Universal Translator

Thursday, December 22, 2011

New Rule: Screw "Continuity"

I was listening to the December 5th Majority Report podcast earlier today, and Sam Seder had Ari Berman on as a guest.  Berman had recently returned from the UK, and he reported that Prime Minister Cameron and the other UK leaders had recently given a series of speeches in which they basically said they were doubling down on the “austerity plan” that has been so contractionary and has actually made economic matters worse in the UK and throughout Europe.

Of course, Paul Krugman has been railing about the austerity kick that so many have been on lately, both in Europe and here in the United States, and repeatedly has wondered why political leaders remain so cocksure that eventually, someday, maybe even someday soon . . . everything will start working out as planned and things will actually start getting better.  They keep doubling down on this program, Krugman complains, despite the fact it flies in the face of all accepted macroeconomic theory and despite the fact it keeps repeatedly not working.

And then I remembered this piece by Matthew Yglesias, about Confessions of the “Old Wizard”: the Autobiography of Hjalmar Horace Greeley Schacht.  Schacht was Currency Commissioner and President of the Reichsbank during the Weimar Republic, went on to also become the Minister of Economics under Hitler before being forced out of the government, and then took part in the German resistance to Hitler.  He was acquitted at Nuremberg.

Schacht successfully ended the Weimar Republic's period of hyperinflation by simply refusing to print more money.  But the real point of Yglesias’s column is that only Schacht or somebody else brought in to replace the former President of the Reichsbank, Rudolf Havenstein, could have made the decision to stop printing marks and thus end hyperinflation.  The reason for that is because Havenstein already had committed himself to printing marks in order to meet Germany’s WWI reparation payments, and were he to stop printing marks after the resulting hyperinflation had wrecked the economy then that would have been an implicit admission that his previous policy had been monstrously wrongheaded.

What Yglesias is getting at is that institutions that have grossly mismanaged public policy have a difficult time changing course because the people responsible for managing those institutions do not wish to admit they have made egregious mistakes.  For example,

[i]f the Federal Reserve Open Market Committee were to take strong action at its next meeting and put the United States on a path to rapid catch-up growth, all that would do is serve to vindicate the position of the Fed's critics that it's been screwing up for years now. Rather than looking like geniuses for solving the problem, they would look like idiots for having let it fester so long. By contrast, if you were to appoint an entirely new team then their reputational incentives would point in the direction of fixing the problem as soon as possible.

One of the things Obama’s critics like to carp about is that for a guy running on a bad economy bequeathed to us by the Republican party, a guy who campaigned on hope and change . . . Obama kept basically the same economic team in place after he took over for the sake of “continuity.”  (Tim Geithner?  Ben Bernanke?)  After all, how can we change our game plan if we keep the same strategists?

But as Yglesias points out, the situation may be far worse than mere sclerotic institutionalism.  For example, why does Bernanke keep signaling that the Fed is unwilling to allow inflation to grow, even though doing so will boost the economy and help get more people back to work?  Well, it could be that he really believes his policies eventually will be vindicated, and it could be that he just doesn’t care about the United States’ high, high unemployment rate and really thinks that keeping a tight rein on our non-existent inflation is more important.

But it could also simply be that Bernanke is incapable of changing policy even if he wanted to, because the cost to him personally – to admit that his past actions were mistaken – would be too severe.

New Rule:  When things have gotten screwed up, it is alway, always better to fire the people who did the screwing up and to bring in a new team than it is to keep those same screw-ups around to provide a comforting sense of “continuity.”   

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