Brad DeLong: We’re All Minskians Now!

By L. Randall Wray
(Cross-posted from Great Leap Forward)

Earlier this week I noted, tongue-firmly-in-cheek, that we’re all MMTers now, following Paul McCulley’s recommendation that we just declare victory. And be nice about it.

Well here is a strange post from Brad DeLong: He proclaims that essentially anyone who is anyone is a Minskian. And apparently always was. That is why mainstream economists like “Paul Krugman, Paul Romer, Gary Gorton, Carmen Reinhart, Ken Rogoff, Raghuram Rajan, Larry Summers, Barry Eichengreen, Olivier Blanchard, and their peers” ought to be trusted.

They got it right and will get it right again!

I am following Paul McCulley’s advice and so must be nice. And I do like a lot of what Brad DeLong and Paul Krugman write—oh, maybe 90% of it. Alone among this bunch, however, only Rajan (so far as I know) saw the crisis coming. (And he was castigated for throwing cold water all over Ben Bernanke’s Great Moderation.) Indeed it would be very hard to find any single individual more responsible for fueling the hurricane of financial excess that led to the crisis than Mr. Summers. Next to Alan Greenspan, there probably has never been any economist in a position of responsibility who is more culpable for chronic bad decision-making.

And as I’ve said many times, the much celebrated book by Reinhart and Rogoff really should win an award as the worst empirical study ever undertaken. Clueless about Crisis should have been the title.

OK, they’re all Minskians now. Welcome aboard. No need to engage in the Monty Pythonesque “Judean People’s Liberation Front versus the People’s Liberation Front of Judea” bickering that Brad accuses Steve Keen of (

Let’s play nice.

Still, I find Brad’s post strange, as he raises a number of issues that he finds puzzling. I find it puzzling that he finds them puzzling. Anyone who follows Minsky would/should have no trouble explaining these apparent paradoxes. To paraphrase Brad (again, a bit of tongue-in-cheek; you can go to his post to get the details):

Boy, I cannot figure out how interest rates are so low. I missed the whole 20 years episode in Japan. Why on earth aren’t the US and Japan punished with high rates as if they were Greece? It really is a puzzle. And why can’t central banks just target nominal GDP growth–let us say a China-like 10 or 12 % per year–and thereby get us out of the mess? What, are they stupid or something? Fly the helicopters!

Answer: Japan and the US are not Greece. They are sovereign currency issuers that cannot be forced into involuntary default. There is thus near-zero default risk (a bet against Treasuries is a bet that Congress will collectively go insane and refuse to pay interest on government bonds; it is a fool’s bet because even Republicans are not that foolish).

The interest rate on sovereign debt is a policy variable, not something determined in markets. The BOJ and the FED want near-zero rates, so Japan and the US have near-zero rates. They will have near-zero rates as long as their respective central banks want them.

This ain’t news. Go back to the debates around interest rate determination leading up to the Treasury-Fed Accord of 1951. I’m sure Brad is familiar with these discussions. The interest rate was seen as a policy variable, and the Fed and Treasury were bickering about where to set it. (I’ll post something on this later as I’m working through an excellent paper by a colleague right now.) They finally resolved that more-or-less in the Fed’s favor: it gets to determine the rate target. Until the Fed, Treasury and/or Congress decide to do that differently.

The Treasury can have any rate that the Fed agrees on. And that goes for all maturities so long as the Fed agrees to fix the rates across the yield curve on Treasuries. (Setting rates on other “private” instruments is a different matter—although in principle, the Fed can fix rates there too if it will operate in those private instruments.)

OK final matter. Target nominal GDP growth. Yes we could do that although it is a hard thing to hit. And if we are going to try it, we’ve got to use the right tool.

If we adopted the Chinese version of capitalism, with strong central control and used our banks as a branch of fiscal policy then we could have some chance of hitting GDP targets. Order the banks to finance construction on a scale never seen before in the US, and tell them to do it without regard to profitability—Uncle Sam will absorb all losses.

But as I doubt that Brad and the other “Minskians” are advocating that, nominal GDP targeting is a pipe dream. It will be no more successful than was Chairman Bernanke’s “Great Moderation”. We cannot target nominal GDP growth with monetary policy (interest rate setting). It must be done using fiscal policy. We can disguise that (as the Chinese do) but it is fiscal policy that will ramp up spending. Interest rates are impotent, particularly now.

Helicopter drops are not a part of monetary policy—they are fiscal “transfers”, from Uncle Sam to the lucky souls who find bags of cash in their backyards. Drop enough bags and we’ll get spending up. But there is inevitably a lot of slop between lip and cup.

Personally, I think it would be a bad policy. And so did Minsky. It would generate the Mother of all financial crashes.

It was the Summers-Clinton strategy, run mostly through the “shadow” financial system, to create serial financial bubbles. Minsky called it Money Manager Capitalism, disguised as Bernanke’s Great Moderation.

19 responses to “Brad DeLong: We’re All Minskians Now!

  1. Yes, it’s hard to know whether to laugh or cry over this DeLong piece. He posted it on his blog too, and I commented there:

    There seems to be some sort of reactionary effort afoot where the economics profession is trying to rewrite history, defend their profession, and claim that they got it all mostly right.

    Every time an economists calls for a “helicopter drop” from the Fed, they ought to receive some sort of malpractice citation and fine, since it shows they don’t understand even the most basic institutional structures of our society. Lately the convoluted recommendations of the central bankists have gotten even more absurd. Now they say that the whole idea of trying to understand the Fed’s purported magical powers through causal models is misguided, because they are way to mysterious and nonlinear to succumb to such models.

    I’ve been trying to get Matt Yglesias’s followers to see the light as well:

    • Mostly right, eh? You know these guys by and large can say they all follow Minsky now. But every chance they think of something they will just be forced to let us all know. Neoliberalism will have a long half life.

  2. I’m glad you play nice, though I fear your retort won’t really go anywhere.
    As Harvey put it (summarized nicely here), also quite nicely:

    These are dangerous times and I would have thought the definition of fair and unbiased to which DeLong subscribes might go somewhat further than that given by Bill O’Reilly. What is needed is generous critique, the taking of whatever is positive in competing accounts and a real struggle to come to terms with ways we might better proceed. It will be hard enough to save capitalism from the capitalists but the real tragedy here is that the real message from DeLong’s commentary is that we need also to save capitalism from the economists.

    • Yes, I think the economists have mostly caused this nonsense we see. I have little respect for the most of them. I blame MMT for that. Damn.

  3. Randy is 100% correct. Apparently, like the mainstream, salt water and fresh water economists, Brad DeLong doesn’t understand the difference between Monetary Sovereignty (the U.S., Japan, Canada, Australia, China et al) and monetary non-sovereignty (the euro nations).

    A Monetarily Sovereign nation can (and should) do the above-mentioned “helicopter drops.” A monetarily non-sovereign nation, trying to do that, soon runs short of money.

    The best economics, these days, is not being done at Harvard, U. of Chicago or Stanford. It is being done at the University of Missouri, Kansas City. That’s where the Nobels should be going, but of course, the Nobel awards are determined by people who don’t understand Monetary Sovereignty.

    It’s something like the Creationists giving an annual award for advances in biology.

    • Clonal Antibody

      The Fed can only do a helicopter drop on the banks – but that is not at all effective in getting the money to Main Street.

      A helicopter drop on Main Street is fiscal policy, and can only be done by the Treasury and Congressional authorization – some thing that appears to be difficlt at best given the current “austerian mania” sweeping DC.

  4. DeLong’s UCB Econ 1 classes are posted on Apple’s iUniversity. I listened to a number of them, but stopped because reading Dasgupta’s VSI, which he assigned, is, oddly enough, so fastidiously minimal that it’s a torturously interminable read. However, I’m still interested in his textbook, which brings me to what I wanted to say: I noticed, in glancing at his table of contents, at least two (maybe three) sections were about Minsky and the Financial Crisis of 07-??. This piqued my interest, because only people like Jamie Galbraith and the people who call themselves proponents of MMT (who, in my ignorance, and high esteem of the New Deal, agree with so far) talk about Minsky.

  5. L. Randall Wray

    Someone pointed to this essay by Jamie Galbraith, a version of which I saw him present. It is as good a take-down of mainstream economics as we’ve had since his dad did it, and before that what Veblen did a century earlier.

    To put it simply, both freshwater and saltwater economists are out of the water when it comes to trying to understand the crisis–much less actually predict one.

    • Randy, it’s an excellent article that will be ignored by the mainstream and appreciated by those who already agree, and undoubtedly will change no minds. What economics needs are people who speak English for the masses, because it is the masses who, upon understanding reality, will change the politicians, who in turn, will change reality.

      No lay person will understand Galbraith’s article sufficiently to rephrase it, other than, “Some people predicted ‘Tomorrow will be worse than today.'”

      No lay person will understand, from this article, why money actually is a “free lunch,” why Greece is different from the U.S., why the federal deficit is too small and the federal debt is meaningless, why inflation is not our biggest problem and that federal deficits have not caused it, why federal taxes don’t pay for federal spending, why the U.S. is not “broke” (as Boehner famously said), nor why just about everything they believe about our economy is wrong.

      So long as economists still keep talking to each other, keep impressing each other, keep being scholarly, nothing will improve. Economics is a unique science. First, lay people need to understand it — not just understand it, but be able to explain it to their spouses. That’s where progress will begin, and that’s where the focus of economists should be.

      Rodger Malcolm Mitchell

      • Quote.”What economics needs are people who speak English for the masses, because it is the masses who, upon understanding reality, will change the politicians, who in turn, will change reality.”
        In the States MMT needs someon that does what Paolo Rossi Barnard is doing in Italy.
        Ps.I am only a “mum” without any knowledge of economics but here I am, and I understand almost everything what you have written because Paolo Rossi Barnard has been explaining the concecpt very well since 3 years

  6. Helicopter drops are indeed a very bad idea — but not for the reasons the author states. I take Steve Keen’s more thoughtful and logical view — QE has been tried several times and it has and will always fail for one reason — because taxpayer QE money is ALWAYS given to the major banks. Many, such as Krugman and De Long, believe that banks are merely a safe conduit for liquidity and so all we need is perhaps only another $2 or $3 trillion in QE to save us. These status-quo-loving New Keynesians seem to believe that banks are actually honest, that their only business is to give loans and, indeed, that they actually want to help America’s economy — by giving cheap business and personal loans to Americans . What tosh !! When QE was tried and between 2007 and 2010 all major US bank’s assets increased by 39% with little ultimate effect upon the US economy. How does that help America? This QE money never ever reached Mainstreet nor was it ever used via loans to improve small and medium businesses in America.

    When the QE handouts was given to the major banks — they initially purchased US Treasuries to reinforce their own hopelessly insolvent positions. The US government changed mark-to -market rules for accounting. Then, when these banks were also decreed “to big to fail” — therefore no more market risk — these institutions used the QE via the markets to purchase tangible foreign assets in order to extricate themselves from a fast devaluing dollar(vs. commodities) thereby further deliberately wrecking the currencies of these same foreign countries, forcing them to purchase more US Treasuries to stabilize their currencies. Result: More forced free credit for the US(which was the Feds real monetary policy intention).

    Of course now — Asia, the ME and BRICs have all but declared war upon the dollar. The petrodollar is now in its death throws. US economists are astonishingly mute and dumb about all this. In such an instance, no amount of MMT will save the dollar or America — because it has become a global problem with too many uncontrollable outside dependencies. How can MMT work or succeed when most of the resource rich or exporting mercantilists of this world are actively avoiding using the US dollar in trade now? The dollar will undoubtedly lose its world reserve status and its effects will eventually only ever have relevance within America’s borders with no more free credit forever available from the rest of the world. With the Kissinger Report(1974) and the Washington Consensus(1978) now well and truly in the trash, the gloves are now off worldwide and the US Fed will no longer have the the covert ability to manipulate the dollar globally at will for America’s continued economic advantage anymore.

    These are all very valid reasons why MMT will not save America now.

    • Bill, the US is practically a world unto itself in important ways. Whether the US dollar is the reserve currency (although hard to see an alternative) or not, will not determine whether Americans live poorly or not. The US has all the population and resources it needs, whether it trades much or doesn’t. That includes energy, as uranium could eliminate US need for fossil fuel importation … forever. Cheap labor is becoming more and more irrelevant … even today many factories seem like like ghost towns compared to the past. That process will continue and soon move into electronics manufacturing.

      The only thing people capable of destroying American living standards, are Americans. If we choose to make a large part of the population poorer than necessary (and make all of us poorer in the process), we can of course do it. We’ve been working on it for the last few decades. Or better yet take a look at Europe as an example! Or, if we refuse to invest wisely we could do that and will be poorer as a consequence.

      The rise of Asia (China) is very interesting and I don’t find it threatening at all. I have an interest in energy and nuclear power (as you may have guessed) and if the Chinese are the ones to develop advanced reactors (as one example) and we cannot, due to entrenched interests, I still think we will all benefit.

  7. Randy, You were very, very nice!

  8. “Personally, I think [helicopter drops] would be a bad policy.” – Dr. Wray

    What are your thoughts on dollar injections? I think it would be fun to put a million bucks in the checking account of every poor person in the country. Ebenezer Scrooge (Rush Limbaugh) would be irate, but who cares?

  9. These people did not have a glue what was coming. Krugman in october 2008, just before collapse of the house price bubble was about to wipe out 7 trillion in household wealth:

    “The U.S. economy was officially not in a recession from November 2001 until August 2003, but it sure felt like a recession to most people. I think we may be in that kind of situation. A near recession experience.”

    “Just a question we all have is how much is this gonna slow the economy? You know are we talking a recession? And the answer, which I can say with great confidence, is nobody knows.”

    “It’s very difficult to pin these things down. It certainly slows the economy, and we will be seeing it again. I think the economy is gonna be sluggish for a long time to come because of the housing. Whether it’s enough to tip it into . . . into something that will meet the official definition of a recession, I think the odds are less than even. ”

    See they don’t consider wealth to be factor at all. Whats 7 trillion worht of housing wealth lost anyways? Economy will shrug it off. And then Krugman wonders why chinese households save so much of their income even though their average wealth is only 1/20th of americans. Gee, I wonder what could be the reason? They just think it is some sort of psychological quirk.

  10. LRW, “OK final matter. Target nominal GDP growth. Yes we could do that although it is a hard thing to hit. And if we are going to try it, we’ve got to use the right tool.
    If we adopted the Chinese version of capitalism, with strong central control and used our banks as a branch of fiscal policy then we could have some chance of hitting GDP targets. Order the banks to finance construction on a scale never seen before in the US, and tell them to do it without regard to profitability—Uncle Sam will absorb all losses.”
    You have to solution in your response, you need only to redefine it. As perhaps in a Minsky response would he not call for separation of ” for profit banks” from the central bank. Take away the priveliges they “bought” such as being able to keep winnings yet have gov cover losses.Let’s take one sector for an example; How to gain $14 trillion in revenue and create 4 to 5 million jobs : Housing sector and housing construction. If the Fed were to purchase all residential loans at full balance (yes, that would be maybe even at 70% of real value) and modify all residential loans with a rate of 2% dor a term of 36 years, would this settle the housing crises ? Would this create demand for new ? Read more details : ” Don’t End The Fed, Amend The Fed”
    Bill Jemcks | June 30, 2012 at 11:24 pm | Reply Helicopter drops are indeed a very bad idea — but not for the reasons the author states. I take Steve Keen’s more thoughtful and logical view — QE has been tried several times and it has and will always fail for one reason — because taxpayer QE money is ALWAYS given to the major banks.
    The solution as stated by Einstein. “Keep it simple”
    Minsky and Keynes, something like “euthanize the ‘for profit’ banks” ?
    Re read: (Google) “Don’t End The Fed, Amend The Fed”
    I would like to start this paper “Don’t End The Fed, Amend The Fed,” with the following comment by Cathy O’Neil (“mathbabe”), “this may generalize using so-and-so’s theorem or what’s-his-name’s method….”. Consider it a gift to the… person who reads … this paper and wants to prove something new.”

  11. Contained within any problem,there is the solution.
    For the solution:”We cannot solve our problems with the same thinking we used when we created them”.Albert Einstein

    Perhaps the answer lies in how you redistribute the wealth of a nation; as well as how you acquire it.
    ***** “Believe nothing merely because you have been told it…But whatsoever, after due examination and analysis,you find to be kind, conducive to the good, the benefit,the welfare of all beings – that doctrine believe and cling to,and take it as your guide.”- Buddha