified portfolios, and nearly everybody suffers mightily when unemployment is high and capacity utilization and spending are low. Economists today know a great deal more – albeit not as much as we would like… And the working classes all have the vote.

Thus, I would confidently lecture only three short years ago that the days when governments could stand back and let the business cycle wreak havoc… No such government today, I said, could or would tolerate any prolonged period in which the unemployment rate was kissing 10% and inflation was quiescent without doing something major about it.

I was wrong. That is precisely what is happening.

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