Monday, November 16, 2015


In a recent post Arnold Kling notes that both Scott Sumner and Tyler Cowen have offered "frameworks" or outlines of their macroeconomic thinking. In that post Kling presents a framework of his own. You know I had to take a look at all three.

Arnold Kling -- My Macro Framework:
... How do we get into messes? To some extent, each unhappy economy is unhappy in its own way. But some elements that one tends to find include Minsky-Kindleberger manias and crashes, sudden changes in credit conditions, sharp movements in important relative prices (oil, home prices), and permanent shifts in the skill structure of work.

It is a minor point. But if the question is How do we get into messes? then "sudden changes in credit conditions" is not the right answer. The sudden change in credit conditions *IS* the mess. What gets us into the mess is the long, slow, gradual change in credit conditions.

We start with a small accumulation of private sector debt and reach climax with a vast and unsupportable accumulation of private sector debt. This slow change is how we get into the mess. The moment that everyone suddenly realizes debt is excessive -- the moment of the sudden change in credit conditions -- in that moment we are already in serious trouble.

Sumner -- Is it time to blow up the New Keynesian model?
In the short run, employment fluctuations are driven by variations in the NGDP/Wage ratio.

Both NGDP and wages are nominal quantities. If you think of wages as a measure of the price level, you'll see that the NGDP/Wage ratio gives you a measure of RGDP. If this is correct, Sumner is only telling us that

In the short run, employment fluctuations are driven by variations in RGDP.

or maybe that

In the short run, variations in RGDP are driven by employment fluctuations.

And now perhaps it is obvious that Sumner is simply restating Okun's law.

That's okay. Maybe Scott Sumner secretly prefers old Keynesian to new Keynesian.

Tyler Cowen -- My macroeconomic framework, circa 2015
... stimulus to be effective needs to be applied very early in the ... recession.

Yes, that's correct. I called it urgency.

Tyler Cowen again:
Given that weak AD is only one of the problems in a bad downturn, and that confidence, risk, and supply side problems matter too, the best question to ask about fiscal policy is how well the money is being spent. The “jack up AD no matter” approach is, in the final political equilibrium, not doing good fiscal policy any favors.

Sumner's framework is a pretty well-focused piece of writing. So is Arnold Kling's. Cowen's strikes me as a jumble of semi-important points emerging from spontaneous free association. His "Given that weak AD" paragraph is a perfect example. He's got a whole list of things that matter, but he has not prioritized his list. He leaves it a mess, and from it draws the conclusion that we should ask a bad question about fiscal policy.

That question arose long ago in response to Keynes, who said that if lawmakers are prevented (by their misunderstanding of the economy) from spending on worthwhile objectives when fiscal stimulus is needed, then even spending foolishly would be better than failing to provide stimulus.

The question only arises if you misunderstand the point Keynes was making.

Dunno if I have a "framework" but I'll give it a go.

1. The economy is transaction. Exchange. Trade. Transaction. Everything that happens in the economy can be seen in monetary balances.

2. Don't worry about the real economy. The real economy takes care of itself. Look at the birds of the air; they do not sow or reap or store away in barns, but they get by.

3. Worry about monetary balances. When these get out of whack they do great harm to the real economy.

4. Cost is always a problem.

5. Don't make economics more complicated than it has to be.

1 comment:

The Arthurian said...

What Keynes said:

"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing."