Mason's Epilogue

I needed a word for Mason's last 7 unnumbered paragraphs, so this is it.

Note that at the top he says that thinking about economic policy has changed, but at the bottom he says there is no theory for this yet, and it isn't in the textbooks. Is it just me, or does this sound like one of those hotel commercials where the guest is so well-rested they have superpowers?

Mason also wonders what macroeconomics would look like if AD shocks had permanent effects, and we were not eventually constrained by long-run aggregate supply. I think this is easy to piece together in terms of the AD-SAS-LAS model that I teach in principles. In that model, the economy starts on LAS, an AD shift opens a triangle (with one edge along the LAS), and this is closed down slowly by SAS shifting in the direction that makes the triangle smaller. We end up back on the LAS, but typically at a different price level. I think it's easy to modify this so it works in the way described by Mason: SAS doesn't shift, the triangle remains, and it is slowly closed off by LAS shifting right (due to accumulation of labor, capital, and technology) until equilibrium is achieved again. The problem I see with this is that the initial story of SAS shifting is due to people working too much, and asking for nominal wage increases. To me, it seems that Mason is either asserting that 1) people can't be pushed to work too much, or 2) people won't bargain for higher wages when they are pushed too much. I'd say these are possible, but I'm not sure they are plausible.

But his middle 3 paragraphs seem to contradict all this. It sounds like he envisions something like this, but in which the economy is never off the LAS (thus the constraint on employment growth ... this is like saying the LAS can shift to the right only so fast). But he also asserts that there could/would be higher wage growth, but this is the SAS shifts not happening that I mentioned in the previous paragraph. I can't see how they both happen and don't happen? Or how the most important input cost to enterprises, wages, is supposed to go up without that being transmitted into output prices? This could happen if output demand was very elastic, so that suppliers got the burden of the cost shift, but how do we make elasticity do what Mason wants??

Then there's the last paragraph:

... a generation of mainstream macroeconomic theory was retconned ...

That's pretty offensive. Retconned is a newer portmanteau word in the English language. It means that after the fact you changed your story to match what happened before. I think the implication of retconning in new classical macroeconomics is just ... unbelievably ignorant. In the 70's and into the very late 80's, those new classical macroeconomists were ... out there. Lots of people thought they were crazy, and even dangerous. If anything, it was the politicians and the bureaucrats of the 80's and 90's who retconned, as they struggled to figure out what parts of what they were already doing could be justified by the new theories that were getting confirmed left and right. Part of this was the recognition that monetary economists going back as far as Patinkin in the mid-50s, and more popularly to Friedman in the 60's — who were largely ostracized by polite society — had been right all along.

In the end, I think the title of the post is pretty informative. We're now in a world in which the political plan doesn't have much underlying economic theory. Who's going to retcon in response to that?