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Yes to Economic Restructuring; No to Universal Bankruptcy

By Brad DeLong

/ MoneyWatch

Tyler, in your previous post you wrote:

The fact that aggregate demand must contract is a big part of what is driving the sectoral shifts and we don't want to recreate the previous allocation of resources. The key to recovery is to get these unemployed resources into new and profitable uses and that means successful entrepreneurship. Government fiscal policy, at best, can provide a stabilizing bridge from one state of affairs to another. It cannot eliminate the need for the very painful adjustments to take place.
Well, it's not clear to me that aggregate demand "must contract." Aggregate demand could expand and pull people and entrepreneurs out of sectors that should contract (debt-financed elite consumption, health care financing, housing construction) and into sectors that ought to expand (domestic private investment, infrastructure, green energy, health care delivery and research, export industry to fund a capital outflow). Things go much more smoothly and much more happily when people are pulled into the future by opportunities rather than pushed out of the past by losses.

Perhaps we both have the same problem. We both think that Americans should -- for their own good, and in their own interest -- eschew debt-financed consumption and large government deficits for a thriftier higher-savings and investment lifestyle with a prudent surplus-running government and a regular outflow of capital to abroad in order to take advantage of the enormous opportunities to do well in the modernization of Asia, and in the process to do good as well.

But we both face the problem that Americans appear to have a strong revealed preference to vote for feckless, fiscally-imprudent deficit-running politicians (primarily Republicans, I would add), to engage in splurges of debt-financed consumption, and to import as though the bill will never come due. But we resolve this problem in two different ways. I throw up my hands and admit defeat -- I see no way of moving economic policy levers to get from where we are to where we want to be. Tyler, I think, at some level probably unconsciously communes with his Inner Andrew Mellon, who sees the creation of a pool of unemployed resources as an aid in this process of structural adjustment. In other words, make Americans feel poor and they will behave better. As Herbert Hoover put it:

[T]he "leave it alone liquidationists" headed by [my] Secretary of the Treasury Mellon... felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." He insisted that, when the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people"...
Tyler will protest, correctly and accurately, that he is not Andrew Mellon; and that he is even more not Herbert Hoover's description of Andrew Mellon; and that I should not put words into his mouth. And he will ask me what long-run plan I have to move the U.S. economy to where we both agree that it ought to be. And I have to confess that I have no plan. But at the moment we appear headed for something distressingly close to universal bankruptcy, and like John Maynard Keynes, I "do not understand how universal bankruptcy can do any good or bring us nearer to prosperity...."

Follow Blog War over the federal stimulus package:

First published on April 9, 2009 / 4:05 PM EDT

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