Mason's # 3: He Thinks This is About Hysteresis, I Think It's About Stochastic Trends

Mason's third point is that the macroeconomy is characterized by hysteresis (no argument there), and that hysteresis is an important factor in understanding the situations we get into (neo-classical economists tend to view this as an examined issue that was found to be not that important). 

What the heck is hysteresis? It's the name in sciences for processes that go one way, but can't be reversed to get to the same point. 

Heating water and then cooling it off has no hysteresis: we can turn cold water into hot water, and then back into cold water. 

But making glass and then breaking it does: we can turn sand into glass, but not glass into sand.

For macroeconomics, the issue is if we push a policy that takes the economy down a certain path, and we don't like where it ends up, can we reverse the policy and end up where we started?

At the level of individuals in the macroeconomy, this is almost certainly true. If we measure your "employability", and then pursue a policy that makes you unemployed, is it possible to return you to the same level of "employability", or do you forever have a dark mark on your resume? The answer seems to be the latter.

But at the level of the whole economy, we do seem to be able to undo stuff like recessions and depressions. That's part of what we see in that 150 years of logged real GDP from Barro that I started the semester with.

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On the other hand, if the data we get about measuring the economy displays stochastic trends, this suggests that there's never any reversion to some trend line. Once we're below, we can stay below it. BUT, once we're below it, we can also have a shock that takes us back above that trend too.

Mason is saying we can get locked in below where the trend might have taken us. And that a really big aggregate demand policy might be what is needed to get us out of that rut.

The time series is saying that (if we have a stochastic trend) that we can be below where that trend would have been for a long time, maybe even forever, but we're not locked into that. The time series is saying that if a really big aggregate demand policy could bump us back up, that we'd be able to see that in the data. 

My take is that we really don't see that. That's a new classical macroeconomic position. And honestly, if you'd told me that in the 80's and 90's I would not have believed you. But I got convinced by the data and the time series analysis.