David R. Henderson  

Paul Romer on Paul Volcker

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Economist Paul Romer reprints a letter he received from an aspiring graduate student in economics and his response to the reader. There is much that is valuable in the letter. In fact, it's on net valuable.

But I will follow Paul's advice he gives in one part of his response to challenge what he says in another part.

Here's the advice I will follow:

When you consider graduate school or a job offer, try find one that has a culture like the one that Milton Friedman described at the University of Chicago when he said "an academic is concerned not with being diplomatic, not with trying to avoid hurting people's feelings, but an academic is concerned with saying what's right. Telling the truth, or trying to get at it. And if you disagree with somebody you don't say 'well, now there may be something in what you say' ... You say 'that's a bunch of nonsense.'"

Now to the part I want to challenge. Paul writes:
To learn about a department, visit and ask macroeconomists you meet "honestly, what do you think was the cause of the recessions of 1980 and 1982." If they say anything other than "Paul Volcker caused them [the two recessions] to bring inflation down," treat this as at least a yellow caution flag.

That's nonsense. Paul Romer makes it sound as if recessions per se bring inflation down. If you think that's true, ask yourself this: What if the federal government causes a recession by cartelizing all industries, which causes those industries to raise prices? Then you get recession plus inflation. What's in fact true, and what, I hope, Paul Romer meant, is that Paul Volcker used a drop in the growth rate of the money supply to bring inflation down and that the virtually inevitable result was two recessions.

HT2 Mark Thoma.

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COMMENTS (3 to date)
Will C writes:

I disagree that he's implying recessions bring inflation down. I think what he was saying is the two recessions came about *from* Volcker's efforts to bring inflation down. As in, the recessions were a result of the monetary policy rather than the cause of the inflation coming down. That's how I read it, at least.

Thaomas writes:

Your department passes, Dave.

Romer is trying to warn the young writer off from a department where those recessions would be attributed to sunspots, mysterious RBM "supply shocks," or "unbalances" caused by use of fiat money.

baconbacon writes:
If they say anything other than . . .

I would say Romer is entirely wrong on this one.

First graduate programs aren't about teaching you what they already know (or shouldn't be), they are/should be about figuring out how to answer currently unsolved questions. A stock answer to a question is fairly worthless as long as it isn't "flying monkeys". The ideal answer would be "theory X says this, and has this evidence for and against it, theory Y says this etc, etc". This will demonstrate (at least to a degree) a better mastery of the entire profession, and a deeper understanding of where the unanswered questions like as well as being more likely to give you tools to answer them.

The second is that the answer is so aggressively simplistic as to make me run screaming from a guy that I want to teach me. Volcker raising rates was probably the cause of the recession(s) occurring when they did, but the reasons he felt compelled to raise rates are far more interesting and complicated, as is the discussion about if things were better off in the long run with his rate increases.

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