Arnold Kling  

The Myth of the Macroeconomy

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Does that sound like a good book title? The theme would be that treating the economy as if it were a single individual that sometimes spends less and works less is a simplification that does more harm than good.

This past weekend, I went to my home town for a high school reunion. In the process, I saw a number of reminders that not everyone is experiencing the same economy these days.

For one thing, the plane on Friday to St. Louis included a number of Baltimore Ravens fans. I could tell they were not from the top ten percent of the income distribution. When did it become common for the non-rich to fly to road games? I guess the advent of Southwest Airlines means that flying is no longer a luxury. But I felt like somebody did not get the memo that we are in a recession.

The reunion was well attended. About half the people came from out of town. Nobody seemed to be suffering from economic distress. Moreover, many of us have children in their late twenties, and everybody's kid seemed to have a good job. One classmate's kid had already made his first million, selling a business that had a popular i-phone app.

Now, there is going to be selection bias at a reunion. People who became alcoholics or otherwise messed up their lives are not as likely to show up.

Even more important, this was Clayton, Missouri. Is there another community in the country that has such a well-defined top spot in the regional status hierarchy? Every other metro area with which I am familiar is more multi-polar. If you played "family feud" and said "Name the most prestigious community for an affluent family to live in the DC metro area," there would be points for Georgetown, Potomac, and Fairfax. For the St. Louis metro, they might have to stop after Clayton.

It seems to me that the central focus in Clayton is the high school. Clayton is its own school district, and yet the high school has only about 800 students. I do not recall families showing off materially. The status symbol was to own a house in this school district. (I was the only one I knew who lived in an apartment.)

People thought that the schools themselves were responsible for the high achievements of their graduates. In fact, when I moved theire in 7th grade, the administrators were so certain that I could not have received a comparable education anywhere else that they put me into remedial classes, a decision which was an educational absurdity. Thus, I had an early opportunity to see--and to see through--the myth of school quality.

So I'm not saying that my weekend experience of "Dude, where's the recession?" is indicative of any broad trend. But it does remind us that there is a lot of variation around the average.

What proportiont of the country has gotten through the last three years reasonably unscathed? (I'm not going to worry about people who spilled their lattes on the newspaper when the stock market had a bad day.) Has it been 10 percent? 20 percent? 60 percent? 80 percent?

There are multiple escalators in the economy. At any one point in time, some people are on up escalators, and some people are on down escalators. From 1970 to 2000, I think that cohort data would tell you that many more families rode escalators up than rode them down. From 2000 to today, my guess is that the proportion riding up escalators has not been as high.

Maybe that is what a recession is. Not a macroeconomic accident in which all of us suddenly decided to spend less and consequently have been unemployed more. But a period in which the up escalators are less crowded and the down escalators have more people than usual.


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CATEGORIES: Macroeconomics



COMMENTS (20 to date)
David R. Henderson writes:

Nicely done, Arnold. You lived in an apartment? Wow!

Yancey Ward writes:

People often forget that while the unemployment rate has risen to over 9%, this means most of the people who want to work still work.

Floccina writes:

It seems that employed people do well in a recession. Things get cheaper but the wages of the employed do not fall.

ThomasL writes:

@Floccina

Traditionally speaking, you are right. The 1930's was really a pretty decent time for consumers by most reports--as long as you had a job.

I do think that--wait for it--"this time it's different." I have not seen prices drop much, and most of the things I buy I have gone up noticeably every year since 2007. Now, they tended to go up most years before 2007 too, but I didn't see them stop, much less reverse course.

Housing is down, of course. But in many areas of the country it is only down vs. the peak. Prices here are still far, far higher than they were 10 years ago, even if they aren't as high as they were 4 years ago.

Jack writes:

He may not be a reference you want on your side, but Ed Prescott in a recent talk ditches the idea of macroeconomics, or a macroeconomy (and micro-), in favor of just plain economics: individual, and aggregated.

Foobarista writes:

In my little professional niche - making very large databases work well for cloud startups - things are white-hot, with headhunters calling me daily. (And the tricky issue is the state of database education is so awful that nobody's going to learn this sort of thing in college, so there's a cadre of people like me who make a good living fixing academically correct but failing installations to make them actually work, but that's another rant.)

Also, Silicon Valley real estate is doing less bad than most.

That said, it does feel odd to be doing well and in a "hot" field while so many other people, including some in my extended family, are doing badly.

happyjuggler0 writes:

when I moved their in 7th grade, the administrators were so certain that I could not have received a comparable education anywhere else that they put me into remedial classes

It occurs to me that most people first learn to spell "there, their and they're" before the 7th grade. However for some people it doesn't take the first time, and so they need remedial education for them to "get it". Of course this doesn't mean that the school has a good remedial program.

Just something for the humility file....

Gene writes:

I'd put Town & Country and Ladue slightly above Clayton in the prestige file, FWIW.

Becky Hargrove writes:

What's amazing to me is how well the actual suffering gets hidden, in many communities. People without jobs often end up living with other family members and losing their social ties. It is so hard for the employed to imagine the life unemployed people live until it happens to them...and then they lose the social ties that would let them tell the story. Not only are the unemployed isolated in their own communities, but often in their own extended families.

Cahal writes:

I think calling the macroeconomy a 'myth' is excessive reductionism and ignores emergent properties. We don't need to study individual atoms to engineer a bridge.

It should be obvious that an individualistic system like the market economy is vulnerable to fallacies of composition. Keynes' General Theory could well be interpreted as an expose of many of these.

Troy Camplin writes:

That is a great book title. I would emphasize the facts that nobody can possibly know what the "macroeconomy" could possibly look like, since it is literally impossible to look at it from the "outside," that in a real sense the macroeconomy is virtual, that it is not a physical entity, that it is not teleological and thus should not be perceived as such.

What would happen if we scrapped macroeconomics and replaced it completely with spontaneous order theory? What would be retained? What would be lost? What if we built up a macroeconomics from the bottom-up, in the same exact way the so-called macroeconomy (really, the spontaneous economic order) emerged? That seems to be the real way to go about doing a project like this. That, at least, is how I would do it.

Yancey Ward writes:

happyjuggler,

Could have been a lack of proofreading. I know I sometimes write the wrong word, not actually misspell it, when a word has a differently spelled homophone. There is a difference.

happyjuggler0 writes:

Yancey,

I was just teasing; under the context I just couldn't resist.

I normally expect typos in blogs and I don't correct the vast majority of such mistakes. Notable blogger examples that come to mind are Scott Sumner and Karl Smith.

Jonathon Hunt writes:

@ Cahal

That's a terrible analogy; you seriously can not be implying that atoms are in the same category as individuals. Conveniently enough for you, Max Borders wrote an article on this very subject.

That's odd, considering the only fallacy I got out of the General Theory was the broken window fallacy.

Jonathon Hunt writes:

@ Happyjuggler

Irony?

Les Cargill writes:

Cahal:"I think calling the macroeconomy a 'myth' is excessive reductionism and ignores emergent properties."

Myth seems is a fine name for it. Myths are great at capturing emergent phenomena. There's always a kernel of truth to a myth. Additional evidence of it being mythos - there are multiple versions that don't work exactly the same.

But we must be careful - myths are not really knowledge in the same sense that Maxwell's Equations are knowledge. But I don't go to a movie theater to see people solve differential equations, either. IOW, can't we have both?

I don't think of the term as being derogatory at all - not that you were going there.

kyle8 writes:

If there is any advantage right now, it will not last long, I see us headed for stagflation as in the 1970's.

GIVCO writes:

Could it be that Macro differs from Micro as fundamentally as normal differs from quantum physics? The forces, fields and particles in quantum simply don't make sense when they start exceeding a certain scale. A particle's described behavior alters by the very fact of observation, but an engineer's supporting beam won't change.

People also change their behavior based on observation (e.g., if you tried that famous Stanford experiment to those familiar with it, they'd never shock the unseen person) while, maybe, monetary supply doesn't.

I really have no idea.

Troy Camplin writes:

If we assume the macroeconomy has emergent properties, we would still have to take an outside perspective on it, which is impossible for us to do. Thus, we cannot understand the macroeconomy any more than a theoretically cognitively aware amino acid could possibly understand the nature and features of the cell from within it. Anything we can say about the macroeconomy is thus literally myth -- stories that may or may not have some relation to the real structures of the real world.

Cahal writes:

'That's a terrible analogy; you seriously can not be implying that atoms are in the same category as individuals.'

I wasn't implying that - you've missed the point of the analogy.

'Conveniently enough for you, Max Borders wrote an article on this very subject.'

Great. That's a pretty poor article. He attacks the machine analogy and then goes on to use another one which one could equally take exception to.

And saying 'how can the government know better than the market' (which he effectively does) makes no sense unless you are trapped in the obscure neoclassical world where the economy is a battle between governments and markets.

'That's odd, considering the only fallacy I got out of the General Theory was the broken window fallacy.'

Did you actually read it or have you just read [the awful] Henry Hazlitt and parroted an Austrian fetish? Or perhaps you've skimmed over it with a preordained conclusion in mind, without actually paying attention to the analysis. In any case, you either don't understand or don't want to understand Keynes. I expect our discussion is futile.

Anyway, my overall point is fallacies of composition. Schelling desmontrated many of these, and it doesn't require a car metaphor.

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