Arnold Kling  

Newspaper Macroeconomics

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I am not a fan of textbook macroeconomics. But it is a marvel of logical consistency when compared with the macroeconomics that you get from journalists.

From the perspective of a macroeconomic textbook, journalists write as if the aggregate supply curve is nearly vertical with respect to monetary policy and nearly horizontal for fiscal policy.

1. You would be rich if you had a dollar for every time a journalist writing about the Fed said that it faced a terrible dilemma, with the economy poised on the "knife edge" between worse recession and a major acceleration of inflation.

2. On the other hand, fiscal policy faces no such trade-off. You never see a journalist writing about fiscal stimulus and pointing out that it risks setting off a major acceleration of inflation.

Among economists who subscribe to the AS-AD paradigm (which is nearly every everyone), there is vigorous disagreement over whether the aggregate supply curve is closer to vertical or closer to horizontal, but once an economist takes a point of view on that, he or she will stick to that point of view regardless of whether you are talking fiscal policy or monetary policy. The macroeconomists who support fiscal stimulus take the notion of a liquidity trap seriously, which is the opposite of believing (1). I defy you to find any academic economist who would endorse (1) and (2) simultaneously.

Interestingly, Ben Bernanke walks a fine line here. At times, he has followed a cautious monetary policy while supporting fiscal stimulus. However, he has never endorsed the view that we are in a liquidity trap. If he had to lay out his thinking in an academic seminar, he would be crucified. But journalists see nothing wrong.

Of course, another characteristic of newspaper macroeconomics is that the Federal Reserve Chairman always wears a halo. I remember how revered Arthur Burns was in the press, and no Fed Chairman had a more egregious tenure. Volcker is sainted. Greenspan was the Maestro, and I believe he would still be getting a pass in the press if his name were Alan Blinder rather than Alan Greenspan (can you identify a significant policy difference that we would have observed under a Blinder Fed? I can't. But Blinder would be immune from the charge of being an "Ayn Rand discipline" or "free market ideologue.")

For now, here is how I would rank various forms of macroeconomics:

1. PSST. It's got a lot of problems, but I think it is promising.
2. Textbook macroeconomics, meaning AS, AD, and even IS-LM (sorry, Tyler; I will concede the caveat that to draw the IS-LM diagram we need to hold fixed both inflation expectations and the term premium). I don't think that the sticky-wage and sticky-price stories can carry all the weight that gets put onto them, but I think the approach hangs together, and it's better than:
3. Rational-expectations macroeconomics. Good technique, no empirical relevance.
4. Liquidity trap. Neither sound technically nor valid empirically.
5. Newspaper macroeconomics. Oy.


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COMMENTS (7 to date)
JST writes:

Isn't the empirical validity of a liquidity trap type phenomenon evident from the simple fact that large increases in the monetary base may not cause accompanying increases in money supply and inflation when we are near the zero lower bound? This seems to be the case currently in the US and for Japan basically since its housing bubble burst almost two decades ago.

To me this places it ahead of a good technique with no empirical relevance.

Arnold Kling writes:

JST,
If we are in a liquidity trap, then why does the Fed have to pay interest on reserves? If we were in a liquidity trap, the Fed could not pay interest on reserves, and the banks would still hold those as excess reserves.

Instead, the Fed takes the view that if it were to stop paying interest on reserves, the banks would go crazy with lending and we would have too much inflation.

Gepap writes:

Perhaps the Fed, as a collection of private bank interests, sees the value in rewarding its members with a little extra something.

The rates on five year securities is essentially negative right now.

Rick Hull writes:

> You never see a journalist writing about fiscal stimulus and pointing out that it risks setting off a major acceleration of inflation.

Perhaps they took Milton Friedman's famous contribution to heart, that: "Inflation is always and everywhere a monetary phenomenon."

Of course, we must be clear what we mean by inflation. I would prefer to banish the term and refer to "monetary expansion" and "a rise (not a rate of change) in a price index" completely separately. Likewise, a change in the rate of change of a price index should have its own term, as well.

I think, to an extent, journalists suffer from deliberate obfuscation by economists, political and otherwise.

Rick Hull writes:

Oops, I really did mean "rate of change" and not a simple rise.

Arthur B. writes:

In a fiscal stimulus, the government returns money to the taxpayers. This money would have been spent by the government and is now spend by the taxpayer. This isn't pushing up prices. Of course the government will not cut its spending, it will borrow whatever it returned. Ideally the money that the government borrows would crowd out other loans. Old private loans would expire and less new private loans would be issued, which would diminish spending. A possible inflationary effect would be that banks would be willing to lower their reserve ratios since the government loans are less risky. That's second order though. In the end, fiscal stimulus is inflationary if the Fed effectively monetizes the debt.

Gaz writes:

> You never see a journalist writing about fiscal stimulus and pointing out that it risks setting off a major acceleration of inflation.

What, don't you get Rupert Murdoch's newspapers over there in the USA?

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