Arnold Kling  

In Pursuit of Empirical Macroeconomics

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The following should not be construed as advice to graduate students. Let someone else try it first.

1. Forget the national income and product accounts. Pay no attention to the arbitrary classification of output as C,I,G, and NX.

2. Instead, look at the data set that Stangler and Kedrosky used on business dynamics along with the JOLTS (job openings and labor turnover survey) data. Try to locate the changes in the economy in the growth and decline of clusters of businesses.

3. For example, compare patterns of small business creation and destruction in a city that has grown over the past thirty years (such as Phoenix) with a city that has declined (such as Detroit). Does secular growth show up as a high rate of firm formation, a high rate of firm growth, a low rate of firm death, or some combination? How does secular decline show up?

4. Can you see emergence and contraction of specific industries? Does the personal computer industry in the early 1980's show up in terms of an unusual amount of firms started in certain clusters, unusual growth for a few firms, or an unusually low rate of death for firms? Can you find clusters of firms associated with the boom and bust in dotcoms in the late 1990's?

5. How do periods of overall employment growth differ from periods of employment contraction?

As a side note, I fear that in talking about the labor matching problem, I have made it sound as if Recalculation is nothing but a labor-matching problem. It is more fundamentally a business-creation problem. A pure labor-matching problem presumes that the firms already exist, and the problem is to match workers with firms. The full Recalculation problem is to create firms that profitably employ workers.

The firms generate patterns of specialization and trade. Profitability is what makes those patterns sustainable.

Suppose that today, right now, you had to figure out a small profitable business that would generate enough income to support your household. Think about this seriously. Come up with a product or service that you could sell, figure out a way to keep costs low enough to make a profit, and make a realistic plan for overcoming competition. That is your local recalculation problem. If you can solve it, then, yes, this ultimately will help match labor skills to the work that needs doing. But that is only part of it.

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COMMENTS (4 to date)
paul writes:

I'm pretty sure the answer to all those questions is: allow maximum freedom among the agents subject to consistent enforcement of a minimum set of rules that protect "rights."

The implicit assumption in macro is that we can empirically find little policy tweaks that will make things better. The fact that we have a large coercive government encourages that assumption.

If economists really had a good idea, they'd try to make money in the real marketplace not the "marketplace of ideas."

Karl Smith writes:

This is interesting stuff and I like to do something with it myself.

However, I am not completely convinced its where the action is. For example, it really seemed like following some sort of Taylor Rule was commensurate with a well balanced macro-economy. We are currently in a position where that is impossible and we have a very unbalanced economy.

In the interest of parsimony why wouldn't we just start there. It could be that the churning details of the economy matter or it could be that like atoms inside of a gas chamber all individual bumping and churning produces macro-level effects that can be largely approximated by Ideal Gas Laws.

You've criticized us as using hydraulic macro before. It may seem foolish to use hydraulic type equations but compressible flow equations are roughly similar and they describe a situation which seems to, in fact, largely parallel the real economy.

R. Richard Schweitzer writes:

It would be worthwhile to base an examination on the old aphorism:

Find a need and fill it.

This means more than finding people crying out with some want or desire - it can even mean "creating" the need, or at least the sense of desire that is seen as need in this context.

So, if you take Arnold's samples of localities, did "needs" dry up or bloom (by the thousands)?

Further, examine the kinds of "needs" being met in declining localities for comparison to the kinds (and varieties) in flourishing localities (take D.C. and No. VA. for example).

Rebecca Burlingame writes:

Think about what might actually happen if you had a room of people which expressed certain needs and at the same time, gave examples of what they might personally be able to tend to, for the needs of others. There would be a dynamism about the process in which all participants would regularly reinterpret their own needs and also, what they in fact might be able to provide. There was once a time when capitalism and free markets worked in such a dynamic fashion, but because so much economic activity is now indirect (prices and choices different from what individuals would create), people scarcely know either what they truly desire, or what they might even reasonably be able to provide.

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