What Will Be the New Economic Paradigm?
Matt Yglesias has a great post over at Moneybox (paragraph breaks added):
… The Depression discredited the gold standard and a whole set of related notions.
The Great Inflation discredited ideas about the Phillips Curve …
We had, until recently, the Great Moderation Consensus that … the Federal Reserve has the ability to stabilize the macroeconomy by fiddling with interest rates.
Well now here we are and the Federal Reserve can’t stabilize the macroeconomy by fiddling with interest rates.
That calls for the creation of a new regime.
I’ve dumbed it down a bit here. He also talks about employment, for instance, including this great line:
…if the government isn’t abandoning the idea of full employment then they have a mighty strange way of showing it.
But I think I’ve imparted the main question. We’ve been or are going through a paradigm-falsifying “moment.” (As always, some good thinking will be cast aside along with some bad.)
What will move into the vacuum left by the (at least partially) ravaged Great Moderation paradigm?
Courtesy of David Beckworth and The Kauffman Foundation (PDF), here’s how econobloggers would like that question to be answered (thanks, FTA, for the great question):
Personally, I fondly envision some coherent amalgam of the M&M gang: Market Monetarists (NGDPers) and Modern Monetary Theorists (with a decent dose of the Austrian’s insight into real-economy production and productivity). I’m guessing that some have already ventured (some parts of) this amalgamation, quite possibly in posts I’ve already read and since forgotten. Thoughts? Links?
(Even as I post this I find that vimothy, JKH, and Steve Randy Waldman are worrying productively at parts of this very question in the comments here.)
Cross-posted at Asymptosis.
NGDP targeting isn;’t outside the orthodoxy, it’s the orthdoxoy doubling down and taking itself to its logical extreme.
I’m sure NGDP targeting won’t work. I’m not sure if its implementation will have negative side effects though, which makes me tempted to support it so the mainstream will be completely exposed.
Urgh, poor comment. I meant *if* someone can convince me it won’t have a negative effect I’d potentially support its implementation, should no better option be available.
I’m one of the people who voted “None of the above.” Sadly, we are a minority. (The convexity effects of NGDP targeting are left as an exercise to the reader, since the economists voting for it have not–I hope, for their sakes–thought them through.)
Still chasing what even Einstein couldn’t resolve: The theory of everything.
How about we let people trained in ecology and environment have a crack at it.
Optimisim in my hope for an M&Ms convergence — this quote from Scott Sumner, which I have little doubt the MMTers will embrace wholeheartedly (even while it bodes ill for a convergence with the Austrians):
“conservatives need to acknowledge that we live in a fiat-money world, and we need to figure out a way of managing paper money that does the least damage to the broader economy. That means we can’t dodge the hard questions of macroeconomics and blithely assert that we oppose the Fed’s “meddling” in the economy.”
Another problem the “hard” Austrians have is the greater the rise, the harder the fall, greater the turmoil. They still have not learned the final part of that phrase from the Great Depression.
It could set the stage for a government they may not like. Dealing with the paper money and handling it through NGDP targetting is where Hayek transcended Mises.
Patching the $600B/yr hole in the economy that is the trade deficit — money that is bleeding out of the paycheck economy never (or not soon at least) to return as wages.
Fixing the $1.25T/yr we’re losing to rent-seekers in health care. Per-capita health costs are $8000/yr, twice the global average. That’s ~$10,000/yr per household per year and it’s only going to get worse as the baby boom continues to hit 65.
Reducing the dead loss that is our $800B/yr defense bill. That’s 12% of wages off the top — 6 work weeks a year, or one hour out of every workday requried to pay for defense.
And as a Georgist I’d say we’ve got to eventually do something about the rents being extracted from the lower 3-4 quintiles via real estate. Fat chance of that though, we’re collectively way too corrupted as a society to see the problem let alone address it.
The bottom line since 2000 is that all these imbalances have caused us to way over-leverage ourselves:
http://research.stlouisfed.org/fred2/graph/?g=4JI
— we’ve been living in a fictional economy. Dunno how long we can continue it, maybe a decade or two.
2026 is going to be an interesting milestone, both the 250th July 4 anniversay and also the first year the entire baby boom is eligible for SSA, being aged 62 – 80.
We’re not going to have our house in order by then, I don’t think.
Patching the $600B/yr hole in the economy that is the trade deficit — money that is bleeding out of the paycheck economy never (or not soon at least) to return as wages.
Fixing the $1.25T/yr we’re losing to rent-seekers in health care. Per-capita health costs are $8000/yr, twice the global average. That’s ~$10,000/yr per household and it’s only going to get worse as the baby boom continues to hit 65.
Reducing the dead loss that is our $800B/yr defense bill. That’s 12% of wages off the top — 6 work weeks a year, or one hour out of every workday requried to pay for defense.
And as a Georgist I’d say we’ve got to eventually do something about the rents being extracted from the lower 3-4 quintiles via real estate. Fat chance of that though, we’re collectively way too corrupted as a society to see the problem let alone address it.
The bottom line since 2000 is that all these imbalances have caused us to way over-leverage ourselves:
http://research.stlouisfed.org/fred2/graph/?g=4JI
— we’ve been living in a fictional economy. Dunno how long we can continue it, maybe a decade or two.
2026 is going to be an interesting milestone, both the 250th July 4 anniversay and also the first year the entire baby boom is eligible for SSA, being aged 62 – 80.
We’re not going to have our house in order by then, I don’t think.
Steve:
More than likely, the Fed abandon Employment policy and did so since Volcker. There policices are skewed to Copocracy and Wall Street.
Steve:
More than likely, the Fed abandon Employment policy and did so since Volcker. There policices are skewed to Corpocracy and Wall Street.
Macroeconomic policy/theory has always been a reactionary endeavor. We always undergo paradigm shitfs when realiy butt heads with the blackboard.
Macroeconomic policy/theory has always been a reactionary endeavor. We always undergo paradigm shifts when reality butt heads with the blackboard. It makes one question the validity of the science.
Yglesias offers two observations that I find interesting from a political angle. The first is his reference to Ryan, Gingrich, and Perry pushing for an overthrow of the economic regime. Yglesias, perhaps inadvertently, points to the reality that the next economic regime will depend on political thinking and calculation as well as economic thinking. Economists with great ideas need politicians who see political utility in them. The need goes both ways, too. (I probably don’t need to say that economists with bad ideas also need such politicians.)
The second is “the word from the Treasury and the Eccles Building seems to be: Quantitative easing and discretionary fiscal policy on the scale needed to stabilize demand and ensure full employment are politically or institutionally impossible.” Once again, I fear that economists might be making judgments about what is politically feasible rather than presenting their best advice and letting professionals decide what can and can’t be done politically. Or that “the word” is coming from economists who are looking for easy excuses for policies that they favor for political reasons. My fears might be groundless, in which case I sincerely hope these economists are doing more than saying “yes sir” and sharing their gripes with the occasional reporter.
I don’t see a lot of room at this point for a fusion of MMT and MM. Market Monetarists are a rather conservative bunch with a profound and stubborn antipathy toward fiscal activism, no understanding at all about the endogeneity of money, continued adherence to the money multipler and loanable funds doctrines, and an exagerated sense of the importance of the central bank in the real economy.
MMTers differ in their policy orientations, but almost all agree on the limits of central bank policy and need for active fiscal engagement in aggregate demand management.
Here’s my approach to full employment: hire people.
At the moment I favour a more stable (non debt based) monetary system akin to that proposed by http://www.positivemoney.org.uk/
How about we choose “none of the above.” Get the Fed out of meddling with the economy since it appears not to have an objective clue as to what to do to make things work effectively for all participants. Nor apparently does anyone in the august profession of Economics. What happened to the free market philosophy? Charge banks .5% over what ever the rate for Treasuries of an equal duration may be at any point in time for funds taken from the Fed. And the Congress enact legislation governing working conditions and labor exploitation related to imported goods. In other words, stop stacking the deck in favor of the corporatists and their sychophants in the Congress. K.I.S.S.!!
A new approach to economics becomes a new approachn to macroeconomics becomesba new approach to macroeconomic policy and then, with no explanation, a new approach to monetary policy. I object to using answers to the question in the title. The assumption can only be that economics is monetary policy.
Even sticking to macroeconomic policy, the best idea seems to me to be to use fiscal policy when in a liquidity trap. The evidence that it works is now even more overwhelming than it was in 2007. I think the proposals presented in the figure are relatively trivial.
Even sticking to monetary policy, I think the best proposal is not on the list — target inflation during normal times of say 4% not 2%. This is the proposal of the fringe obscure head economist at the IMF. The logic is obvious.
I think it is clear what is going on here. Vastly More fiscal stimulus is clearly politically impossible now. Also it is too late to get higher inflation in 2007. So the discussion of a paradigm shift is limited by constraints there and now (here in Italy fiscal stimulus is not feasible and not just because the paradigm hasn’t shifted — also here in Europe there is room for more expansionary conventional monetary policy).
Accepting the ideological limitations of Republicans while discussing possible new paradigms makrs no sense.
@Dan: “Here’s my approach to full employment: hire people.”
Love it.
@Robert: “The assumption can only be that economics is monetary policy. “
Very good point. I stand admonished.