John Cochrane's Response

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.