Bradford DeLong gave a lecture on depression economics in the current discussion at University of Missouri. | Photo by Li Lin

Q&A: Cal Economist Foresees Slow Growth, Supports More QE



Bradford DeLong gave a lecture on depression economics in the current discussion at University of Missouri. | Photo by Li Lin
Bradford DeLong expressed support of continued quantitative easing after a lecture last month at the University of Missouri. | Photo by Li Lin

Brad DeLong is professor of economics at the University of California-Berkeley. He served in the U.S. government as Deputy Asst. Secretary of the Treasury for Economic Policy from 1993 to 1995.

DeLong came to University of Missouri last month to share his interpretation of people’s changing concept of the Great Depression, and he offered his thoughts on the economy’s performance since 2008. “I believe that we will continue to see the economy continue grow at between 2.5 percent and 3 percent per year for the next several years,” he said, “not a deeper downturn, but no rapid recovery to what we used to think of as normal either.”

Missouri Business Alert interviewed DeLong about his expectations for the local economy. The interview has been edited and condensed.

Missouri Business Alert: Among high inflation, deficit spending and loan guarantees, which do you think would be the most effective resort for local communities to further recover their economy and avoid liquidity squeeze?

BD: I said that it’s the time for more government spending largely because people like government debts so much. The U.S. Treasury can borrow between 0 and 3 percent per year right now. There will be about 2 percent of inflation and about 3 percent real growth. That means the productive capacity of the U.S. in its income is growing at 5 percent in dollars each year. But the treasury is only paying us an interest rate at 2 percent interest each year, which means that if you borrow, next year your debt is only 97 percent as burdensome.

So after 25 years, your debt is only half as burdensome as when you take it out. Such situations in which you borrow money but the debt doesn’t become more burdensome is really rare around the world. When they [interest rate, inflation rate, and economic growth rate] are, it’s a sign that you should borrow more. I’d say we need significantly more government spending right now. If the government is going to do it in the next generation, the government should do it now.

MBA: Do you think the current round of quantitative easing can function well for the general market?

BD: I used to think it didn’t function at all well. But the fact the Fed said it might stop in June … the financial markets were  unhappy. Maybe a lot of people in the financial markets think it works. It’s one of these weird things that has to do with expectations in economics: when people think something is working, it is — even if it shouldn’t be. So June has made me much more interested in pursuing further quantitative easing. The policy should continue.

MBA: How should the central bank cooperate with the local banking system in order to better stabilize the local economy?

BD: There was [an] argument back in the 1920s and 1930s, the social credit argument from the social credit party of Alberta. … The central bank is an enormous source of wealth, simply because it keeps the payment system running smoothly and the payment system is a valuable thing for a society to have. The fact that they can buy from anyone in the United States securely and easily is very valuable. And the way that central banks work is that they, by and large, use this surplus and the surplus goes to banks. The banks get guarantees and that allows them to borrow more cheaply, because people know the Federal Reserve is backstopping them. And the social credit party very much believed that this was a surplus that was earned by society as a whole and that the central bank should pay out its profits not by charging banks hefty fees for loan guarantees and then by simply distributing its profits to the entire citizenry.

And that I’ve always found quite attractive. Especially in Missouri, where I look at the number of payday loan shops, and when I think about the interest rates that people who go to payday lenders pay. And I also think about how payday lending is not a very profitable industry to be in because you do have to hunt down a lot of people. And if you’re just Joe’s Payday Loan Shop at the corner of Grand and 43rd, you don’t have the resources to do that. … Collecting loans is much easier if the central government simply took over the payday loan industry as part of its process of adopting a social credit class.

I am always attracted to that, although it’s politically unpopular. Except for Larry Lindsey, one of George W. Bush’s economic advisers, who was very worried about inequality and failure of the financial system to serve the population as a whole, and also Miles Kimball at the University of Michigan.

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