Arnold Kling  

The Power of Folk Macroeconomics

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Scott Sumner (he's back) [UPDATE--and with (ouch!) sarcasm] writes,


In the past I've frequented discussed a strange sort of schizophrenia among macroeconomic commentators. They talk as if fiscal stimulus affects RGDP growth whereas monetary stimulus affects inflation. (Of course both affect NGDP directly, and the effect on each component depends on the slope of the SRAS.

In textbook macroeconomics, aggregate demand is aggregate demand. It does not matter whether nominal GDP goes up because of monetary expansion or fiscal expansion.

Sumner points out that in the UK they are experiencing inflation without real GDP growth. According to textbook macroeconomics, that means that there is a problem with aggregate supply, not with aggregate demand. Instead, commentators are willing to blame the inflation on loose money while blaming the low real GDP growth on fiscal austerity. My guess is that very few textbook authors will bother to correct the commentators, because the textbook authors are hostile to the conservative government in the UK. Two additional points.

1. If inflation is rising, you are not in a liquidity trap.
2. Tyler Cowen always says, "the monetary authority moves last."

Anyway, that is all well and good from a textbook.

Folk macroeconomics consists of spending and an aggregate production function. When the government spends more, output goes up, and employment goes up. End of story. Money is just voodoo. Oh, the central bank can jigger interest rates, but that does not really do anything. (By the way, I am the really odd duck here. I think that money is just voodoo, but I do not believe in the aggregate production function, so government spending is pretty much voodoo, also.)

Anyway, I give Sumner credit for trying to stick up for textbook macro. But folk macro is easier for people to understand, so that is what you will continue to get from the media.


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CATEGORIES: Macroeconomics



COMMENTS (7 to date)
John Hall writes:

What do you think is the best presentation of "textbook macro"?

Arnold Kling writes:

John,
I am partial to the way I presented it here.

Noah Yetter writes:

"...commentators are willing to blame the inflation on loose money while blaming the low real GDP growth on fiscal austerity."

Since loose money is the only possible cause of inflation, I don't see what's wrong with the first part, or how it relates to the second part.

Lord writes:

Government spending is voodoo unless conventional monetary policy is all that is willing to be used and up against the lower bound. The UK is a good test and it may be unemployment is the only way to lower oil prices, that is, this recession was an oil shock as much or more than a financial one.

Bryan Willman writes:

Actually, money is the ability to call on other humans for some good or service or other resource, and so yes, it's voodoo.

(It's only a store of value with respect to value that can be obtained from other people. In an environment where one is the only person, and there are no avatars of other people such as vending machines, money is of no use.)

So yes, almost by definition, it's a kind of voodoo.

(Recall that in popular imagination voodoo refers to mechanisms for influencing other people - money is surely among the most powerful such mechanisms.)


Dale writes:

I am not sure where Sumner makes the claim you think he is making.

All he is doing is commenting on the foolishness of tightening money and increasing government spending at the same time as if they both don't effect RGDP in a demand based recession.

In fact, he says so explicitly

"But it is still quite revealing that a prominent macroeconomist thought the solution to a growth slowdown is more government spending, rather than slowing the expected pace of monetary tightening."

Nothing to do with him thinking this has been a shift in full employment GDP. All Sumner suggests is that a policy of tight money counters the RGDP effects of fiscal expansion.[with the added "and "you should do the monetary policy first"]

As for whether or not their inflation is inflation or not, core inflation seems to be under 3 and not nearly as susceptible to an upward trend[if i am reading it right, it is there, but generally within the margin of error for the past few months]. So it could just be a case of chasing volatility in the headline rate.

Dale writes:

A correction on my previous comment. I was reading eurozone inflation and not UK inflation.

UK core inflation is above 3, but has fallen recently by sizable amounts. Not sure if this was due to tight monetary policy or not.

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