Macro was
born and it is in the process of dying. I am not being melodramatic. Lots of
things have finite life cycles. Take the hula hoop. It was great while it
lasted and back surgeons are still raking in the dough as a result of it. But
it is now hard to find a hula hoop. The death of macro is not necessarily a
negative thing -- I would call it evolutionary. It came, it served, and then it
outlived its usefulness. I will argue below that we will replace it with
something I humbly call Davidsonian Economics. I am really crappy at naming
things so if you are among the first 10,000 people to write back with a better
name I will give you 79% of my future royalties.
To explain
the process and what this means to us requires me to write a little about the evolution
of macro ideas. I am going to try to do this in two ways. For normal humans
I am going to summarize the main points and use a lot of bolding and
underlining. Soon you can go off to your regular routine – e.g. kissing the dog
and petting the wife. For those of you afflicted with bottomless boredom and
something akin to a PhD, I will drone on with details until you are ready to
rent the full library of Fidel Castro’s speeches.
First, the
brief summary and by brief I mean less than 743 paragraphs. Great ideas always
stem from real human problems. When I grew up polio was a disease that affected
too many people. Scientists then found a cure and mankind was made immeasurable
better. The results are not always so clear for social sciences – but during
and after the Great Depression a lot of people wanted to try to “cure” us of
future depressions and recessions. John Maynard Keynes was one of those
people. His work was carried on by economists
we call Keynesians.
Today we are
faced with the lingering impacts of a Great Financial Crisis and World
Recession– and many great minds are trying to find a cure for the latest social
science disease – slow economic growth. So if you believe what I write below then you
have become a Davidsonian – and we will have started a new economics we will
call the Davidsonian School of Thought. Our colors will be Cream and Crimson
and our favorite liquor will be of course JD. I hope to add some cheerleaders
soon. Now to the evolution we call macro...
Before the 1930s – No Macro – Adam Smith’s “invisible
hand” cured most economic disturbances; economic growth theory focused on
supply factors. Neither monetary nor fiscal policy was used to offset
short-term recessions. Monetary policy was geared to keeping prices stable in the long-run.
1960s Keynesians said workers were slow to discover
rising prices and could be “fooled” into supplying more labor whenever asked.
Governments could fool firms into thinking prices and profits would rise when
government stimulated demand. An increase in government spending or a reduction
in income tax rates would, therefore, lead to more demand for goods and services and firms
would produce more goods and services. Workers would find out later that their
wage increase didn’t buy more goods and services as they discovered the higher prices of goods and services. By then the recession was healed. Keynesians
preferred fiscal policy over monetary policy.
1970s Neo-Keynesians and Monetarists saw the Stagflation of the 1970s and
emphasized what happened when workers caught on to the policy-demand-inflation
game. After a period of rising demand and economic growth, workers would want
bigger wage increases and this led to another recession – but this time with
higher inflation. Ugh. Stimulus worked as long as you could fool the workers about
the cost of living. These economists saw the risks involved with macro policy
but gave it a green light so long as policymakers didn’t get carried away.
1980s Rational Expectations believed that workers, after living
through inflation and stagflation, would be better at incorporating inflation
expectations into their current wage bargains. Thus they were harder to fool.
This took the bang out of the ability of government to stimulate the economy
with fiscal or monetary policy. If policymakers were not careful, a stimulus would have
little to no effect on employment and output.
1980s and Beyond Neo-Supply-siders seeing that the impact of
demand-based stimulus policy had peaked started focusing on using policies that
directly impacted the decision to employ workers and produce more output. While
supply-side policies do not adversely affect inflation they do often appear to
worsen the income distribution. Politically supply-side policies are a little
like gun confiscation advocates in Nevada.
2013 and Davidsonians find us with a new behavioral
assumption – that politicians are dumber than rocks and cannot be trusted to
fashion a successful economic program. Despite really strong (as in kimchi) economic
demand stimulus, the US economy continues to clank along at school-zone speeds.
Even the mention of new expanded stimulus programs sends shock waves over
national debt reaching crisis proportions. Such policies immediately create
uncertainty and very conservative behaviors on the part of workers and firms.
Notice that if you are not asleep yet we have gone full circle in the last 75
years from a time when we had no demand policies; to when they were lauded; to a
precautionary phase; to no impact; to finally a stage of perverse impact. That
puts us back to where we were before the 1930s.
We are back
to something more like the Classical Theory. The only way to improve employment and economic growth is to restore competition and remove regulations that prevent wages and prices
from clearing markets. Today Keynesian
stimulus programs reduce confidence and need to be replaced by financial and aggregate
supply policies that raise confidence and reward firms that improve productivity and control costs.
The days of fooling firms and workers is over. There is no magic wand. You can't get something for nothing. Cyprus reminds us all one more time of the dangers to debt. What makes the economy grow has never changed -- entrepreneurs and businesses need to innovate and take risk. We need an environment that rewards and facilitates that process.
I think you are on to something. Real growth occurs when something of value is produced and then sold at a price commensurate with the perceived ...not bubble...value built in. There are other ways, like pumping in large chunks of money for short term spending spurts or fixing the interest rate at a very low price but those are very short term and have a long list of unintended long term side effects. Money have to have value and has to come from somewhere. Otherwise it loses value and we have inflation with recession following.
ReplyDeleteThere is another way to look at this issue. This is the first time in the short above described history of Macro Economics that machines have taken over a large chunk of jobs...including agriculture. Where 5 workers once earned wages there may be 1/2 of a worker needed. What do these displaced workers do? In our somewhat social based economies payments are transferred from those who have paying jobs to those who have no or some underachieving job.
Even with this, the distribution of wealth has resulted in a very few people holding a very large portion without the middle class workers who used to work the aforementioned jobs. The machine/digital/electronic age arrived too soon and definitely before alternative jobs could be developed.
Yes, regulations interfere with Adam's hand but there are many paradoxes and exceptions. If left alone, some industries would pollute the water until it was undrinkable and the only defender would be the personal injury attorney. Just small example of stop gaps to excesses found in manufacturing...not to mention many other issues that protect the people. On the other hand, I am not a bleeding liberal and agree that the government is bloated and the main job of the people who work for it is to protect their job buy supporting the creation of government jobs.
Ah, back to the days of Calvin Coolidge, the first man to discover that Supply-side Economics is not "Voodoo Economics" at all. We'll probably never see those days again. I say "probably" because experience in the military taught me never to say never.
ReplyDeleteDear LSD. Hi. Hope yer doin better after the Hoosiers NCAA loss; at least they lost to a Final 4.
ReplyDeleteI listened today to Michael Medved’s interview with an avowed Communist active today, mostly in unions et al. I don’t recall the C’s name. It’s infrequent to hear a candid interview with a C. His message was that his movement is growing—gaining sympathy and momentum and that ‘merica has been moving (aka Progressing) toward C for the last three centuries, since the Jeffersonian agri-economy, slavery, civil war deaths, war and butter and so on—his point being that free market/capitalism can only flourish by exploitation/death of workers. Medved inquired about the millions of deaths in the Russian and Chinese revolutions; the C’s response was those deaths resulted from poor execution (pardon the pun) of revolution—apparently this C advocates “bloodless” revolution such as the masses “taking over” the govomit ‘cause the military will have succumbed to the C siren and therefore no need for bloodshed.
I was less taken by his ideas than his matter-of-fact commentary—as if it’s a foregone conclusion that C will not only take over the U.S. but the world. One concept was that the U.S.’s high productivity—industrial, ag, etc.—would be used to uplift the rest of the world and that decisions to allocate U.S. productive resources would be made by committee. (Hm-m-m-m-m, sound similar to circa 2008-2013—but, hey, I digress . . . just a coincidence, I’m shure). The C movement is alive and well.
Last night I watched a 2006 movie, All The King’s Men, (Sean Penn as Willie Stark), novel/play inspired by the life of Huey Long, LA gov in ‘30’s. Penn should have gotten Oscar’s best actor award. His campaign rhetoric (aka Long’s) was too uncannily similar (in the 30s?!!!) to Obummer’s regarding taxing the rich, the oil companies, high taxation, and redistribution of wealth—too obviously targeted to and emotion-laden for consumption by the “ignorant” masses (hicks and rednecks in the movie . . . general population today).
Yeah, I know. What, do you ask, does all this have to do with the evolution of macro? Technically, literally, nada. But, here’s the relevance; economic theory is irrelevant to the ignorant masses. Despite all the econ numbers of and proof of failed (politico)/econ systems like C, socialism, fascism, and other erstwhile utopian fantasies only free market/capitalism has produced the most lasting positive record. But even the “enlightened elite” (can you say yer fav Mr. Krugman?) advocate for less free/cap stuff. Go figger. Here’s my final point (yea, you say!): Give it up, it’s over, baby, it’s over. We, the world, has peaked and tipped over the tipping point. Too many Libs/Regressers, U.N.s, IMFs, World Banks, ECBs, ooh ooh ooh and let’s not fergit the Fed . . . the big enabler of’m all.
Say g’night, Gracie.
Never say never. Who knows. There is a new business book coming out ( as if there are not enough of these types of books where the money maker is the author). It deals with the digital and global future. I is written by the person who founded Google with inputs from numerous notable geeks. It appears to be not of the same old same old that shows up in most business books and may address this issue. How to solve the periodic recessions in capitalistic countries who have global trading and instant knowledge....that no companies had prior to 1995.It is a new world of which I may be too old for.
ReplyDeleteDear Charles,
ReplyDeleteI hope you feel better. As for basketball, I am over my depression and am ready to root for Syracuse. I love their style of basketball! As for the rest of your rant my preference is to enjoy the sun while it is shining. Having spent my whole life learning and teaching macro -- there is no joy in giving up on all that. There will always be be people who disagree with me but it sure is a lot of fun getting into the fray. If I lose then at least I tried. Luckily despite the best political and economic models -- no one knows what the future will bring. I hope you are wrong about the tipping point and I will gleefully move forward under the assumption! g'night Gracie.
Hi, James. As a new-to-be-published-author I’ve become aware of the increasing number of new books arriving on our “shelves” daily on many subjects. I also watch TV newz a lot, mostly politically oriented, and—unfortunately—am pretty much up-to-date on political/econ/financial stuff. I’m not a happy camper . . . as my post to LSD indicates. Yeah, we’re becoming the old curmudgeons we made fun of 40 years ago and most likely will not understand all the new stuff—particularly those/that which pertains to the geeks/new world/digital guys to which you refer. Yeah, world commerce is moving at light speed (metaphorically, since growth rates vary regionally but globally overall at a snail’s pace) and we old guys won’t be able to grasp the short-term implications . . . I guess that is what you suggest. But, I’m skeptical that a digital-oriented-geek-money-maker guy has a more viable formula on “. . . how to solve the periodic recessions in capitalistic countries who have global trading and instant knowledge.” I believe the human/markets dynamic are too powerful and unpredictable to be harnessed by micro instantaneous info-feedback-loops/algorithms such that economic ups/downs can be mitigated. Segueing from global/financial markets to the more mundane market for new books, I would take that new book by Google’s founder with a grain of salt and room-temp lager.
ReplyDeleteNever say never? Well, maybe . . . to give a slight nod to optimism . . . like the glass is half full rather than half empty. LSD wants the former . . . and a fine outlook it is . . . but I think global trends—widening gap between halves and halves nots, disparity in aging of populations, growing population of uneducated and uninformed (at least in the U.S.), propensity toward debt, dilution of currency values absolute and relative, looming trade frictions, growing terrorism, more movement toward collective governing philosophies rather than capitalist, and so on bode ill despite the digital age. That it can move info faster, better, cheaper than before will not, I think, alter the fundamental trajectory of the aforementioned trends . . .
This is great fun watching you two dudes duke it out. :-) Keep up the good work. Larry
DeleteCould be a good discussion. The threads are quite clear. Today in the US the income distribution is the most one sided since the founding of the country. A general statement. The question is "what circumstances got us here?" What impact does this distribution have on future economic growth? Combine this with rapid pace technical change, machinery and computers replacing former jobs and global competition with countries with income distribution worse than ours what will be the results.
ReplyDeleteAs man emerged from hunt and gather to agriculture there was a 3,000 year span until agriculture lost its place in line and manufacturing took over first place. This took 200 years. Jobs in both industries have been replaced for the most part at the middle and lower levels by machines and digital technology. That started in the 70's and is well underway. Where is this leading 3,000 years/200 years/30 years? What does this do to the free market model because governments have made adjustments via regulations and how capital flows in the free market that has begun to make the free market no so free...what impact will this have? Is the system broken or do we need a new version? That is for you academics to figure out but time is of the essence and political tampering will not work.
I like the post. It's hard to say whether Keynesian effects are out there. But it's purely a theoretical question, because what is clear is that we cannot trust the politicians to administer the optimal Keynesian policy if there is one. They'll use it for pandering to voters, and the uncertainty over who exactly they'll decide to pander to, and how much, freezes everybody else as we wait for them to act before we do any big investing or consuming.
ReplyDeleteAnyone who invested in solar power in 2007 was crazy. The optimal strategy was to delay till 2008 and see if Obama wins and you get can get a huge subsidy (and if Obama had lost-- invest in solar power in 2009 anyway, if it has positive PV).
"Bloodless revolution" and "Communism" seem to be mutually exclusive terms. It'll be hard to find a bloodless revolution where Communism is involved. Lots of blood when Mao took the chairmanship. Pol Pot sprayed quite a bit, too. Ol'Joe Stalin tracked it all over. The bloodless revolution thing is more appropriately associated with the Fabian Socialists. Today, we'd call them Progressives, and they've been at work since at least Woody Wilson. They're a patient bunch using the incremental approach. Once they get enough of us common folk slurping at the government trough, it's all over but the shouting. I'm thinking we're about there.
ReplyDeleteJim: Could be a good discussion. The threads are quite clear. Today in the US the income distribution is the most one sided since the founding of the country. A general statement. The question is "what circumstances got us here?"
ReplyDeleteel Tuna non-academic: What got us here? Being the good guy. Allowing developing economies in the 50’s access to our markets that eventually led to shipping jobs overseas, mostly high-paying labor-intensive jobs that built the middle class, facilitated upward mobility and attendant income gains. Additionally, compromises between Rs and Ds led to expanded govomit and liberal social policies and legislation that eventually watered-down self-reliance/responsibility and led to debt rather than equity, both on the individual level and national govomit level. Continued liberal influence in education has resulted in a decrease in the quality of K-12/college grads. All general statements, but the unintended negative consequences (assuming causation) of these trends—I believe—are undeniable.
Jim: What impact does this distribution have on future economic growth? Combine this with rapid pace technical change, machinery and computers replacing former jobs and global competition with countries with income distribution worse than ours what will be the results?
el Tuna non-academic: The result? Bad doodo. The aforementioned trends occurred slowly over 50 years and reversal in the short term is impracticable; will probably continue for years unless there is less compromise in Ds favor in DC. Impact on future econ growth?—There will be a lot of friction (headwinds, as the talking heads say) that retards quicker recovery as seen in past recessions/slowdowns. Continued govomit expansion as the expense of free market/capitalism and increasing social/economic unrest. As much as the small engine that could (businesses) tries to overcome the gravitational pull of more taxes and regs, it will continue two meters forward and 1.5 back. The U.S. has no plan—at least under the current Coconut head—to create jobs to replace the good-paying ones of the 50s-60s—and the education level of grads cannot meet the requirements of existing well-paying jobs. Earning/income disparity will continue.
Jim: As man emerged from hunt and gather to agriculture there was a 3,000 year span until agriculture lost its place in line and manufacturing took over first place. This took 200 years. Jobs in both industries have been replaced for the most part at the middle and lower levels by machines and digital technology. That started in the 70's and is well underway. Where is this leading 3,000 years/200 years/30 years? What does this do to the free market model because governments have made adjustments via regulations and how capital flows in the free market that has begun to make the free market no so free...what impact will this have? Is the system broken or do we need a new version?
ReplyDeleteel Tuna non-academic: The encroachment of govomit in the free market/capitalism has got to stop . . . even recede. Got to get less compromise betwixt Ds and Rs. It’d be good that for every new law/reg passed one taken off the books. The cost of compliance is killing commerce/innovation. The trends in technology replacing labor is—as you imply—unstoppable. Exacerbating this trend is the increasing number of uneducated/uninformed unskilled workers entering the workforce; the emerging and growing technological trends need educated, informed, intellectually-skilled workers. There is a chasm between that demand and supply that has not occurred overnight. It’s the consequence of legislation and policies of compromise between Ds and Rs since WWII—the consequence of govomit interference in the free market/capitalism. Is the system broken?—Yes. Do we need a new version?—No. I think the old version of free market/capitalism would have worked just fine if left to its own vices—despite all its blemishes and warts. Let capital flow freely as it initially was intended; let free markets be free; let capitalism work its wonder.
Jim: That is for you academics to figure out but time is of the essence and political tampering will not work.
el Tuna non-academic: Political tampering is what got us here. Today’s academics (BTW, I yam not a yacademic), given their left-leaning sympathies are not the answer. Get govomit out of free market/capitalism and give the yacademics basic books on reading, writing, and ‘rithmatic and in 50 years we might experience income equality and regained global competitiveness. A general statement.