Mason's # 2: Dismissing that Fears of Overheating Might Be Warranted

This one has gotten a lot of criticism from others, so I'll link to those as I further develop this series of posts.

As a whole ... this reads like it was written by someone who is young (and can't remember) and naive (and didn't want to learn). Inflation has not been a problem in developed countries for 35 years. It was a huge problem from the late 60s to the early 80's, pervasive through time, and shared cross-sectionally across countries. Yet Mason seems to downplay the worry.

I really like that he talks about downturns as distinct and different. That's what my (rather Keynesian) dissertation was about 30 years ago. So I tend to agree.

I have evolved. When Mason talks about complex coordination problems ... it's an argument also made by Austrian bloggers like Arnold Kling, and in tough theory papers like those by Ricardo Caballero. I like this point too.

Next he goes after positive shocks. What he's really driving at is a branch of neo-classical theory called real business cycles. It argues (amongst other things) that what we observe in the economy is the effect of unobserved shocks to technology and other things. The thing is, the time series analysis we're doing in class actually measures those shocks and shows that quite a lot of them do seem to be positive.

Having said that, I loved this quote:

There are no “positive shocks” for the same reason that there are lots of poisons but no wonder drugs.

Mason is probably an awesome professor if he drops bombs like that in class. I don't even know if I agree with it; I just like it.

So there actually are models in which there are only negative shocks. These are called plucking models. I do feel that the neo-classical literature has not explored these sufficiently.

He sums up with this:

In real economies, demand shortfalls are much more frequent, persistent and damaging than is overheating.

This is the one that makes me think "young and naive". In some sense, one of the great victories of new-classical macroeconomics over the last 40 years has been putting forth an argument about inflation being from overheating, and offering a policy prescription (that worked!!!).

To me, he's saying we don't need to worry about that antiquated neo-classical economics inflation concern, because its new classical macroeconomics branch solved it for us. The dissonance is stunning.

Do note that I don't disagree with his point about demand shortfalls, only his dismissal of the opposite of those.