"There is no spoon"

Yesterday I reviewed one of Noah's posts. He linked to one by Mark Thoma. Today I'm looking at Thoma's post.

Thoma asks: Will the Economy Return To the Old Normal?

I don't know if that is "passive voice" or what, but it sure leaves out any participation by economists, don't you think?

Thoma writes:

This is a debate, in part, about whether the economy returns to trend after a shock, i.e. whether shocks are permanent or temporary. It is also a debate about the nature of the trend itself...

Oh... See? This is what economists do. Thoma is asking whether there is some metaphysical driving force that makes the economy always "return to trend." As if what happens to the economy has nothing to do with policy. It's a crock.


The nature of the trend itself?? There is no trend. The trend is an observation. It is an observation of what happened up to now. The trend is a figment, a conceptual tool. It's not in the economy. It's in the mind.

...the nature of the trend itself, i.e. whether the trend rate of economic growth is a smooth process that can be approximated by a trend line (with demand shocks responsible for most of the variation around the trend), or if the trend is a variable series subject to both permanent and temporary shocks (so that a substantial part of the variation in output over time comes from the trend itself...

Reject this.

If "the trend rate of economic growth is a smooth process" then we don't have to do anything by smile, and the economy will recover.

If "the trend is a variable series subject to both permanent and temporary shocks" then there is nothing that can be done to help the economy recover.

Nothing that can be done, or nothing that need be done. These are our only options?

I reject this.


Thoma quotes Mankiw:

According to the conventional view of the business cycle, fluctuations in output represent temporary deviations from trend.

The business cycle is the result of human interaction in a world of finite resources, or what economists call scarcity. Human nature is fixed and unchanging, but a sloppy fit. The position human nature takes, the "fit" of it, varies over the cycle. Sometimes we are more political, sometimes more social, sometimes more religious, sometimes more militant. Why we act as we do is not a question for economics. But we tend to act in certain ways at certain points on the cycle. That is what makes the pattern a cycle.

There are many cycles, or many interacting and overlapping trends. If we think of these cycles as waves, and it we think of sound as waves, we may compare them. Waves can be added together, or subtracted. More accurately perhaps, the effects of overlapping waves combine to produce a unified effect.

The longest business cycle I know of is the cycle of civilization, which is driven by the concentration and distribution of wealth.

Now, how does one look at the cycle of civilization and reduce it to temporary deviations from a trend of perpetual increase? Only near the economic peak of the cycle could such a concept even exist. Only after the peak would perpetual increase be such a pressing concern. Only in the decline would it matter.


Almost fell for it.

Thoma presents two graphs near the end of his post. One shows GDP varying about its long-term trend. The other, the "plucking model", shows GDP running at or near its long-term trend except when some shock or "pluck" pulls it down from trend.

Interesting. Indeed, that's why I almost fell for it. The plucking model shows GDP (after the pluck) returning to trend. The other model shows GDP always returning to trend.

But there is no trend.

There is no trend.