It's not a secret, but no one talks about it much: body bags are also something that we've had shortages of over the last 14 months.
Someone local here in Cedar City who has a budget and authority to order body bags for future use is pleased that the ones ordered over a year ago have finally shipped.
FWIW: I have permission to post this tidbit.
In class, CM asked (with respect to the Marxist/radical/heterodox/post-Keyensian views in the thread about J.W. Mason's post):
When am I going to learn why modern economists have rejected Marx's conceptions of macroeconomics? The labor theory of value, falling rate of profit, and reserve army of labor especially stand out as interesting and important macroeconomic ideas--Do we cover these things in Senior Seminar?
The easy answer to this is your mostly not going to learn about them at all. As I remarked in this post about the implications of J.W. Mason's post, most departments are neo-classical (including yours) and are simply uninterested in covering that stuff.†
I would not say that there is any suppression of views going on here. This is not really about flavors of economics that all students should be exposed to. It's really about completely different fields that ought to have their own departments. Noting that the neo-classical economists at SUU don't cover Marxist/radical/heterodox/post-Keynesian thought is akin to noting that they don't cover accounting. It's sufficiently different that it's just not what we do.
I am not sure about this, but I've gotten a pretty good exposure through the years, and I might be the best equipped to point you in the right direction. Having said that, these are neo-classical criticisms.
Labor Theory of Value: check out Steven Horwitz's "We're Still Haunted by the Labor Theory of Value". I really like his point that to Marxists, the value of output is determined by what we put in to get it, but to neo-classicals the value of what we put in is determined by what we get out. For example, in the first one, a meal is good because someone put a lot of time into it, while in the second one the people we like to cook for us are the ones who produce meals we like. This is part of a bigger discussion about marginalism, the diamonds vs water paradox, and the contributions of Menger, Jevons, Walras, Marshall, and Clark (although people are trying to cancel him).
Falling Rate of Profit: does it suffice to say this prediction is 150 years old, and this hasn't happened yet? To me, Marx sounds like he's describing free entry and perfect or monopolist competition. He doesn't spend much time discussing economies of scale and monopoly in the context of increasing rates of profit. He also seems unaware of the idea of a firm working in multiple product lines, and accepting zero profit in most of them, while always looking for one that will temporarily deliver monopoly profits.
Reserve Army of [unemployed] Labor: I indicated in class that this is part of Marxist (but maybe not really Marx') theories that I tend to like. But that's not the same thing as seeing that all around me. Historical perspective on this is important: during Marx' lifetimes unemployment went from non-existent to a common thing. This was new in human history, and Marx attempted to explain why it would happen. Through the lens of 175 years of experience with how unemployment works, I tend to view it as a coordination problem: the potential worker is here and now, and the potential job is over there and then, and perhaps they don't match up well. I also tend to think the JOLTS data points to this idea not being very important: for example, while quits dropped a lot in 2008-9, this is the period in the data when a worker would be most concerned about that reserve army, and they just weren't.
Having pointed you in some directions, I would say that the way to learn Marxist economics is definitely not to go and learn it from someone who is not an economist at all. The issue here would be that they might be unlikely to know any neo-classical economics at all. And yet the whole thing is about an entire profession trying Marxism on for size, and finding it lacking.
And I would object to a word used in CM's question. This is not a rejection by "modern" economists. This is a wholesale rejection by just about everyone in the field going back for about 125 years. It's not modern in the scheme of a field that's coming up on 250 years old.
And if you want to be autodidactic, I know of no better source than my old buddy Ajit Sinha.
† The closest you will come in our department is some of Dave Berri's non-sports, non-required, classes. Recommended.
Cute story: what do Marxists and neo-classicals talk about over dinner? Ajit and 2 radical friends were in New Orleans at a conference when I worked at UNO and Tulane. I offered to take them out to dinner. They wanted to try alligator. The conversation worked its way around to how unusual it is for humans to eat carnivores. That evolved into, if the alligator ate a dog, and the dog had bitten a human, would we four be guilty of indirect cannibalism? We resolved that the alligator was very good, so we would worry about that some other day.
MZ asked in the Chat during class:
... I would be interested to see what data you have disconfirming climate change as an existential threat!
It's off topic for lecture, so I didn't answer it there. But I will here. There's a lot to unpack in that one sentence.
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First, no one has data from the future. So there can be no data that might disconfirm an existential threat.
Instead, most of the discussion about climate change is about the implications of models.
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Second, in the methodology of science, a position that can't be disconfirmed isn't a theory at all.
This is clearly very problematic since the only way we can then test some theories of climate change is to live through the periods they are forecasting. Potentially ... not fun.
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Third, many views that something is an existential threat rely on a supposed change in the world that is at variance with our past experience with the data.
For example, you may be afraid of dogs, and your friend may tell you their dog has never bitten anyone. Your fears can be valid, but the consequence you fear still requires a change in the world that is at variance with your friend's past experience with their dog.
With climate change, it's not easy to forecast catastrophic outcomes when the data we have doesn't show any in the past. One can always build a model in which there is catastrophic outcome, but that isn't the same thing is it?
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Fourth, as an economist, existential is a word you should be very careful with.
Lots of people outside of economics use words like "priceless" and "existential".
This is often a shortcut for either 1) not measuring the price at all, or 2) covering up the fact that the price isn't what you think it is or ought to be.
If you're going to be an economist, avoid thinking about prices as being infinite, and start thinking about putting numbers on them.
I like the punch line of this video:
In economics, pay attention to what people do, not what they say.
Oh and ... above I remarked that I like data better than a model. I also prefer a model to no-model-at-all. A lot of people who use words like existential ... don't have a model.
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Fifth, "existential" is also something that ought to have a probability attached to it. Is it a low probability of certain death? Or a higher probability but of only a possible death? Or something else? It matter. A lot.
What I say to many people when they say this sort of thing (and no insult intended MZ) is that if you don't know you should stop talking, and ideally come back when you know more.
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MZ wanted a source. I could overload you with stuff, but let's start with one. This is the (free) link to an article that just came out in the most recent issue of American Economic Journal: Macroeconomics entitled "Evaluating the Economic Cost of Coastal Flooding". That's a very good journal, and the authorship team includes economists, geoscientists, and climatologists. It's not the whole spectrum of climate change, but it's one issue that people worry about a lot. Here's the first part of the abstract:
Sea level rise will cause spatial shifts in economic activity over the next 200 years. Using a spatially disaggregated, dynamic model of the world economy, this paper estimates the consequences of probabilistic projections of local sea level changes. Under an intermediate scenario of greenhouse gas emissions, permanent flooding is projected to reduce global real GDP by 0.19 percent in present value terms. [emphasis is mine]
First off, that's in present value terms. So that's all costs of coastal flooding from the future, brought back to today's terms.
Second, is 0.2% large? Most people don't think so. Plausibly, the U.S. would be hit by roughly that percentage. Just to ballpark it, typically GDP grows 3.0%/year, and is in the range of -2% to +7% routinely. Would anyone even notice 0.2% if it was spread over many years?
And ... I'm not being dismissive. A "quick fact" I often give my principles students is that the limit of what you can feel in real GDP is a change of plus or minus 0.5%. So by a rule I've used on and off for 20 years ... this particular threat that some might call existential is not something we would even notice.
Do note that this does not mean that no one would notice it, or no one would be hurt by it. But it is saying that the collective pain would be minute.
It's also worth learning what an economist with expertise writes about existential events and climate change. Here's Robert Pindyck from MIT (I don't know Pindyck's politics, but MIT is not a place known for, really, and conservatives at all).
Pindyck is one of the foremost experts on investment under uncertainty ... like, say, averting climate change (he's so big that he wrote the math econ book I used in my first year of graduate school in 1985, and it wasn't even in the first edition then).
Six years ago he has a very tough AER article entitled "Averting Catastrophes: The Strange Economic of Scylla and Charybdis" with you can get for free here. In it he does talk about climate change, and other possibilities (including pandemics!!!) from the point of view of you can't insure against everything, so how should you ensure against a variety of existential threats that have low probabilities? And he has a model, and numbers, and simulations. Interestingly, while in some climate is a problem to be ensured against, and in others it is not ... a pandemic is always something you should ensure against.
He also wrote a JEL paper entitled "Climate Change Policy: What Do the Models Tell Us?" about the usefulness of the climate change models. It isn't pretty.
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I do think it's worthwhile asking why others are not talking about results like this.
And perhaps you are not reading between the lines ... but this is similar to the Biden administration that doesn't really seem to want to have economists involved in their economic decisions?
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I'll close with a simple suggestion that a budding economist can actually figure out. If you're concerned about climate change, what is the elasticity of your chosen temperature measure with respect to atmospheric carbon dioxide concentrations? But, of course, that comes from industrialization, so what is the elasticity of atmospheric carbon dioxide concentrations with respect to something like global GDP? And what do you make of those numbers?
Those are questions I first looked at in 1990, after becoming concerned about global warming in 1988. In 30+ years I have been unable tot reconcile them with my lived experience of climate change politics.
I have been asking students to solicit questions for a Quodlibet every Spring since 2009. I have copies of every question and answer that are searchable.
Prior to that, I also asked students to do this in 2002-3. At that point, this was a smaller class offered every semester, but I'm not sure when I started, or if I still have copies of all of those. So I'm using the best of my recollection, and what I could find, for that.
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I spotted something unusual in the Quodlibet this semester.
I am not picking on these students, but I think it might represent a worthwhile change in attitudes towards the world that's worth noting.
Anyway, two students asked question that used variations on the word "ban". (And, in going through them just now, I also saw that BS's post is about banning, but doesn't use the word).
The questions are fine. They reflect current events and discussions in the media.
But I went back and searched, and no one has ever used a variation on "ban" in this format before. Ever.
To me, this makes me think that banning things is part of the zeitgeist in a way that it never was before.
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To be clear, neither student suggested that we ban anything.
But, they did ask questions about political discussions to ban things.
So I think it's useful to think about what the economics are of a political decision to ban something.
So here's some questions to ask yourself the next time you hear about a proposal to ban something.
There are other questions, but this leads me to some implications for the zeitgeist:
Towards the end of the long series of posts riffing on what J.W. Mason wrote about progressives and the "Biden stimulus package" I noted that there seems to be a strong movement, particularly amongst Democrats, to be aprecautionary (i.e, to flout the precautionary principle). Perhaps this is another example.
Klein is an opinion columnist for the New York Times. He also co-founded Vox. Definitely Democratically-oriented.
A lot of this is coming from his opinion piece in the New York Times entitled "Four Ways of Looking at the Radicalism of Joe Biden". That may be gated. It's worth your time to find a way around that. Here's an idea: try our library.
So it's a Democrat writing about how the Biden administration has moved to the left of Democrats.
The standard explanation for all this is the advent of the coronavirus. The country is in crisis, and Biden is rising to meet the moment. But I don’t buy it. That may explain the American Rescue Plan. But the American Jobs Plan, and the forthcoming American Family Plan, go far beyond the virus. Put together, they are a sweeping indictment of the prepandemic status quo as a disaster for both people and the planet — a status quo that in many cases Biden helped build and certainly never seemed eager to upend.
Klein has 4 explanations for this.
1)
Republicans have completely stopped engaging with the Democrats. You can't compromise with someone that won't talk to you. So the mainstream Democrats are compromising with the Democrats further to the left instead.
2)
Most people don't seem to understand this point:
Washington is run by 20- and 30-somethings who run the numbers, draft the bills, brief the principals.
It's always been that way. And this younger generation has "... Sharply different view on the role of government ... and the risks worth taking seriously".
Now, and this is my personal opinion, I can see how someone in that generation would look at the last 20 years and see government failures all around, but I don't see how from this one concludes that it will be different this time.
3)
I'm actually OK with this. I think highly of economists, but I don't think other people have to:
Biden has less trust in economists, and so does everyone else [in his administration].
Obama’s constant frustration was that politicians didn’t understand economics. Biden’s constant frustration is that economists don’t understand politics.
It does bug me that the people in charge have less trust of economists about the economics itself.
This especially bugs me because it does not happen in other fields. The idea that we'd have less trust in soccer coaches about soccer itself is not something most people would accept.
4)
Biden is a political chameleon. This is simple. The electorate moved left, and so did Biden.
Do not fool yourself that this was about electoral shenanigans (I'm not even denying the relevance of those).
Instead keep in mind that Trump was a lifelong Democrat. If the Republicans can fall in behind Trump, it means they were moving to left at least several years ago.
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Klein also tweets, and there are some cool clarifications and comments there. Plus he gets replies from people from the stratosphere like Paul Krugman:
Mostly this seems right, but "not listening to Larry Summers" is not the same as "not listening to economists." The really big difference with Biden is the reduced influence of Wall Street ...
I agree with this on one level: I didn't think the people that both Bush and Obama brought in from Wall Street were very good.
But on another level I disagree. The Biden executive is heavily staffed with people who've rotated through a particular Wall Street firm: Black Rock.
Bush and Obama pulled Wall Streeters mostly from Goldman Sachs. To me, switching to Black Rock is a lateral shift.
On a different note, Mason made clear that the direction of the Biden team shows a lot less interest in incentives than in the past. That's all about the microeconomics and the efficiency of doing things in certain ways. Here's Matt Yglesias:
The danger is that the more successful you are at saying “fuck it, we just need full employment” the more micro/efficiency considerations actually end up mattering a lot.
That reflects an essential truth: when something works seamlessly it starts to seen unimportant, and we begin to take it casually. For example, most people drive more carefully after an accident, and that helps them avoid another one, but that discipline fades, and when it does the probability of an accident goes back up again. This is Cochrane's point: the people on the Biden team have forgotten that moves like this in the 60s ended badly all through the 70s.
I would say both Krugman and Yglesias are to the left of Klein, but neither one is in the league of Jared Bernstein or Heather Boushey.
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And what does Tyler Cowen think about Klein's hypotheses?
I would frame the described truths in a quite negative manner. I would say that in essence they are making decisions based on their own sociology and class and conformism, and also on the basis of what they think (poorly informed) voters want, rather than focusing on scientific reasoning and trying to see that through. And whatever problems economics might have, including as a predictive tool, one does not do better with those who are trying to take its place.
That's raw.
There was no discussion.
I asked the class if anyone had read anything from the large series of posts linked through "Table of Contents ...". I got no takers.
I asked 2 students specifically, and they kinda' sorta' admitted to not doing the readings, as directed in class on Tuesday.
That was the Tuesday, several days after I'd announced through email that the set of posts was largely done and that you should start reading them immediately.
GP then indicated that he'd done a few of them.
Class, this is not acceptable.
In class I recommended that you read at least the first 10 items in that post, and that it would be better if you read the first fifteen, prior to next Tuesday's class.
Mundell is a name that macroeconomics students need to be familiar with.
He won the Nobel Prize in 1999, largely for integrating international economics into macroeconomics in the early 1960s.
At the IMF between 1961-63, Mundell added a crucial model to existing views of closed, or self-contained, national economies.The effects of economic policies depend crucially on the exchange-rate regime, he demonstrated: floating rates made monetary policy powerful and denatured fiscal policy, whereas with fixed exchange rates the reverse is true. Encapsulated by a pair of equations, described by a couple of intersecting curves, the Mundell-Fleming model (Marcus Fleming, his IMF boss, died in 1976), brought Samuelsonian clarity to the analysis of international finance.
He is also called the "father of the Euro" for providing the insights that indicated that a European monetary union was workable.
And he was very influential in the exposition of "supply side economics" to the Reagan and Thatcher administrations in the early 80s.
There are obituaries around, but this piece from about 10 years ago covers the important stuff well.
Fiscal policy is changes in total government spending, and changes in total government financing of that spending (taxes and deficits).
I have no doubts that fiscal policy is a effective at changing the course of the economy. Increases in spending are beneficial. Increases in funding are harmful.†
A problem is that this is way oversold by politicians and the media. Conveniently, they like to emphasize the good stuff, and de-emphasize the bad stuff. The thing is, you don't get one without the other when it comes to fiscal policy
Keynesians went through great pains to show that the multipliers for spending were ever so slightly larger for spending than for taxing or borrowing, and therefore expansionary policy would actually expand the economy.
Economists are no longer so sure of this. So typically I assumes as a null hypothesis (until shown otherwise) that the one cancels out the other.
From this perspective, when you hear about how great the "Biden stimulus package" is, you should be waiting for the other shoe to drop. It did this week, in the official form of the much rumored "Biden tax increase", officially named the "Made In America Tax Plan".
As is typical of fiscal policy actions, you can see that the politicians know the thing won't work as advertised, so they're careful to build it the appropriate way. This is because if they taxed you $12.43 and then gave you a Sweet Pork Salad and 32 oz. Diet Coke from Costa Vida ... you'd catch on pretty quick that it was an even trade. So instead they want to give the food to the good guys, and get the bad guys to pay the tax. Usually good guys means people who vote, and bad guys means people who don't.
There are three ways to do this.
A super easy way is to give stuff to people who can vote, and to have corporations that don't vote pay the tax. That's what's going on here.
A second is to make sure there are a lot more good guys than bad guys. This is where taxing the rich comes in: tax fewer rich people a lot, and spread that money over a larger group of recipients. You'll get a net gain of votes that way.
And third, there's a particularly insidious method. This is to make sure the people available to vote currently get the benefits, and people who won't get to vote until later (children or the unborn) to pay the bill. There's a bit of this with the "Biden stimulus package, where the benefits are paid out over the next several years, and the "Biden tax increase" which has projections showing increased inflows out to 15 years into the future.
† The old-fashioned Keynesian names for these is injections and leakages, and the metaphor was of trying to maintain pressure in a series of pipes. In 1949, a machine was actually built to show this to students. It was called Moniac, and they still have one of these that works in New Zealand. Check it out:
Shipping manifests are private, so there's not much information on this.
For my part, as an American, I don't think of the Suez Canal as critical to us, but it makes sense that much of our trade with India goes through there. And who knew that's where we're sending paper to be recycled??
These are year-end figures, so they might not match up with the numbers you heard, say, last week.
Deaths for a country go up every year: bigger population, more deaths. But the U.S. population has been growing by about 2%/yr, so that should be the baseline figure for deaths as well.
Not surprisingly, deaths were way up last year. For the year, the CDC recorded a growth rate for deaths of 18%. Of that, 5% was not attributable to COVID-19.
Why have COVID-19 deaths gone up at all? It's pretty simple really: more opioid abuse is the big one.
But not going to the hospital as much, or at all, is another cause. Should those deaths be labeled as COVID-related?? Maybe so.
And then there are the as yet undiagnosed COVID-19 deaths. Sometimes these take months before they're made official. We don't know how many of those are still out there (this happened to someone I know ... lived alone, found "cold", so low priority ... months later the COVID-19 confirmation was made).
We don't know the extent of these, but even in the 85+ age cohort, deaths from non-COVID-19 reasons are up. It's pervasive.
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So that's the intro. The important parts are that 1) deaths were up across the country in every single age group except babies toddlers, and 2) deaths attributable to COVID-19 were found in every group including babies toddlers.
There's actually a positive part for that. For the 3 groups that are 14 and under, total deaths dropped in spite of there being a handful of COVID-19 deaths. I guess everyone sticking around the house kept the kids safer.
But, of course, the teenagers and young adults fled their homes like crazy (when they could) because parents drive them nuts. So deaths in those groups from non-COVID-19 causes were the big increase.
The transition occurs in middle age. For the age 35-44 cohort, the growth rate is higher for non-COVID-19 deaths, but for the 45-54 cohort it's shifted.
COVID-19 is often presented, especially by the young, as mostly a threat to seniors. This data shows that this is not the case. The borderline appears to be about 45 (and maybe a year or two higher if we extrapolate from the cohort data). Most people would not even define that threshold as being in late middle age yet.
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Just for perspective, deaths attributable to COVID-19 last year are about 10 times bigger than car accidents, 7 times bigger than opioid abuse, and about 8 time higher than suicides.
And, don't forget, over 100 times the death from 9/11, over 150 times the deaths from Pearl Harbor, and now every top 10 day in deaths in the U.S. is associated with COVID-19 around this past holiday season (and not with natural disasters or wars).
I got a lot out of the class discussion today, and wanted to post some of the things for future use.
1) Clarifying, I tossed out a label for non neo-classical economists as Marxist/radical/heterodox/post-Keynesian and now ... progressive. First off, I would not say that those are all the same, and the people practicing those would definitely make big distinctions. My view is that there's a spectrum from one end to the other (and I'm not sure about the order of the last two, or where progressive would fit into that at all). I also made a throwaway comment about progressives. I would say that there's a lot of overlap between progressive and Marxist/radical/heterodox/post-Keynesian, but I would not say the one implies the other or vice versa. I would definitely say there's an intellectual marriage of convenience going on: a lot of hard Marxists thinking "OK let's call ourselves progressive for a while", and a lot of erstwhile (mainstream) Democrats thinking "I'm calling myself a progressive, and this time around I'm OK with the Marxists being in my group".
2) CM brought up Plato's thoughts on government. For those who have not been exposed to this, the one line summary is that Plato's ideal government is one in which wise experts make the decisions. I want to be very clear that I am not supportive of that idea, generally, or specifically in the context of the "Biden stimulus package". Instead, what I am pointing out is that in many ways macroeconomic policy making was already very, very, far away from that, with tons of input from non-experts. If anything, we're taking a deeper dive into that now.
3) CM also brought up an excellent point. One way to view things is that neo-classicals and Marxist/radical/heterodox/post-Keynesians differ in the axioms they assume to think about the world (like, say, supply and demand is relevant and useful). Another way it to look at their outputs: it doesn't matter if the inputs differ if the two groups want to form conclusions about the same macroeconomy and policies. I think this parallels Sowell's idea that there is a conflict of visions: some people judge thinking on motivations, and others on consequences. I don't think CM was saying I was wrong (although I could be wrong here too), but rather that there's 2 ways of looking at it, and I just mentioned one of them.
4) I also want to fatten up what I wrote about observational equivalence a bit. It does not mean that we can't differentiate between theories from non-experimental data. But it often means it's a lot of work, and work that most people simply don't do. There were a lot of econometric advances made in the 70s and 80s — and ultimately Nobel prizes for Sargent, Sims, and Hansen — for figuring out what we could say and how sure we could be.
For example, suppose people anticipate monetary policy, but do so imperfectly. The thing is, those anticipations are in their heads, not in our data. Anyway, assume that changes in M can be divided so that M = A + U, where those are for anticipated and unanticipated. A Keynesian would say both affect the economy equally, so the same coefficient or weight would apply to A and U. A new classical, like Lucas, would say that only U affects the economy, so the coefficient or weight on A is zero. Each is great as a theory, but remember that the A and U are inside people's heads. So when the economist is estimating how monetary policy gets M to cause Y, they'll estimate the A and U and well as their coefficients at the same time, so when one changes they all do. Observational equivalence is the idea that there's a whole realm of uncertainty there that people who don't do this stuff for a living haven't even thought of. But, of course, that doesn't stop them from blithely announcing that they know the right answer, like say M causes Y. But the new classical would say, no, M is correlated with Y, but only the U part causes Y. Fifty years ago, macroeconomists didn't realize that there's a differences — but once they figured that out we now recognize that it's too easy to put together casual evidence that supports some political position, and awfully hard to actually get it right.
5) I'm synthesizing a little here about my interpretation of how policy works, and why Mason is happy with this policy. I think there are policy ideas or programs from both parties, that they find desirable, but which they were unable to pass in the past: too controversial, too unusual, too politically one-sided, too far out of the mainstream, and so on. But people didn't forget about them; they were "on the shelf". Then Congressional leadership comes along and decides this time around I think we can pass a bill for spending $1.9T. This is like a big empty bin. Into it, they pile those "on the shelf" ideas that their party has. I think Mason's point is that 1) because the bin was so large this time, and 2) because the neoclassical naysayers from the Democratic party were pushed to the side this time, that the "Biden stimulus package" is different. It includes more Marxist/radical/heterodox/post-Keynesian ideas than any other bill that's ever been passed. So Mason is thinking that it's great that all this stuff he's sure will work is finally going to get tried. On the other hand, a big chunk of traditional Democratic macroeconomists are saying that they blocked this stuff for decades with very good reason.
I am reminded of this political cartoon that circulated widely as a meme about 2 years ago. Mason is sure the fork is plastic. He's glad Summers has been sidelined because he wants a smaller fork, and thinks the guy in the mauve shirt should wear gloves just to be safe. Cochrane is the guy in the blue shirt; he's sure this fork is stainless steel. Cowen is saying maybe not, but ya'know we checked every fork around here yesterday, and they were all stainless steel ... and besides, no one has had the sense to even go to the store and see if they can find some plastic forks. Tufte thinks it might work out OK because they probably won't be able to get the fork in the outlet at all, and if they can't it doesn't matter what it's made of.
FWIW: socialism is more of a political label. I know of no one who calls themself a socialist economist. They prefer the flavors in that Marxist/radical/heterodox/post-Keynesian grouping I've been using.
P.S. I absolutely think the Mason post is something to bookmark and come back to once year until about 2035. If things work out OK, update your thinking in the direction of Mason. If things don't work out, definitely pull it out and show it to people who say socialism has never really been tried. When push comes to shove, this time around the progressives have said quite clearly it's their showcase.
Oops. I lost this one in the mix. Adding it to the table of contents post now.
The contemporary Democratic position seems to be that "running the economy hot" is going to increase real wages.
In terms of a simple model, this means that shifting the AD to the right with fiscal policy is going to produce a boom in which real wages rise. In short, that real wages will be procyclical.
Except there isn't a theory that says that.
There are a lot of empirical results, and they are a mixed bag. Neoclassical economists have been looking at this for a very long time, and have not found this at all. Instead, real wage seem to be acyclical.
It's not definitive, but Cowen does a Google Scholar search for papers with the keywords "real", "wages", and "acyclical" and finds that they've been used together ... 18 thousand times. That's ... a lot.
Cowen also notes that a good paper on why the cyclicality of wages may change through time was published in the AER about 15 years ago ... and used a model to clue the reader in.
So it seems like contemporary Democrats are hanging their collective hat on something that ... if it's going to work, is going to have to work in a way it never did before.
I think we are seeing in Democrats currently, the addition of a third point, to what were two common but destructive political inclinations that the two parties share.
A lot of what is popularly called partisanship comes from these two features. But I think Democrats have now added a third one.
Hippocrates is regarded as one of the first thinkers in medicine. He established a principle that is still part of the eponymous oath that doctors swear: first, do no harm.
In more contemporary, and non-medical areas, this is now referred to as the precautionary principle.
What I see in many contemporary Democrats, particularly progressives, is an implied view that the precautionary principle is incorrect, inappropriate, stupid, pointless, or wrong.
This is new. I call it the aprecautionary principle. I see it in the approach to Larry Summers and others that used to be leading economists among Democrats: current Democrats view older ones as the enemy, and the precautionary principle as potentially holding them back from moving in a new direction.
Included in this is a general disregard for the macroeconomics of macroeconomists.
Buckle up.
Dramatically, Noahpinion calls it "The Return of the Macro Wars".
Because the Biden administration is borrowing and spending a lot of money, a huge debate has erupted about whether that’s OK. And where the original Macro Wars were fought on the blogs, the current ones are more likely to play out on Econ Twitter.
The most interesting thing about the new Macro Wars is that academic research is almost a total non-factor. ...
Why? If academics themselves weren’t involved in the debates, you could say that OK, maybe these people are just ignorant of the literature. But academics are involved, and they do know the literature; they’re just not invoking it much.
The unspoken truth here is that those people who are just not invoking theory much are mostly people who don't have very good publication records. Are these people using Twitter because they are closed out of traditional publication outlets? Or are they using Twitter to cover up the fact that they weren't that good to begin with? Or are they using Twitter to push something they like that others think is crazy?
Then Smith harks back to the observational equivalence problem I mentioned above:
... The problem is that macro theory is just really, really hard. ...
Complicating this is the fact that macroeconomic data is really, really crappy.
The question is, does that mean we don't now anything? Maybe.
Does it mean we can't know anything? Maybe.
Does it mean that politicians are better at macroeconomics than macroeconomists? I don't think that follows at all from those last two questions.
So what are people doing instead?
In the meantime, people are using heuristics, rules of thumb, and simple calculations to make their arguments. Theory has taken a back seat, simple heuristics (mostly Keynesian heuristics) are the order of the day.
In fact, I think that even heuristics derived from empirical macro research — fiscal multipliers, output gaps, etc. — are taking a back seat to simpler ideas, expressed in the form of memes. it’s worth asking whether this represents a paradigm shift in macroeconomic theory — not theory as academics do it, but theory as employed by central bankers, legislators, ...
Heuristic is a good college level word that you should look up. Do note that in other posts I've indicated that I'm OK with giving someone else a shot, and freely admitted that observational equivalence can make it hard to figure what's good and what's bad.
Smith then gets right to Mason's point:
I think Mason isn’t quite right, first of all because the Biden bill mostly isn’t fiscal stimulus, but more importantly because actions don’t constitute theory. Biden’s relief bill — and the even bigger infrastructure bill, if it passes — is actually an experiment. Like a minimum wage hike or a more permissive immigration policy, Biden’s massive spending is a bet that something economists traditionally thought would cause substantial negative consequences actually won’t be that bad.
If Biden’s bet fails, we’re in trouble. But if it succeeds, we’ll learn something valuable about the way the economy works.
Cross your fingers.
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Tyler Cowen linked to Noah Smith's post, and added this:
... I do not view contemporary macroeconomics as wonderfully predictive, but it does put constraints on what you can advocate or for that matter on what you can predict. I saw the Republicans go down this path some time ago, and now the Democrats are following them — it ain’t pretty. I think what we are seeing now is that (some, not all) Democratic economists want Democrats to be popular, and to win, and so they will rearrange macroeconomic thinking accordingly....
I'd add emphasis to this in red state Utah: if you think the Republicans have demonstrated better fiscal policy over the last 20 years, you're fooling yourself. They were the first ones to go off the rails with a spending binge (9/11 and Iraq), and we should not be surprised that the Democrats followed that with the "Obama stimulus package" in 2009, or the "Biden stimulus package" in 2021. Or, for that matter the 2 "Trump stimulus packages" in 2020, or the Trump/Republican Senate/Democratic Congress run up in 2018-19.
In no way am I claiming that this spending was not necessary or justified. We can definitely be in favor of it, and no problem if you are. Instead, what you should think about is the asymmetry: has there ever been a crisis that resulted in less spending??
Perhaps the problem is we've given free rein to people whose job it is to spend other peoples' money. Maybe we need to think more about whether you should make decisions about your money, or they should make decisions about your money.
At the time, people freaked out about this. But I now see it as an early warning sign.
Clinton, was campaigning against Obama in the primaries in 2008. Keep in mind 2 things
Anyway, she proposed suspending the federal tax on gasoline during peak summer driving months as a way to help out the economy.
She was pushed on this by Paul Krugman (Princeton University trade theorist, opinion columnist for The New York Times, future Nobel Prize winner, generally a progressive), who asked her to name "... A credible economist who supports the suspension ..."
Her response, on national TV I might add (when the networks were more important and there was no streaming), was
"I'm not going to put my lot in with economists".
Who, pray tell, was she going to throw her lot in with on economic issues??
FWIW: While she did say this, Clinton is one of those mainstream Democrats whose views have been blocked out by the progressive wing of the Democratic party.
P.S. In 2021, I was unable to find a video clip of this. But I found a transcript (read quickly or go back, to avoid the ad). The full quote is very much in line with Mason's view of the "Biden stimulus package": it's right because the politicians said so, and the economists should be closed out.
Tyler Cowen of Marginal Revolution is not happy with the "new macroeconomics" of J.W. Mason, and others. He places a good chunk of the blame for this on Twitter. For example:
“Running the economy hot” is a metaphor — it is better to respond with an actual model/argument, and noting the recovery was slow last time [in 2009-14] does not suffice!
Do note that the lack of a model has also been put forth as a big problem with MMT. No one is asking for much here ... supply ... demand ... something.
Yes, the era of blogging has passed. Probably peaking around 2007 or so, when people with big institutional backing started moving into the space. But Tyler Cowen and I go way back on this (I'm not name-dropping, just noting that we and others were really fascinated by the possibilities in the early 2000s), and some of us are still doing it. So Cowen is a little biased against tweets. Here's some excerpts:
1. ... On Twitter both good and bad ideas go viral far more rapidly.
3. It is too easy to tell people that they “completely misunderstand” something ... This leads to many bad tweets, typically tweets that…completely misunderstand something or someone ...
4. It attracts a younger set of writers than blog macro did. That makes it ... less informed about economic history, recent decades in particular. Very recent evidence and experience is considerably overstressed ...
5. Twitter macro is poor at spelling out the entirety of an empirical literature ... Blogs in contrast are/were most likely to take a more exhaustive approach to literature survey, sometimes too exhaustive [you never noticed that about Tufte, did you??]
6. ... Most coherent macro mechanisms do in fact take more than 280 characters to spell out. ...
8. Econ Twitter involves more “don’t really know anything at all” kinds of people
9. I genuinely do not understand why more tweeters do not set up free blog or Substack accounts, and, if only five times or so a year, write a longer post or column explaining and defending their views and tying them into the broader literatures. This seems to me to betray a certain kind of intellectual laziness ...
11. It is easier to express meaningful agnosticism in a successful blog post than in a successful tweet. This is one of the biggest problems with Twitter macro, and indeed with Twitter more broadly. It is also hard to express trade-offs in a successful tweet, another major problem. “We must do this” kinds of thinking are instead encouraged. [you may have noticed I often present both sides, well I hope, and sometimes won't dismiss something I dislike]
12. ... on Twitter. The morality is often third-rate or worse.
13. The one-sentence (supposed) refutation is very much overrated on Twitter ...
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For better or worse, this all seems to have promoted the economics far left (those with the label Marxist/radical/heterodox/post-Keynesian, that sometimes these days also go into stealth mode, mingling amongst progressives who might not be that far left). These used to be uber-serious people. Not any more.
Many of these people were influenced by the success of Bernie Sanders starting in 2016.
I cannot emphasize enough that prior to the very end of 2015, Bernie Sanders was regarded as a joke ... by everyone. He would not even call himself a Democrat.
Bernie Sanders went from having no cred, to some cred, by putting up good numbers against Clinton in the primaries. It does not seem to have dawned on most people that if Clinton was a bad candidate against Trump in 2016, and a bad primary candidate against Obama in 2008, that it probably doesn't say much that Sanders did well against her in early 2016.
Anyway, this might be a good time to revisit this story, which I bet you've never heard. In February 2016, Democratic economists (mostly associated with the Obama administration) started pointing out forcefully that there was little theoretical justification or empirical evidence to support Sanders campaign claims (here, here, here, and here).
Eventually, Sanders got himself some economists, and had them write a report on his plans, the evidence, and so on (Friedman was the lead author). This was quickly reviewed by top people in macroeconomics. From this blog:
But they were very diplomatic about a technical issue. They can’t explain a result that Friedman got. But they’re willing to speculate. And their speculation is that he made a conceptual mistake in his economics that led to math errors.
That’s a big deal: presidential candidate makes economic proposals that sound too good to be true supported by economist that can’t do the economics right.
Even better, the mistake is at an advanced undergraduate level, and related to issues covered in your handbook. They relate to growth vs. level effects, and permanent vs. transitory effects of macroeconomic shocks.
We are not quite up to this point as I write this, but we will cover it in the next class or two:
So what do Romer and Romer find in Friedman? They can’t explain some of his more outlandish assumptions about growth. Here’s what they suspect: Friedman presumed that a temporary shock to growth rates had a permenent effect on them, leading to estimates of ongoing growth and level effects. In the investment example, this is like assuming that one lucky stock pick in turn makes all your stock picks lucky … forever … and your investment nest egg pulls away rapidly and permanently from your competitors. The implication is that Friedman’s work is no better than a fairy tale.
We have a conjecture about how Friedman may have incorrectly found such large effects. Suppose one is considering a permanent increase in government spending of 1% of GDP, and suppose one assumes that government spending raises output one-for-one. Then one might be tempted to think that the program would raise output growth each year by a percentage point, and so raise the level of output after a decade by about 10%.
To the public, this sounds like jargon. To a macroeconomist, this sounds like “made a mistake on Tufte’s ECON 3020 Exam 3 that he’ll take off full credit for”.
And this, from March 2016, sounds a lot like the criticisms being made of the "Biden stimulus package" today:
I remarked above that the surface issues of Romer and Romer are more accessible to the general public. Here’s their summary of what they find (their original had emphasis that does not come through a cut and paste operation):
Unfortunately, careful examination of Friedman’s work confirms the old adage, “if something seems too good to be true, it probably is.” We identify three fundamental problems in Friedman’s analysis.
• First, all the effects of Senator Sanders’s policies that he identifies are assumed to come through their impact on demand. However, his estimates of those demand effects are far too large to be credible—even given Friedman’s own assumptions.
• Second, in assuming that demand stimulus can raise output 37% over the next 10 years relative to the Congressional Budget Office’s baseline forecast, Friedman is implicitly assuming that the U.S. economy is (and will continue to be for a long time) dramatically below its productive capacity. However, while some output gap likely still exists, the plausible range for the output gap is much too small to accommodate demand effects nearly as large as Friedman finds. As a result, capacity constraints would likely lead to inflation and the Federal Reserve raising interest rates long before such high growth rates were realized.
• Third, a realistic examination of the impact of the Sanders policies on the economy’s productive capacity suggests those effects are likely to be small at best, and possibly even negative.I encourage you to, but won’t require you to, read the Romer and Romer paper. It’s fairly accessible, and has lots of clear thinking about the data, different viewpoints, and how economists assess policy.
That advice was from 5 years ago in this class, but it seems especially relevant today. And I think that Tyler Cowen's criticism of Twitter economics is that it has allowed a lot of otherwise smart people to buy into this nonsense without thinking through the details.
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It gets worse.
After being publicly exposed on this topic ... Sanders never admitted the mistakes in the position paper with his name on it, or withdrew it from circulation.
In 2016, Sanders faded away as the Democratic Party machine, more or less stole the candidacy for the less popular Clinton. The Sanders people came back strong in the years in between to make sure that the primary system for 2020 better represented the people who vote Democratic. More power to them; Sanders really did get screwed over in 2016. Unfortunately, we now seem to have advisors in the Democratic White House that aren't really in the center of the Democratic Party.
Summers was on the record before ARPA was passed that it was too big:
Summers calculated that in 2009, the gap between actual and estimated potential output was $80 billion a month and that the Obama stimulus covered about half of the shortfall.
At the moment, Summers estimates the gap to be at $50 billion a month and said the Biden stimulus would address three times that.
Furthermore, Summers noted that in 2009, unemployment was skyrocketing and projections of future consumer spending looked bleak.
In the current climate, unemployment is falling and economists believe consumers could be poised to start spending some of the $1.5 trillion in accumulated savings from the lockdown.
And this was what he said last week on PBS, and it's not exactly anti-Democrat:
“I think this is the least responsible macroeconomic policy we’ve had in the last 40 years,” Summers said.
“I think fundamentally, it’s driven by intransigence on the Democratic left and intransigence and completely unreasonable behavior on the whole of the Republican party,” he continued.
“There are more risks in this moment that macroeconomic policy itself will cause gray consequences than I can remember,” Summers said. “There’ve been terribly serious moments in the past, but then macroeconomic policy was trying to stabilize things.”
“Now there’s the real risk that macroeconomic policy will be very much destabilizing things,” he concluded.
In principles, we talk about how the problem with the slowness of politics is that the same policy can be countercyclical at one point in the business cycle, and procyclical a few months later as conditions improve. That's what Summers is driving at.
Here's a longer piece from the Washington Post entitled "How Larry Summers Went from Obama's Top Economic Advisor to One of Biden's Loudest Critics". It's interesting, but I also found that they seemed to quote a whole lot more pro-Biden/ARPA people than they did people who support Summers' position.
Summers was also the author of a 57 page memo that was not supposed to see the light of day, but which was outed in The New Yorker in 2012. It was written while Obama was still President-elect, and Summers was part of the transition team. It asserted that the practical limit to how big the "Obama stimulus package" could be was about a third smaller than it ultimately was. Summers got outvoted then too. But today, the impression of the effects of the "Obama stimulus package" amongst economists is that it was vastly overrated. To me that sounds like Summers was right. Of course, the "Biden stimulus package" is about 140% bigger than the "Obama stimulus package", it was preceded by 2 big stimulus packages, the economy is only about 25% larger now than it was then, and the unemployment rate ... even after including people who have dropped out of the labor force is lower than it was in 2009-10.
Lastly, you might want to go to this transcript of an interview with Ron Suskind. He wrote an insider account of the Obama administration in 2014. In it he discusses Summer's openly voiced view that the Obama administration lacked "adults in the room". (You don't have to read the whole thing: just do a CTRL+F and search for occurrences of 'adult' in the webpage). It kind of seems like the teenagers have finally ditched the adults in the Biden White House.
"Running the economy hot" is the buzz phrase of the last month. The metaphor is of an engine that's more efficient when it's run at higher RPM. Your car does this: it probably chugs a bit while idling at a signal at about 650 RPM, but it purrs when you drive around town at 1800 RPM.
In the pandemic/lockdown recession, this metaphor suggests that previous administrations and Congresses did not give the economy enough gas (probably because mean Republicans somehow benefited from this), and only this spring has Democratic control of Washington come in the nick of time to stomp on the gas.
As if.
Tyler Cowen is economics most popular blogger, a columnist for Bloomberg, and professor at George Mason University with a serious (but not amazing) publication record. Back in January he posted this (quoted nearly in full, no need to click through):
In Keynesian economics, “running the economy hot” boosts employment by lowering the real wage.
In Lucasian economics, “running the economy hot” boosts employment by fooling people into thinking that real wages are higher, when they are not.
In #thegreatforgetting economics, “running the economy hot” boosts employment and real wages by…boosting employment and real wages.
It is actually the much-maligned supply-side economics that, at least in principle, makes sense here.
That's not a real hashtag. Rather it's a sort of a text meme that they use at Marginal Revolution to draw attention to the fact that a lot of tweeters seem to not know much that happened before a decade or so ago. (And personally, I think a lot of those people are still upset that Obama didn't turn our world into one in which unicorns eat candy and poop rainbows ... and their preferred solution is to amp things up this time around).
In Bloomberg two weeks ago, he gave a fuller (and lower level) explanation in the article entitled "Will 'Running the Economy Hot' Really Help Workers?" (this might be gated, check the library if you can't find it online).
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The thrust of all this is that a lot of people seem to be ignoring tradeoffs ... ya'know, that core thing we start teaching you in the first week of principles of micro?
The tradeoff to think about is that employers do not employ people out of the goodness of their hearts. They employ them because they are worthwhile. And ... at any point in time they're probably OK with the mix of workers and wages they have, since if they weren't they'd be changing things in an obvious way, and most of the time we don't see that.
Employers would happily hire more people if they could pay them less. This is the Keynesian story.
Employees would happily work more if they were fooled that they were getting paid more, while employers would take advantage of that is they have better information. This is the Lucas' story.
Running the economy hot means pushing demand to shift to the right with fiscal policy, causing a movement up and to the right along supply. Q goes up, and P goes up (and remember that a wage is a form or price). Ouila!
This runs into the problem that demand shifts have transitory effects. Some people don't like all the extra work, and they respond by demanding a higher real wage. But note that's the opposite of the two one-sentence stories laid out at the top. In both of these stories, it means that rising employment will be followed by falling employment ... a point some of you may remember from my principles class.
An additional problem is if the effects are transitory, and you're an elected official, that next election is a very serious event. And the way that you make transitory effects "permanent" is by following them with more of the same. It isn't a mistake that as soon as ARPA was passed, that the White House started pushing for a big infrastructure bill. It isn't a mistake that ARPA, like the ARRA of 12 years ago, really spreads the spending out through time, so that as the effect of earlier spending fades, new spending comes online.
All in all this might be a good time to go back and skim Friedman's 1968 Presidential address to the American Economics Association, or Edmund Phelps who'd been making the same point for a few years before that. Not surprisingly, they both went on to win Nobel Prizes. Hmmm. The point they made back then is that each repeat of the expansionary fiscal policy cranks up the inflation rate by a bit ... and that it has no little tendency to come down on its own ... until you start pursuing contractionary fiscal or monetary policies. In the U.S., it took about 15 years for the 'run the economy hot' people in the 60s and 70s to begin to undo their damage. Of all people, it was a Democrat — Jimmy Carter — who came to his senses first.
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4/16 Update
It occurs to me that the quote "It is actually the much-maligned supply-side economics that, at least in principle, makes sense here." might not make much sense to students without a little more background.
Supply-side economics is the idea, mostly associated with some Republicans (like Reagan) that the economy would improve if government focused more on the (aggregate) supply side.
The name itself is kind of a slam at Keynesian policies that prevailed before 1980. Those were focused almost exclusively on the aggregate demand side.
Now, there's some rhetorical sleight-of-hand here: suppliers of goods and services are the ones who demand labor. (In micro, this is called a derived demand). So a policy that helps out suppliers is going to shift the demand for labor to the right. That will tend to increase both Q and P: in the labor market, those are employment and wages.
Cowen's snarky point is that supply-siders (though much-maligned over the last 30 year) at least had a theory of how they were going to increase employment and wages at the same time. And, while there's a lot of people in denial still, the data tends to support their position.
Cowen asserts that #thegreatforgettingeconomics don't seem to have a theory about how this will happen, and given his assertion elsewhere that there's little evidence for procyclical wages without a supply-side push, no past data to back themselves up with either.
BS asked after class if we are in the midst of a bubble in residential real estate.
First, let me emphasize that bubbles are hard to spot when you are in them.
Secondly, I tend to be overly optimistic. I was in denial about the bubble in home prices in 2006-7.
Third, my answer, without hesitation, is yes and it's going to end badly.
Houses being flipped is a very bad sign. That behavior should not be profitable. When it is, it's because there's something amiss.
Also, in the pandemic/lockdown recession, there is no general shortage of income (which is what is so crazy about the "Biden stimulus package"). There are absolutely some types of workers who are hurting, but that's specific rather than general. There is also less to spend your income on these days. This is why we saw bubble behavior and herd behavior with things like GameStop (and other stocks).
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The data to look at for this is the Case-Shiller U.S. National Home Price Index, available on FRED. Remember what I taught you: download the data (if interested) and don't look at it until you log it. It's reasonable to think home prices will trend through time.
What this shows is that the bubble is still small and of very recent vintage. Growth rates for home prices held quite steady at about 0.4%/month for the 9-10 years up until February 2020.
And then COVID-19 hit. For obvious reasons, a lot of people wanted to move to less populated areas, with less pervasive lockdowns. Fair enough. But we also had a government pursuing an expansionary fiscal policy (2 stimulus packages under Trump), and another one under Biden. The average growth rate is double since the start of the pandemic/lockdown.
Not.Prices.Doubled ... Growth rates doubled. That means that in a graph of logged data, it's slope is getting steeped. In the huge bubble that popped in 2006, home prices did this for 8-9 years before the bubble popped. Of course, they're called bubbles because they can pop at any time, so we should not expect this current bubble to go on that long.
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What do we do about bubbles? Prick them. Macroeconomically, we do this by raising interest rates until less informed buyers get the message to stop overdoing it. Yes, bubbles do seem to be preferentially caused by the buyers, not the sellers.
Except last week, the Fed announced that they don't see interest rates going up until 2024 at the earliest.
I get it. COVID, right? But, as always, there are tradeoffs in the real world, and we need to be seriously weighing low rates to promote demand, versus high rates to discourage it.
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I also mentioned that there was a video about this that I'd lost in the depths of the internet. It came out in April 2006, a few months before markets started peaking in Miami and Los Angeles (the first places where the bubble collapsed). It showed a home price index going back to 1890, plotted as a virtual roller coaster.
I have looked for it in the past, but have been unable to refind it. Stuff disappears after a while on the internet. But it always pays to keep looking, because people who download things often re-upload them when they go missing. So today, it was easy to find again. Check it out:
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But, you might ask, didn't we regulate these markets more seriously to address problems?
My opinion is that all of that, like Dodd-Frank, was just regulatory theatre. Plausible action that's just make believe. This is not an uncommon viewpoint amongst macroeconomists and financial professionals. Now, having said that, this does not mean I have a lot of great ideas for better regulations that they might have tried. I don't. The fundamental problem is that humans are goofy, buyers' herd behavior and ignorance creates bubbles, and we should get used to them as a natural albeit nasty phenomenon.
That thing in the background that looks like one of those isolated mountains we get in Utah is actually the rest of the roller coaster you just rode.
Fun Fact: I might be only person you know who's been on not one but two roller coasters when they broke: at the top just before the first drop on an outdoor one, and near the top but going full speed on an indoor one in the dark.
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P.S. I always like to relate to student two personal stories about the crisis.
First, my wife and I were at a restaurant called Garden House (the building is still there, but it hasn't been a restaurant in many years). I'm not sure how we did it, but we were without our kids who were 8 and 5 at the time (woo-hoo). We got to talking to the couple at the next table. He was a new professor at SUU (this was his last stop, he retired a few years ago). Anyway, they had come from FGCU near Fort Myers. That area of southwestern Florida was one of the first places where the bubble collapsed hard and fast. They remarked that they were glad to get out of there, and had lost a lot of money selling their house. I was shocked and surprised. The housing bubble was not yet on my radar screen, although I'd noticed that appreciation in my neighborhood on Leigh Hill had stopped. The date? August of 2007 ... about a year before the financial crisis got really bad.
Second, a better connected SUU faculty member who does a lot more consulting used to occasionally farm some work out to me. He passed some spreadsheets to me, and wondered what we could do with it. It was from a very large international bank. And they were worried that before, people had gotten behind on their mortgages and then recovered, and now they weren't: people were slipping from 30 days behind, to 60, to 90, and so on, without showing any improvement. This bank was worried about having these assets on its balance sheet, and wanted better forecasts of this data. The consulting job was competitive, and really before we could put much together the bank told us they were going in a different direction. It happens. The date? December 2006, a little less than 2 years before the financial crisis got really bad.
John Cochrane is a very big name in economics. MIT Ph.D. (a top 5 program), professor at the University of Chicago in the business school (a top 5 program), got an offer he couldn't refuse from the Hoover Institution (part of Stanford University). Has a new book out, with a theory of why we didn't see huge inflation after the Federal Reserve (and other central banks), in the wake of the financial crisis, bought everything in sight and supplied ridiculous amounts of reserves to the financial system. As always ... Google Scholar. I am not slamming Heather Boushey here, who has 10 times as many citations as I do: she is on the CEA for a reason, it just isn't that she's mainstream. John Cochrane is, and he has 10 times as many cites as she does, or 100 times as many as me. Cochrane is at the core of neo-classical economics over the last 30 years. I don't know his politics, but I'd say he leans right.
John blogs at The Grumpy Economist, and posted "Back to the 60s" in response to Mason's post:
It's mostly wrong, I think, but very thoughtfully puts together the wrong ideas behind contemporary policy macroeconomics.
...
The post is brilliant for systematizing the emerging view of economics in the Biden Administration, in much of the Fed, and its academic allies.
Here is Cochrane on Mason's description of mainstream macroeconomics:
That's an excellent description of post 1970s, Lucas, Prescott, Sargent, Friedman macroeconomics. Unlike some other commenters from the "left," one cannot accuse him of ignorance. "Catechism" is a deliberate insult, as the view came from substantial theory and evidence, but let's leave that alone.
He puts this into a graphic worthy or a principles book:
The belief in the 60's was that shortfalls in demand could be "filled in": we could start with the solid line and improve to the dashed one. Cochrane asserts that this is why developed nations had a 20 years struggle with high and rising inflation, from the mid 60's to the mid 80's. After that, we didn't push as hard. In the bottom panel we start with the jagged line, and try to smooth it into the dashed line. What Mason is asserting is that we can "run the economy hot" and get up to the solid line again.
This assertion will surprise survivors of the 1970s, when overheating manifestly did not lead to greater productive capacity, and the inflationary gap did not close on its own.
The rest of the post gets harsher, but covers mostly the same ground that I did in my posts.
