Bryan Caplan and David Henderson

Macroeconomics

A Category Archive (878 entries)

Rudebusch on "Housing Demand"

Macroeconomics
David Henderson
This is another installment in my posts on my visit to the San Francisco Fed on April 9. My talk was in the afternoon, but I always like to see the talks that precede mine so that I can get... MORE

Bad news; industrial production is soaring

Macroeconomics
Scott Sumner
TravisV sent me to the following graph of industrial production: That looks like good news. To see why it is bad news, we need to take a brief digression. The recent recession has been rather unusual. RGDP fell sharply between... MORE

Germany's mysterious recovery

Labor Market
Scott Sumner
In the past 10 years Germany as gone from being the "sick man of Europe" to the star of the eurozone. This partly reflects the strong job creation that preceded the recession, perhaps due to the labor market reforms of... MORE

Simon Kuznets: An Appreciation

Macroeconomics
David Henderson
I second co-blogger Bryan Caplan's appreciation of the late Simon Kuznets. One of my pleasures in writing the many bios of famous economists for The Concise Encyclopedia of Economics was researching and writing his bio. Some excerpts from the Encyclopedia... MORE

Never reason from an inflation rate change

Macroeconomics
Scott Sumner
In a new post, Tyler Cowen is skeptical of Paul Krugman's claim that higher inflation hurts the rich. Brad DeLong also expresses some skepticism. I agree with Cowen and DeLong, but would like to quibble with this comment in... MORE

Is Welfare a Band-Aid for Nominal Wage Rigidity?

Cost-benefit Analysis
Bryan Caplan
The minimum wage and welfare (broadly defined to include unemployment benefits and such) curiously interact.  As I've previously explained:The minimum wage deprives the unfortunate workers shown in red of their ability to support themselves.  Given this involuntary unemployment, the case... MORE

Answering Arnold's Challenge

Growth: Consequences
Bryan Caplan
Tyler publicizes a challenge from founding EconLog blogger Arnold Kling:I still want to see an economist reconcile a belief in secular stagnation with a belief in Piketty's claim that the return on capital is going to exceed the growth rate... MORE

There's a vigorous debate about the money multiplier taking place in the blogosphere. On one side is everyone from MMTers, to new monetarists, to market monetarists. On the other is Nick Rowe. And I'm sort of in the middle, but... MORE

Central banks do not deserve our respect

Monetary Policy
Scott Sumner
Nor (in my view) do they deserve our contempt. They should be viewed skeptically. They are trying to do a good job, but often fall well short. One such occasion occurred in 2011 when the ECB tightened monetary policy. Prior... MORE

Krugman slides deeper into old Keynesianism

Monetary Policy
Scott Sumner
Those of us who liked the 1990s vintage Paul Krugman have been able to hold on to a few stands of hope. At least he still supports free trade. At least he only applies the old Keynesian model to the... MORE

Caldwell on Hayek's "Consistent" Stories

Austrian Economics
David Henderson
In a fascinating article on why Friedrich Hayek did not write a review of John Maynard Keynes's The General Theory of Employment, Interest, and Money, Hayek expert Bruce Caldwell writes: Perhaps most damning is the tendency of Hayek's stories to... MORE

NGDP targeting is not a "fragile" policy

Monetary Policy
Scott Sumner
This post tries to tie together some diverse observations about the sticky wage/NGDP shock model. The motivation for this (unfortunately long) post was the observation that many non-economists seem to find the sticky wage/NGDP shock model to be appealing. I... MORE

Is Abenomics working?

Macroeconomics
Scott Sumner
Tyler Cowen recently linked to an interesting post by Edward Hugh. Hugh argues that much of the recent uptick in Japanese inflation is due to the recent depreciation of the yen. That may be true in an accounting sense, but... MORE

Bastiat just rolled over in his grave

Fiscal Policy
Scott Sumner
The Administration has released a report defending the ARRA program, and it's every bit as embarrassing as you might expect. Where to begin . . . 1. The report seems to ignore the fact that fiscal stimulus failed to produce... MORE

But now we know the actual problem was tight money, which caused NGDP to fall in half. Here's Noah Smith: This seems to be the overwhelming consensus in academic macro these days. It seems obvious to most people that the... MORE

Questions that have no answer

Monetary Policy
Scott Sumner
There are some questions that have no answers. One example is the question: "Was monetary policy too expansionary during the housing boom?" The only sensible answer is "it depends." It's not clear what the Fed was trying to do during... MORE

Never reason from a price change, example #305

International Macroeconomics: Exchange Rates, International Debt, etc.
Scott Sumner
Over at TheMoneyIllusion I have a series of posts exposing the common fallacy of "reasoning from a price change." (Trademark) This occurs when people assume that consumers will buy less oil when the price is high, or there will be... MORE

Immaculate inflation and immaculate growth

Fiscal Policy
Scott Sumner
Here's Paul Krugman: Barry Ritholtz reminds us that we've just passed the third anniversary of the debasement-and-inflation letter -- the one in which a who's who of right-wing econopundits warned that quantitative easing would have dire consequences. As Ritholtz notes,... MORE

Why do booms feel good?

Labor Market
Scott Sumner
The answer to this question might seem obvious, but it isn't. Yes, booms feature lots of jobs and income, but most standard macro models suggest that booms feature "excesses," with too much employment and perhaps over-investment too. In the... MORE

Where the Stress Falls

Monetary Policy
Scott Sumner
Marcus Nunes has a highly critical post contrasting Paul Krugman's views on Argentina in 2012 and today. I won't be quite as critical. As is often the case with Krugman it's almost impossible to figure out what he is "really... MORE

Recently, there has been a brouhaha in the blogosphere over comments made by Paul Krugman and then responded to critically by Russ Roberts and Bob Murphy. Chris Dillow then defended Krugman. The issue--and everyone on both sides agrees that this... MORE

John Cochrane Views the World

Taxation
David Henderson
One of the big advantages of having been an economist for a long time and having been at the Council of Economic Advisers 30 years ago is that I've gotten to know and follow a lot of people and their... MORE

Do barriers create "bubbles?"

Finance
Scott Sumner
Ryan Avent discusses a recent speech by Larry Summers:The basic set-up of his narrative remained unchanged from last year. Imagine a world, he said, in which resources are increasingly concentrated in the hands of those with high propensities to save and... MORE

Keynesianism: It's not just resting

Macroeconomics
Scott Sumner
During late 2012, market monetarists like myself argued that fiscal austerity in 2013 would not slow growth.  We based that on an idea that was relatively uncontroversial as late as 2007 (even among New Keynesians)---monetary offset.  If the central bank... MORE

Introducing Scott Sumner

Macroeconomics
David Henderson
Starting tomorrow, Econlog's new guest blogger will be Scott Sumner. Ever since we lost Arnold Kling, in the late summer of 2012, Econlog has needed a macroeconomics presence. Both Bryan Caplan and I post occasionally about macroeconomics, but we are... MORE

Higher Is Not Down

Macroeconomics
David Henderson
In a front-page report in the Wall Street Journal on low inflation in the United States (where the inflation rate for the past 12 months was only 1.2%) and in the euro zone (where it was only 0.9%), the authors,... MORE

Interest is Special, Says Special Interest

Microeconomics
Art Carden
Regular readers of EconLog know that I, like Bryan Caplan, try to follow Rolf Dobelli's advice and Avoid News. Here's one reason why. Scan the headlines and look for claims about programs that are Obviously Good Ideas, according to Some... MORE

Krugman's Kontradictions or Contradictions?

Fiscal Policy
David Henderson
Blogger and frequent Econlib Feature Article contributor Robert P. Murphy has coined the term "Krugman Kontradiction." I believe, and I think Bob agrees with me, that Krugman is very clever and crafty. (Or should that be Klever and Krafty?) And... MORE

What should students learn in their introductory economics courses? Are we, as Mike Konczal argues, "teaching economics backwards" (HT: Justin Wolfers via Twitter)? I'm sympathetic to Konczal's argument that we need to focus more of our attention on the institutions... MORE

GDP: A Bad Measure of Well-Being

Macroeconomics
David Henderson
Picture this: The U.S. government finally sells the Postal Service. As with other functions moved from the government to the private sector, the privatized post office does what the government did for about half the cost. So, with prices correspondingly... MORE

I teach our principles and intermediate macro courses at Samford, and when Google Reader shut down I (like many, I suspect) let my RSS feeds die with it. It's time for that to change. What are your favorite macro blogs?... MORE

Did the Federal Spending Cuts Slow Growth

Macroeconomics
David Henderson
One of Scott Sumner's most important posts in the last few months is his November 8 post, "Mike Konczal: "We rarely get to see a major, nationwide economic experiment at work." Scott quotes blogger Mike Konzcal from last April: We... MORE

Without digging deeply into the conversation, my sense is that a lot of economists and public intellectuals saw the financial crisis and the slow recovery as a confirmation of a lot of things they already believed. For textbook Keynesians, it... MORE

Lawrence Klein, RIP

Macroeconomics
David Henderson
Lawrence Klein, an economist who won the 1980 Nobel Prize in economics for his macro-models of the economy, died on Sunday. Because the bio of him in The Concise Encyclopedia of Economics is so short, I'm reprinting all of it... MORE

A Challenge for Anti-Keynesians

Behavioral Economics and Rationality
Bryan Caplan
Many of my favorite people are strident anti-Keynesians.  In their eyes, Keynesianism isn't just false; it's incoherent pseudo-science, a blight on our fair economics profession.  Those who think of Keynesianism as pseudo-science generally hold all Keynesians in one dim view. ... MORE

A Micro-Mincer regression estimates personal income as a function of personal education and controls:ln Personal Income = a + b*Personal Years of Education + other stuffUnless b is very large, b approximately equals the individual education premium.  b=.09, for example,... MORE

Keep Calm and Read Bastiat

Macroeconomics
Art Carden
This morning, a colleague and I are conducting a seminar on Frederic Bastiat for homeschooled students. We're discussing "What is Seen and What is Not Seen," "A Petition," "The State," and "The Law." In re-reading these essays, I'm struck yet... MORE

A Primer on Malemployment

Economics of Education
Bryan Caplan
Fogg and Harrington provide an excellent intro to the empirics of malemployment.  Highlights:Definitions:Mal-employment, a variant of underemployment, is based on the concept of over-education. It represents a mismatch between skill requirements of the job and the education of the worker:... MORE

This is an almost 2-hour video of a forum held at Butler University in April. The participants are Mike Munger, Robert Skideslky, Richard Epstein and moderator Russ Roberts. The transcript is here. Some highlights: 00:08:40: Mike Munger's "beauty contest... MORE

Why Can't Labor Be More Like Housing?

Labor Market
Bryan Caplan
During recessions, demand for both housing and labor plummets.  But the two markets respond in very different ways.In the housing market, we usually see dramatic price falls.  Lots of properties sit on the market for months.  But almost any property... MORE

Solow and Samuelson on the Phillips Curve

Books: Reviews and Suggested Readings
David Henderson
In my critical comment on Robert Solow's slam on Friedman, I pointed out that when I reread Solow's and Samuelson's famous 1960 article on the Phillips Curve as a "menu" for policy makers choosing between low unemployment and low inflation,... MORE

Kitty Galbraith on Keynes

Books: Reviews and Suggested Readings
David Henderson
Kitty Galbraith makes Hayek's mistake (although check the big caveat below) This is my next installment on Richard Parker's book on John Kenneth Galbraith: His Life, His Politics, His Economics. From a footnote, a quote from Galbraith's wife Catherine (Kitty)... MORE

I, Beef Jerky

Central Planning vs. Local Knowledge
Art Carden
Yesterday morning, I opened a bag of beef jerky that reads "MADE IN THE U.S.A." at the bottom of the front of the bag. On the back of the bag--and I found this interesting--one reads that the jerky Contains beef... MORE

Daniel Kuehn, in the comments on my recent post on Galbraith's criticism of Keynes, and in his own blog post, has pointed out that Keynes did not commit the error that Galbraith accused him of. To refresh your memory, Galbraith... MORE

Galbraith's Criticism of Keynes

Books: Reviews and Suggested Readings
David Henderson
This is next in my continuing series of posts about Richard Parker's John Kenneth Galbraith: His Life, His Politics, His Economics. In May 1941, John Kenneth Galbraith had an article published in the prestigious Review of Economics and Statistics. It... MORE

Do Wage Cuts Reduce Communal Purchasing Power?

Behavioral Economics and Rationality
Bryan Caplan
I'm frankly stunned that Krugman would approvingly quote the following passage from Keynes:[I]f a particular producer or a particular country cuts wages, then, so long as others do not follow suit, that producer or that country is able to get... MORE

New at Forbes: McDonald's and Minimum Wages

Central Planning vs. Local Knowledge
Art Carden
Here's my latest Forbes.com article, which is written in part in response to fellow Forbes.com contributor Laura Shin's question about whether the attention given to McDonald's wages will lead a higher minimum wage. I highlight what is, I think, one... MORE

The Present and the Future Both Need Bastiat

Growth: Causal Factors
Art Carden
I agree with Bryan: Frederic Bastiat's essay "What is Seen and What is Not Seen" is "the pinnacle of profundity." Indeed, on re-reading Bryan's post on Bastiat from last summer, I realized he wrote most of what I was planning... MORE

I am always proud to claim vindication by bet.  But I am extremely reluctant to claim vindication by events.  Few things are easier than (a) making vague claims, (b) waiting for something or other to happen, then (c) crowing about... MORE

In my profession as an economics professor and through churches I have attended, I've been around a lot of people who want to "make a difference." They almost inevitably equate "making a difference" with "working for a government or a... MORE

Why My Billion-Dollar Plan Won't Work The Way I Want it To

Central Planning vs. Local Knowledge
Art Carden
The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design. - F.A. Hayek On May 29, I offered my proposal for how I would answer Bryan's "spend a... MORE

My latest op-ed was published today by AL.com. In it, I evaluated claims by Senator Jeff Sessions and Rep. Mo Brooks that "we don't have that many jobs" (Sessions) and that "simple economics" says "You increase the supply of anything,... MORE

The long-promised but slow-in-coming dialogue promised here. PERSONS OF THE DIALOGUE Jacob Carden, Age 4 Taylor Grace Carden, Age 2 Dad: Art Carden, an Economist, Age 34 Scene: Chuck E. Cheese's in Vestavia Hills, Alabama. Dad: Children, I notice you... MORE

The Subprime Crisis: Why Asymmetric Information Didn't Save Us

Behavioral Economics and Rationality
Bryan Caplan
Foote, Gerardi, and Willen's subprime manifesto is theoretically enlightening as well as empirically edifying.  Unlike many economists, they understand asymmetric information on an unusually deep level.  Standard adverse selection models suggest that the market for iffy mortgage-backed securities would never... MORE

Conditional Insight, Unconditional Disaster

Behavioral Economics and Rationality
Bryan Caplan
I just read Foote, Gerardi, and Willen's subprime facts manifesto.  Twice.  In the process, I learned more about the subprime crisis than I learned in the last five years put together.  If you're going to read one piece on this... MORE

Another Inflation Bet

Economic Methods
Bryan Caplan
Arthur Breitman and I have hammered out the following inflation bet: If the 12 month change of the CPI-U as reported by the BLS is greater than 5% for any sliding window between today and December 2015 in monthly increments,... MORE

Keynesian Bets: What's Out There

Behavioral Economics and Rationality
Bryan Caplan
As far as I can tell, none of the comments on my Keynesian bet bleg point out or propose a Keynesian bet.  On Twitter, however, Noah Smith alerted me to the existence of the following Smith-DeLong bet:If, at any time... MORE

Keynesian Bets Bleg

Economic Methods
Bryan Caplan
The strongest evidence for Keynesianism, in my view, is introspection.  During the last five years, however, I've often heard Keynesians claim that their views have been vindicated by events.  To which I'm sorely tempted to respond:It's easy to claim "vindication... MORE

The Pyramid of Macroeconomic Insight and Virtue

Economic Methods
Bryan Caplan
Many of my friends laughed at Paul Krugman when he wrote: Maybe I actually am right, and maybe the other side actually does contain a remarkable number of knaves and fools.Krugman continued:The key to understanding this is that the anti-Keynesian... MORE

Want to know how to win a gold medal in Rio in 2016? Here's a guaranteed plan to reach the top spot on the podium: 1. Qualify for an Olympic event. 2. Do better than every other competitor. That's it!... MORE

Why are apparently good workers unemployed for so long in recessions? One channel that Tyler has promoted is ZMP: Some workers are almost completely unproductive, so employers can them rather than have them eat up all the pizza on Pizza... MORE

First things first: A hearty welcome to my new co-blogger Art Carden.To the task at hand: A while ago I wrote on how "Capital should be untaxed" should be the default view in economics: Zero capital taxation should be the... MORE

Krugman Gets Hoover Wrong

Economic History
David Henderson
No one whose opinion I respect doubts that Paul Krugman is very clever. Here's a recent example from his column in yesterday's New York Times, titled "The Urge to Purge": When the Great Depression struck, many influential people argued that... MORE

Henderson on Mulligan's Redistribution Recession

Books: Reviews and Suggested Readings
David Henderson
Casey Mulligan's cleverly titled book, The Redistribution Recession, could have been one of the most important economics books in 2012. It makes the case that a major reason U.S. employment has been so low is that during the recent recession,... MORE

Assorted Tweets: Cyprus Speed Bankruptcy Edition

Public Choice Theory
Garett Jones
1: Is the Cyprus bank levy a crude approximation of bankruptcy?  Actually, the bank levy is probably better for depositors than bankruptcy....The reason it's probably better than bankruptcy is because in return for haircuts, Cypriot banks will get cheap money from... MORE

Some theories of the business cycle say that booms and recessions are caused by shocks to the supply of key inputs: a wave of new high-tech ideas, a rise in oil prices, big changes in labor law.  In supply-side stories, it's easy... MORE

Scott Sumner on Real Causes of Business Cycles

Macroeconomics
David Henderson
Scott Sumner has a first-rate post this morning and one of the most important ones you can read if you want a quick look at why real changes in the economy rarely cause large business cycles. Here are the first... MORE

That is the title of an article by Michael Sivy sent to me by a frequent reader of Econlog. I have heard other people ask the same thing, so I'll answer. First, let me point out that authors of popular... MORE

There's an old story about a mathematician asking Paul Samuelson for one idea in economics that was simultaneously true and not obvious.  Samuelson's answer is here.  Today, I've got another: The Chamley-Judd Redistribution Impossibility Theorem.  Chamley and Judd separately came... MORE

TARP Bet Bleg

Economic Methods
Bryan Caplan
As far as I can tell after a quick read, this OMB report says that I'm on track to win my TARP bet in 2013.  But I'd rather outsource this to outside readers.  Anyone?Update: Does anyone dispute that this is... MORE

Highlights from Hummel's Macro Class

Macroeconomics
David Henderson
In 2009, I taught Jeff Hummel's Masters class in Macro at San Jose State University while he was on sabbatical. I did so to relearn macro and to learn what's new in macro. It worked. However, the segment I was... MORE

There are some ideas I love to believe in despite a lack of evidence.  Among my favorites: That the business cycle is partly a self-fulfilling prophecy: You go to the party you think everyone else is going to, you stay... MORE

The new Econ Journal Watch piece by David Cushman checks this claim that Krugman made in March 2009:...it is right to expect high growth in future if the economy is depressed now. I'm not writing about that quote, since Cushman and... MORE

When is a Spending Multiplier "Big"?

Fiscal Policy
Garett Jones
We're still debating how extra government spending influences the short run economy.  How it influences the long run is a more important question but that's a topic for another blog post.  Recently there's been some buzz that multipliers are on... MORE

Krugman Speaks Truth to Stiglitz

Fiscal Policy
David Henderson
And, moreover, uses some of Milton Friedman's best work to do so. First, Joe [Stiglitz] offers a version of the "underconsumption" hypothesis, basically that the rich spend too little of their income. This hypothesis has a long history -- but... MORE

Will The End of Sleep Reduce Wages?

Wages and Salaries
Garett Jones
Jon M at Sociological Speculation reports: ...new drugs such as Modafinil appear to vastly reduce the need for sleep without significant side effects (at least so far). Based on reports from users, it seems that people could realistically cut their sleep... MORE

How to Trust Government Data (or not)

Growth: Consequences
Garett Jones
I recommend Russ's recent EconTalk with Morten Jerven.  Jerven's forthcoming book, Poor Numbers, shows that GDP estimates in sub-Saharan Africa are fraught with error. Jerven, who visited many statistics offices in the region firsthand, concludes that poorly staffed offices and... MORE

Hail Bob Murphy

Economic Methods
Bryan Caplan
My inflation bet with Bob Murphy, unlike David's, doesn't mature until January 1, 2016.  David as usual is a model of gentlemanly conduct, but other observers are cackling with glee at Bob's defeat.  This is frankly deplorable.  Bob deserves far... MORE

Reviewing Mark Zandi's Newest Book

Finance
Garett Jones
My latest book review for Barron's is here ($, probably).  Zandi's Paying the Price adds some value; this post excerpts some positive parts of the review:"Regulatory, legal, and policy uncertainty was holding business back." That's author Mark Zandi, Moody's Analytics chief... MORE

In Praise of Calibration

Macroeconomics
Garett Jones
Nobelist Thomas Sargent said this, about early tests of rational expectations macro models back in the 70's: I recall [future Nobelists] Bob Lucas and Ed Prescott both telling me that those tests were rejecting too many good models. That phrase, "[T]hose tests were... MORE

Is Fiat Money a Bubble?

Money
Garett Jones
I thought the mainstream view was that fiat money was--in most mainstream theories and possibly in practice--a bubble.Jean Tirole (Econometrica, 1985) defines a bubble (it's a conventional definition among economists), and notes that Samuelson's excellent model of money fits that... MORE

"Why do Americans work so much more than Europeans?" That's the title of one of Nobelist Ed Prescott's papers.  His story has something to do with high taxes causing low employment, so you might be tempted to begin your yawning... MORE

As always, I enjoyed the hour.  Hope you do as well.I suspect it was this post that led to the invitation.  I really do believe Fisher's 1933 Econometrica article offers a more complete model of the entire business cycle process... MORE

I Win My Unemployment Bet With Mike Shedlock

Economic Methods
Bryan Caplan
Back in 2010, Mike Shedlock ("Mish") and I agreed to the following bet:If the official initially reported U.S. monthly unemployment rate falls below 8.0% for any month between now and June, 2015, I win $100.  Otherwise, Mish wins $100. Since,... MORE

Did the Dot.Com Boom Boost GDP Much?

Macroeconomics
David Henderson
In my August 26 post, "U.S. Federal Budget Cuts in the 1990s," I pointed out that U.S. government spending fell from 21.8 percent of GDP in 1990 to 18.4 percent of GDP in 2000, a 3.4-percentage-point drop. I focused on... MORE

Net Worth Makes You Trustworthy

Macroeconomics
Garett Jones
Eli Dourado has a great post on whether we can believe we're still in the short run (see Bryan's critique here). Along the way, Dourado calls into question the sticky debt channel, correctly noting that according to official estimates, household... MORE

Long-Run Unemployment at Low Inflation: Dourado vs. Akerlof-Dickens-Perry

Behavioral Economics and Rationality
Bryan Caplan
My friend and former student Eli Dourado has gotten a lot of attention for his recent post, "The Short-Run Is Short."  Key passage:Around 40 percent of the unemployed have been unemployed for six months or longer. And the mean duration of... MORE

I'm still shocked at the speed with which bipartisan elites coalesced around TARP.  A key reason: The proffered alternatives were incredibly painful. No bailouts would have meant bankruptcies much bigger and more complicated than Lehman--and that bankruptcy ostensibly threatened short... MORE

Bad balance sheets: Awful for retail demand

Macroeconomics
Garett Jones
Mian and Sufi (who showed that cash for clunkers failed) have written a batch of papers on leverage and the financial crisis. This one may be my favorite: They check to see whether counties with the highest leverage before the crisis... MORE

Sumner Channels Yglesias Against Jones

Behavioral Economics and Rationality
Bryan Caplan
Garett Jones is one of the most Sumnerian macroeconomists I know.  But he's not Sumnerian enough for Sumner.  Sumner channels Matt Yglesias to question the importance of Garett's debt deflation mechanism (or to be more precise, debt less-than-expected-inflation mechanism):Debt prices... MORE

Debt: The Stickiest Price of All

Macroeconomics
Garett Jones
Economists tell a lot of stories about how a fall in dollar spending can hurt the real economy.  And we should be forced to tell these stories--we shouldn't take it for granted that a fall in spending causes a fall... MORE

Lee Ohanian on the Great Recession

Macroeconomics
Arnold Kling
He talks with Russ Roberts. A few excerpts: typically in U.S. business cycles, productivity, measured either as total factor productivity or labor productivity--output per hour or output per worker--typically falls significantly during substantial recessions such as those in the 1970s... MORE

Harry Byrd on Keynesianism

Macroeconomics
David Henderson
When I'm at my cottage in Canada, as I am now, I do a lot of reading. I just finished Robert Caro's new book, The Years of Lyndon Johnson: The Passage of Power. It's good, but for those with limited... MORE

In a recent e-mail alerting me to an important 2011 piece by Alan Greenspan that I somehow had missed ("Activism," International Finance 14:1, 2011: pp. 165-182), Jeff Hummel writes the following: One of the unusual features of the current recession... MORE

Classifying a Helicopter Drop

Macroeconomics
Bryan Caplan
A question for economists of all factions:What would you call a "helicopter drop" of cash: "monetary policy" or "fiscal policy"?Please explain your answer.... MORE

Austro-Keynesianism

Austrian Economics
Arnold Kling
About four years ago, I described myself as an Austro-Keynesian. Recently, I have been asked about that concept. One way to put it is that I accept and reject some major tenets of each camp. From the Keynes camp, I... MORE

Fed Forecasting Errors

Macroeconomics
Arnold Kling
Evan Soltas writes, A disparaging but not unfair comparison would be to little orphan Annie. "The sun'll come out tomorrow," Annie sang. "Bet your bottom dollar that tomorrow there'll be sun." The 3-to-4 percent recovery growth we've been long promising... MORE

Steve Randy Waldman writes, Idle unemployment is a problem in societies that are highly productive but very unequal. Here basic goods (food, clothing) can be produced efficiently by the wealthy via capital-intensive production processes. The poor do not employ one... MORE

Gary Gorton's forthcoming book

Finance: stocks, options, etc.
Arnold Kling
It is called Misunderstanding Financial Crises, a title that may be unintentionally ironic. As you probably know, Gorton is famous for treating the crisis as a "run on the shadow banking system" that had very little real basis. The deterioration... MORE

Peter Thiel's Question

Growth: Causal Factors
Arnold Kling
Bryan has one angle. I have another. In this video, Thiel confronts Google CEO Eric Schmidt over the issue of Google's cash hoard. If you have $50 billion in low-yielding investments, are you not more of a bank than a... MORE

Ray Fisman on Structural Unemployment

Labor Mobility, Immigration, Outsourcing
Arnold Kling
He writes, Hurst notes that fewer and fewer Americans with a high school education or less are finding employment in manufacturing. This is a trend that accelerated in the late 1990s. Some of those lost jobs resulted in twentysomethings exiting... MORE

A Thought to Ponder

Behavioral Economics and Rationality
Arnold Kling
from Timothy Taylor. Behind Hornbeck's estimates seems to me a deeper pattern of human behavior. When confronted with difficulties, leaving to try somewhere else is hard, but do-able. Staying and continuing with the same behavior is unpleasant, but do-able. But... MORE

The Selgin-Sumner-Tobin Model vs. PSST

Macroeconomics
Arnold Kling
George Selgin writes, U.S. NGDP was restored to its pre-crisis level over two years ago. Since then both its actual and its forecast growth rate have been hovering relatively steadily around 5 percent, or about two percentage points below the... MORE

Jobless Science Ph.D's

Labor Market
Arnold Kling
The Washington Post has the story, but buries the lede. The pharmaceutical industry once was a haven for biologists and chemists who did not go into academia. Well-paying, stable research jobs were plentiful in the Northeast, the San Francisco Bay... MORE

Kahneman on the Crash

Behavioral Economics and Rationality
Bryan Caplan
Daniel Kahneman's view of the 2008 crash is eerily similar to my own:Many people now say they knew a financial crisis was coming, but they didn't really. After a crisis we tell ourselves we understand why it happened and maintain... MORE

The Debt-Fueled Binge Story, Keynes, and PSST

Macroeconomics
Arnold Kling
Mark Thoma gives us Tim Duy: What was more important in holding the economy close to potential output, residential construction itself, or the housing price bubble? I tend to believe the price-driven balance sheet effects were driving dynamics over this... MORE

The Drop in Home Equity

Macroeconomics
Arnold Kling
Timothy Taylor has written one of his bests posts. He writes, Through much of the 1990s, the ratio of owner's equity to GDP fell, but in the early 1990s, that was partly a result of depressed regional real estate markets... MORE

PSST: Work-Sharing May Not Work

Macroeconomics
Arnold Kling
Don Peck writes, Today, American companies facing weak demand typically lay off workers, even though that decision can be costly down the road (rehiring and training are expensive). A work-sharing program would allow companies to instead make temporary, across-the-board reductions... MORE

Krugman on Inflation

Macroeconomics
David Henderson
Paul Krugman writes: I've been writing about how macroeconomic reality under Ronald Reagan didn't actually match the myth, and many people are inevitably upset. And one of the things they tend to bring up is the hoary old myth that... MORE

Awaiting Comments from Scott Sumner

Monetary Policy
Arnold Kling
Two papers on Milton Friedman's monetarism (both in the same pdf), one from Jerry Jordan and one from Allan Meltzer. They come from a 2010 symposium sponsored by the LIberty Fund and the Pacific Research Institute, and they are reproduced... MORE

Really???

Macroeconomics
Arnold Kling
Simon Wren-Lewis writes, I do not think targeting nominal GDP means that the monetary authorities can achieve that target at all points in time. The main way I think it overcomes the zero lower bound (ZLB) for nominal interest rates... MORE

What I'm Reading

Books: Reviews and Suggested Readings
Arnold Kling
The Kindle sample for Robert Hetzel's The Great Recession. I will probably buy the book, but its exorbitant price strikes me as profoundly unfair. If you are interested in the book, then I recommend my Million Mutinies series (continues here... MORE

Garett Jones Blogs

Central Planning vs. Local Knowledge
Arnold Kling
He is one of my favorite economists. He is only guest-blogging now, for Megan McArdle. I had stopped reading her blog while others were substituting, but Garett is a must-read. Still, his posts could use a bit of refinement, which... MORE

Interest Rates: The Strange Interlude

Macroeconomics
Arnold Kling
Russ Roberts pointed me to an essay from last year, by Edmund Phelps. The bond market will see that, in the long run, the pile-up of government debt - and any pile-up of entitlements - will make things much worse... MORE

Model Forecasting Performance

Macroeconomics
Arnold Kling
Mark Thoma has the story, from Volker Wieland and Maik Wolters. Basically, the forecasts made in the latter part of 2008 failed to anticipate the severity of the recession. Here are some implications that come to mind: 1. The mainstream... MORE

New Thinking in Macroeconomics

Macroeconomics
Arnold Kling
The latest essay in my "million mutinies" series says, For mainstream economists, the financial crisis has produced a new intuitive model of the economy which has yet to be articulated in any formal theory. Of course, I do not believe... MORE

Face-Saving and the Business Cycle

Macroeconomics
Arnold Kling
From a new paper by Steven R. Grenadier, Andrey Malenko, and Ilya A. Strabulaev. When decision makers face the unappealing task of revealing unsuccessful outcomes that impact their reputations, delay may be their first instinct.1 Delay becomes even more enticing... MORE

Free for Now

Macroeconomics
Arnold Kling
Recent issues of some journals from de Gruyter publishers, including Capitalism and Society, which published a paper of mine on PSST.... MORE

DeLong and Summers

Macroeconomics
Arnold Kling
I outsource my comments to Scott Sumner. So let's start over. The Fed is unwilling to provide enough monetary stimulus. OK, now what is the point of this paper? Is this to train our future econ PhD students? Are we... MORE

Leveraging and De-leveraging

Macroeconomics
Arnold Kling
Timothy Taylor writes, The claim isn't that leverage cycles explain all recessions, but rather that they can help explain why some recessions--often those that also include a financial crash--can turn out to be so severe. The U.S. data on borrowing... MORE

Notes on the Phillips Curve

Macroeconomics
Arnold Kling
1. The original version expressed a trade-off in terms of the level of inflation vs. the level of the unemployment rate. From about 1953-1968, the trade-off was approximately: inflation + unemployment = 7 percent. 2. In the 1970's Phillips Curve... MORE

Potential Output Straw Man

Macroeconomics
Arnold Kling
Recently, bloggers have been talking about potential output or potential GDP. I find the discussion to be frequently misleading. For example, Mark Thoma quotes Tim Duy: If we claim the economic potential of the nation has declined - that in... MORE

The Evolution of Macroeconomics, Part Two

Macroeconomics
Arnold Kling
My latest essay: We have accumulated more than six decades of macroeconomic experience since the end of World War II, yet neither stubborn Keynesians nor stubborn monetarists have encountered any data that would make them change their minds. Instead, since... MORE

New Commanding Heights Watch

Labor Market
Arnold Kling
A reader who remembers this essay suggested this chart: I lifted the chart from Barry Ritholtz, who in turn lifted it from paper by David Andolfatto and Marcela M. Williams. I think that the evidence for structural change as a... MORE

The Bailouts and the Economy

Macroeconomics
Arnold Kling
A Panel of Expert Economists was asked whether they agreed with: Because the U.S. Treasury bailed out and backstopped banks (by injecting equity into them in late 2008, and later committing to provide public capital to any banks that failed... MORE

Timothy Taylor on Long-term Unemployment

Labor Market
Arnold Kling
Timothy Taylor writes, We need a convincing theory of this third kind of unemployment--sluggish unemployment, tar-pit unemployment--and an associated sense of what policies are useful for addressing it. Firms as a group have high profits and strong cash reserves, but... MORE

Paul Krugman on IS-LM

Macroeconomics
Arnold Kling
He writes, The immediate problem was a huge shortfall of demand, as the private sector moved from large financial deficit to large financial surplus. Pointer from Mark Thoma. You have the basic identity that (S-I) + (T-G) = (X-M). That... MORE

Bryan and Scott respond, sort of

Labor Market
Arnold Kling
Bryan responds to my question. Scott Sumner also responded in the comments on my original post. My question is how to reconcile low employment with low unit labor costs. Presumably, low unit labor costs would cause labor demand to be... MORE

Is the NAIRU 8.5 percent?

Macroeconomics
Arnold Kling
Mainstream macro in the 1970s (which a lot of people seem to have gone back to) held that there was a NAIRU, meaning the non-accelerating inflation rate of unemployment. If unemployment was above that, inflation would fall. If it was... MORE

Nick Rowe's Continuity Question

Macroeconomics
Arnold Kling
He asks, Assume I am an individual household or small firm, and that I have perfectly flexible prices. How am I affected if all the other households and firms around me have sticky prices, and there is a monetary shock... MORE

The Hill Criteria and the Stimulus

Economic Methods
Arnold Kling
This week's IGM forum is on whether the stimulus produced more jobs. Most of the panelists agree that it did. I wonder how many of the panelists are familiar with the Bradford Hill Criteria for making inferences based on observational... MORE

Regional Variations in the Recession

Labor Market
Arnold Kling
Atif Mian and Amir Sufi write, The aggregate demand channel for unemployment predicts that employment losses in the non-tradable sector are higher in high leverage U.S. counties that were most severely impacted by the balance sheet shock, while losses in... MORE

Wealth and the Output Gap

Macroeconomics
Arnold Kling
Tyler Cowen writes, There is still not enough talk of wealth effects in current macro debates, as they are invoked only selectively. Scott Sumner writes, I'm missing something blindingly obvious, as Jim Bullard, David Andolfatto and Tyler Cowen (who also... MORE

The Austerity of 1946

Economic History
Arnold Kling
John Cochrane writes, I ran across a fascinating article, "A Post-Mortem on Transition Predictions of National Product," in the 1946 Journal of Political Economy, by Lawrence Klein. Klein, who would go on to create the main macroeconomic forecasting models and... MORE

My PSST Papers

Macroeconomics
Arnold Kling
The Adam Smith Institute has just released a paper of mine on patterns of sustainable specialization and trade. An excerpt: The PSST approach drops the assumption that production technology is known. Instead, the Smithian division of labour and Ricardian comparative... MORE

My PSST op-ed

Macroeconomics
Arnold Kling
in the WSJ European edition. Unfortunately, the patterns of specialization and trade that had emerged five years ago were not sustainable. Many jobs in home construction, durable-goods manufacturing and distribution, and mortgage finance were dependent on housing markets with ever-rising... MORE

An Empirical Disagreement

Labor Market
Arnold Kling
Bryan focuses our disagreement: when 10% of the workers in an occupation lose their jobs, or 5% of firms in an industry go out of business, continuity isn't merely a convenient assumption. It's a hard fact. So now it boils... MORE

Discontinuity and the Real World

Labor Market
Bryan Caplan
Arnold writes:So, if the demand for mortgages collapses, all it takes to get back to 2006 levels is for mortgage underwriters to take a 20 percent pay cut? In a world with no discontinuities, we would not get crazy subprime... MORE

Discontinuity, Revisited

Macroeconomics
Arnold Kling
Bryan writes, (c) Workers continue to be employed at their old job for 5, 10, or 20% lower wages until an entrepreneur makes (b) happen. So, if the demand for mortgages collapses, all it takes to get back to 2006... MORE

Wing-Walking Revisited

Labor Market
Bryan Caplan
Arnold writes:Suppose that a bunch of mortgage underwriters get laid off. There are two possible full employment equilibria. (a) They can be instantly employed as dishwashers at 20 cents an hour. (b)They can be employed as health insurance claims processors... MORE

Nominal GDP and PSST

Macroeconomics
Bryan Caplan
Arnold tells us:The PSST story is equally consistent with a correlation between employment and nominal GDP. It just interprets the causality as running the other way. If a bunch of workers are laid off, for whatever reason, nominal GDP will... MORE

PSST and Recovery

Macroeconomics
Arnold Kling
Bryan asks, without nominal rigidities, why doesn't the PSST model specifically predict that prices will adjust to restore full employment? Suppose that a bunch of mortgage underwriters get laid off. There are two possible full employment equilibria. (a) They can... MORE

Nominal GDP and Employment

Macroeconomics
Arnold Kling
The ratio of nominal GDP to employment is NGDP/L, where L is the level of employment. This can be decomposed into: NGDP/L = (NGDP/RGDP) x (RGDP/L) = the GDP deflator x productivity As long as inflation and productivity growth are... MORE

Quiggin on the Caplan-Quiggin Bet

Economic Methods
Bryan Caplan
In 2009, I bet John Quiggin that Europe's unemployment would average at least 1.5 percentage-points higher than the United States over the following decade.  Quiggin's update:Until now, I've been consistently ahead. EU-15 and US unemployment rates were very close during... MORE

Saving and Investment: My (Keynesian) Take

Macroeconomics
Arnold Kling
I am going to try to stick to substance, and not do name-calling. But I think I am articulating a model that is in the spirit of Keynes, which probably puts me on the Brad DeLong and Paul Krugman side... MORE

Real Real GDP

Growth: Causal Factors
Bryan Caplan
Gross Domestic Product is staunchly atheoretical.  If someone spends money on X, X is GDP - even if "someone" is Congress, and X="a bridge to nowhere."  There are exceptions; most notably, the stats supposedly exclude "intermediate goods" to avoid double... MORE

Easier to Break than to Fix

Macroeconomics
Arnold Kling
Nick Rowe writes, Negative AD shocks will do harm to PSST, but positive AD shocks cannot do good to PSST. The issue of asymmetry in macroeconomic phenomena is important. I would speculate that in a modern economy the process of... MORE

What is a Structurally Impaired Job?

Labor Market
Arnold Kling
Walter Kurtz writes, Credit Suisse defines structurally impaired sectors to "include real estate related industries, finance, manufacturing, and the state and local government sector." These are the sectors that at least in part rode the "bubble" economy wave. Many of... MORE

Ed Leamer on "Pure" Economics

Macroeconomics
David Henderson
Messieur Walras...was one of the first "mathematical economists," who chose the title Elements of Pure Economics for his 1874 book...Do you wonder what is "pure" economics? It's not an epithet, like pure baloney. "Pure" is a reference to the language... MORE

"Wages Must Fall!": Matt Yglesias Edition

Labor Market
Bryan Caplan
With this, Matt Yglesias instantly enters my sadly short list of good Keynesians:The depressing truth is that the easiest way to bring good, high-paying manufacturing jobs back to America is to make them less good and less well-paying...More goodness:[T]he reality... MORE

Mining for PSST

Macroeconomics
Arnold Kling
James Hamilton writes, My suggestion is that America should try to return to what some scholars maintain was the original source of America's success, which came from using North America's abundant natural resources as a basis for a competitive advantage... MORE

We're All Heterodox Now

Macroeconomics
Arnold Kling
The Economist writes, They have thrived on the back of massive disillusion with mainstream economics, which held that the economy would grow steadily if central banks kept inflation low and stable, and that there were no great gains in the... MORE

Keynes a la Mode

Macroeconomics
David Henderson
Backhouse and Bateman argue, as the book's title implies, that although Keynes wanted a substantial amount of government intervention, he did believe in preserving large elements of capitalism. This part of the book is somewhat persuasive, although their discussion of... MORE

Why No Mini-Recessions?

Macroeconomics
Arnold Kling
Scott Sumner writes, Now here's one of the most striking facts about US business cycles. When the unemployment rate does rise by more than 0.6%, it keeps going up and up and up. With the exception of the 1959 steel... MORE

Robert Hetzel on the Liquidity Trap

Macroeconomics
Arnold Kling
He speaks for me when he writes, The institutional fact that makes a liquidity trap an irrelevant academic construct is the unlimited ability of the central bank to create money. One can make this point in an irrefutable manner by... MORE

Cartoon Macro

Books: Reviews and Suggested Readings
Bryan Caplan
Volume 2: Macroeconomics of Grady Klein and Yoram Bauman's Cartoon Introduction to Economics ships this week - a great last-minute stocking stuffer.  Volume 1 was good (see here and here); volume 2 is better.  Chapter 2 ("Unemployment") does a swell... MORE

Bryan Caplan Crosses Nick Rowe

Labor Market
Arnold Kling
Bryan writes, Unemployment is just a labor surplus; since wages are the price of labor, the fundamental cause of unemployment has to be excessive wages. Nick Rowe writes, The only way to increase output in a demand-constrained economy is to... MORE

Joseph Stiglitz Crosses Nick Rowe

Macroeconomics
Arnold Kling
Stiglitz writes, At the beginning of the Depression, more than a fifth of all Americans worked on farms. Between 1929 and 1932, these people saw their incomes cut by somewhere between one-third and two-thirds, compounding problems that farmers had faced... MORE

"Wages Must Fall!": What All Good Keynesians Should Say

Behavioral Economics and Rationality
Bryan Caplan
When Keynesians want to gloat, they often point to the overwhelming empirical evidence in favor of nominal wage rigidity.  For the latest example, see Krugman on the Irish labor market.  Their unemployment is 14.5%, but the nominal wage index has... MORE

Two Papers on PSST

Macroeconomics
Arnold Kling
In the latest issue of Capitalism and Society. I wrote one of the papers, and then Peter Howitt wrote a comment. I recommend both of them, although personally I find Howitt's paper more interesting, because I already knew what I... MORE

NYT's Jeff Sommer's Shoddy Reporting

Macroeconomics
David Henderson
I've been busy in the last week with end-of-quarter classes and two speeches, the latter of which I'll report on today or tomorrow. Which is why I hadn't replied to Jeff Sommer's criticism of me in the New York Times.... MORE

John Cochrane's Talk at Hoover: His Version

Macroeconomics
David Henderson
On Tuesday, I posted my notes from John Cochrane's December 3 talk at Hoover. When he saw my notes, John sent me his talk and gave me permission to reprint it. Here it is. Comments at "Restoring Robust Economic Growth... MORE

Hayek and 20th Century Economic Thought

Austrian Economics
David Henderson
How important is the work of Friedrich Hayek in 20th-century economic thought? David Warsh has written an excessively nasty piece on that, which doesn't mean it contains no kernels of truth. Alex Tabarrok has written a defense of Hayek which... MORE

John Cochrane's Talk at Hoover

Macroeconomics
David Henderson
At his Friday talk at Hoover, University of Chicago economist John Cochrane went a mile a minute to try to fit a lot into 10 minutes. He succeeded and the talk was outstanding. But because he went so fast, my... MORE

Mankiw: We Need Fiscal Hawks, Monetary Doves

Macroeconomics
Arnold Kling
He writes, If I understand the news coming out of Europe correctly, the new head of the European Central Bank is offering a simple deal: If fiscal policy becomes hawkish, monetary policy will be dovish. In other words, as government... MORE

Are These Recessions All the Same?

Labor Market
Arnold Kling
Here are some data on job losses in each recession since 1970 (I grouped together the two recessions in 1980-1982). I look at total losses in nonfarm payroll employment and losses in employment in the durable goods sector. The figures... MORE

What Happened to State and Local Governments?

Macroeconomics
Arnold Kling
Michael Mandel writes, real state and local government output, as measured by the BEA, has been effectively flat since 2001. To put it a different way, the stagnation at the state and local government level started way before the 2007... MORE

Me on Middle-Class Jobs

Labor Market
Arnold Kling
Interviewed by Phil Bowermaster here. I elaborate on my thesis that the Great Depression was a major transition and that we currently are undergoing another major transition.... MORE

More on ZMP

Labor Market
Arnold Kling
Tyler Cowen comments, drawing a response from Bryan. I just don't think that the fraction of the healthy adult population with ZMP has risen much since the last time unemployment was 5%. Here is where the term sustainable in patterns... MORE

Final Points on ZMP

Labor Market
Bryan Caplan
Tyler makes some thoughtful points on ZMP.  Replies:1. There has been plenty of evidence for "labor hoarding"; oddly, once the ZMP workers start actually being fired, the concept suddenly becomes controversial.  The simple insight is that firms don't hoard so... MORE

The Truck Driver Puzzle

Labor Market
Arnold Kling
An economist who attended a business conference told me that the trucking industry is doing well (probably a sign that the economy overall is improving). However, industry experts foresee a shortage of drivers next year. How is that? Some possibilities:... MORE

The Debt Story: AD or PSST?

Macroeconomics
Arnold Kling
Atif Mian and Amir Sufi write, If weak household balance sheets are responsible for a large share of job cuts, we expected losses in non-tradable industries to be much larger in U.S. counties with weak household balance sheets. That is... MORE

Response to Bryan on ZMP

Labor Market
Arnold Kling
His post is here. I would say that there is a decent probability that he is correct. However, below are some potential counter-arguments. I will also address Don Boudreaux. On the point that past forecasts of technological unemployment have been... MORE

Do AS and AD Intersect in a Recession?

Macroeconomics
Arnold Kling
As you may know, I have been recording chalk-talks for my high school economics class. I did macro first, and now I am working on micro (I am now quite a few lectures ahead of where we are currently in... MORE

The Reasons for My Hostility to ZMP

Labor Market
Bryan Caplan
My brilliant former student Eli Dourado wonders why I'm so hostile to the Zero Marginal Productivity (ZMP) theory of high unemployment:It is hard to think of another idea that is more Caplanian. This is after all the man who pointed... MORE

How Sticky Are Nominal Wages?

Labor Market
Arnold Kling
The broadest measure of employee compensation is called the employment cost index. It includes the cost of benefits, such as health insurance. It is available quarterly, starting in the first quarter of 2001. I used the private sector worker ECI.... MORE

Measurement Problems: House Price Inflation

Macroeconomics
Arnold Kling
A while back, Scott Sumner wrote, The BLS doesn't claim housing prices fell 7.7% since mid-2006, they claim they rose by 7.7%. Just a minor 39.3% discrepancy with C-S. BLS is the Bureau of Labor Statistics, the custodians of the... MORE

In my last reply to Arnold, I asked for a "Guide to Discontinuity/ZMP for Skeptics."  Arnold's response:The main evidence that I cite against the AD/AS story is the length of unemployment spells and the large number of workers who are... MORE

Youth Unemployment: A Puzzle for Any Story

Labor Market
Arnold Kling
Mike Konczal writes, Every age group has seen a substantial drop in the employment-population ratio during this Lesser Depression, but no other group I've seen comes close to this plummet. For the first time in half a century, a majority... MORE

Evidence for PSST: A Rejoinder

Labor Market
Arnold Kling
Bryan writes, What's the best available "Guide to Discontinuity/ZMP for Skeptics"? Non-economists have always been quick to believe stories about technological unemployment. Economists have been ridiculing this popular fear for centuries. What happened in the last three years that ought... MORE

Reply to Arnold on PSST

Labor Market
Bryan Caplan
My last post critiqued Arnold's PSST ("patterns of sustainable specialization and trade") alternative to the conventional aggregate supply/aggregate demand model:In Arnold's story, firms and workers violate the First Law of Wing Walking: Never let hold of what you've got until... MORE

Discontinuities

Labor Market
Arnold Kling
Bryan writes then when technological change occurs, we should observe Cut wages in existing industries drastically enough to keep firms afloat and workers fully employed. That is true for small changes. Mathematically, it assumes continuous functions. It may not be... MORE

PSST vs. the First Law of Wing-Walking

Labor Market
Bryan Caplan
For the last couple of years, Arnold has been energetically promoting a macroeconomic alternative to the standard AS-AD model.  He calls it PSST - "patterns of sustainable specialization and trade": I focus on patterns of trade to try to avoid... MORE

Have a Nice Day

Optimum Currency Areas
Arnold Kling
That is about all that is left to say about the European situation. Clive Crook writes, the only sane choice is to accept the logic of the currency union they created and the obligations that go with it. In the... MORE

Nice Sentence

Macroeconomics
Arnold Kling
From Ed Glaeser. Unemployment represents a crisis of imagination, a failure to figure out how to make potential workers productive in the modern economy. That might be a one-sentence articulation of PSST. The challenge is to find the comparative advantage... MORE

Yesterday, while reviewing my tax withholdings, I noticed a weird anomaly.  In 2011, for the first time in my life, my employer was paying more Social Security taxes than I was.  I furrowed my brow until I remembered this earlier... MORE

Russ Roberts on Aggregate Demand

Macroeconomics
Arnold Kling
He writes, When an economy is not healthy, there is less exchange. There is less buying and selling of goods and services and labor. To describe that unhealthiness as less aggregate demand is just to put the problem into different... MORE

Newspaper Macroeconomics

Macroeconomics
Arnold Kling
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... MORE

He writes, There are no solid theoretical foundations for price level theory in a modern economy where hedonics is very important. It's not just that we're not good at measuring price changes for computers and consulting services; it's not even... MORE

The Construction Sector and the Economy

Macroeconomics
Arnold Kling
Citing work by his colleagues, David Andolfatto writes, the collapse of the construction sector accounts for 46.4% of the decline in U.S. GDP and 51.9% of the decline in total employment (roughly 3.4 million jobs). Pointer from Mark Thoma. There... MORE

For the Myth of the Macroeconomy File

Growth: Consequences
Arnold Kling
1. I found an ungated version of the John Haltiwanger paper first spotted by Mark Thoma and then praised by Tyler Cowen. Some excerpts and my comments are below the fold. 2. Brian Arthur has a piece on the digital... MORE

The Myth of the Median Worker

Macroeconomics
Arnold Kling
Russ Roberts continues to engage with Tyler Cowen on whether there has been stagnation. A lot of the argument is over what has happened to the median worker. But that may not be a useful construct. Let us continue to... MORE

Russ Roberts on Motivations for Belief

Macroeconomics
David Henderson
Pardon me for coming late to this discussion. I've been sitting on airplanes this week but am now back. Russ Roberts recently wrote: The evidence for the Keynesian worldview is very mixed. Most economists come down in favor or against... MORE

The Legacy of Sargent and Sims

Economic Methods
Arnold Kling
Some thoughts, beyond my reaction of "eh." 1. Since their work became widely circulated, one can argue plausibly that 99 percent of all macroeconomics papers published, dissertations completed, and tenure decisions awarded have been in the mold of Sargent, Sims,... MORE

Comments on Servants

Labor Market
Arnold Kling
I liked the comment thread on this post. A few paragraphs from Michael E. Sullivan's comment: You can get a huge return by hiring a personal assistant if your time is very valuable, but in order to achieve this, your... MORE

Henderson on Sargent and Sims Nobel

Macroeconomics
David Henderson
"A Nobel for Non-Keynesians," my piece on the Nobel prize winners, Thomas J. Sargent and Christopher A. Sims, ran in the Wall Street Journal today. I wrote it yesterday a.m., which is why I didn't take time to post on... MORE

Joseph Stiglitz on Recalculation

Macroeconomics
Arnold Kling
He writes, First, America and the world were victims of their own success. Rapid productivity increases in manufacturing had outpaced growth in demand, which meant that manufacturing employment decreased. Labor had to shift to services. The problem is analogous to... MORE

Where are the Servants?

Labor Market
Arnold Kling
In an economy where some folks are very rich and many folks are unemployed, why are there not more personal servants? Why don't Sergey Brin and Bill Gates have hundreds of people on personal retainer? I pose this question as... MORE

The IS-LM Model Attacked and Defended

Macroeconomics
Arnold Kling
Tyler Cowen writes, Every time you write down an IS-LM model you should hear a clock start ticking in your head. The longer the clock ticks, you more you need to worry about this problem because the more that a)... MORE

Quotable

Labor Market
Arnold Kling
From the WSJ blog: Since the recession ended, businesses had increased their real spending on equipment and software by a strong 26%, while they have added almost nothing to their payrolls. The post's title also is eloquent.... MORE

More on the Myth of the Macroeconomy

Macroeconomics
Arnold Kling
From a speech by Electronic Arts CEO John Riccitiello, reported by Andy Katkin. I see an unfortunate gap between the economic performance of key parts of the tech sector, and the rest of our economy. I see two economies on... MORE

The Myth of the Macroeconomy

Macroeconomics
Arnold Kling
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... MORE

On Macroeconometric Models

Economic Methods
Arnold Kling
My latest essay. the Congressional Budget Office can reasonably estimate the effect of economic and policy scenarios on components of the government's budget, including taxes and spending. However, it cannot reasonably estimate the effect of tax and spending changes on... MORE

Jim Follain on Macro

Macroeconomics
Arnold Kling
He writes, First, let's do more research to help reduce the uncertainty regarding the fiscal situation we face and the new, modern and more complex economy in which we live. This step will involve de-emphasizing a number of metrics underlying... MORE

The Job-Seeker's Paradox

Labor Market
Arnold Kling
Phil Bowermaster writes, Increasingly, perhaps, a job is something that we each have to create. We can't count on someone else to create one for us. That model is disappearing. We have to carve something out for ourselves, something that... MORE

A Lesson in Mainstream Macro

Macroeconomics
Arnold Kling
From Narayana Kocherlakota, The impact of any macroeconomic shock can be divided into two components. One component is the effect of the natural demand and supply adjustments that would occur if prices and their expectations were to adjust continuously. Monetary... MORE

Some Macro to read and to think about

Economic History
Arnold Kling
1. Doug Irwin offers a monetarist explanation of the 1937 recession, based on gold sterilization. Scott Sumner is no doubt pumping his fist in the air. 2. Daniel Little on the Great Factor-Price Equalization. 3. Here is a thought I... MORE

Making Astrology Look Respectable

Economic Methods
Arnold Kling
On the Internet, it is easy to find the John Kenneth Galbraith quip, "The only function of economic forecasting is to make astrology look respectable." Does anyone have a genuine citation for it? A page number somewhere? Anyway, they're back... MORE

Old-time Religion?

Macroeconomics
Arnold Kling
Paul Krugman writes, You often hear people saying that the crisis has revealed the need for new economic thinking, for new ideas about macroeconomics. Yet the first priority seems to be to resuscitate old ideas. Brad DeLong describes an interview... MORE

My Jobs Speech

Labor Market
Arnold Kling
I figured I would talk before the President does. Here goes. Let me know what you think.... MORE

Keynesianism vs. Pump Priming

Macroeconomics
Bryan Caplan
Keynesianism is widely seen as a "pump priming" rationale for government intervention.  The government sees the economy in the doldrums, gives it a much-needed jolt, and then the private economy gets back on feet - with no need for further... MORE

Don't miss Tyler Cowen's excellent post on the size versus the length of fiscal stimulus.  Key passages:For all the talk of a "large stimulus," you don't hear much about a "longer stimulus."... Ideally a stimulus employs some idle labor, stops... MORE

Do We Need all this Expectations Hoodoo?

Macroeconomics
Arnold Kling
Michael Woodford writes, expectations can be shaped far more effectively by speaking directly about future policy, rather than leaving it to be inferred from actions that have no definite implications for the future. Words speak louder than actions? Woodford is... MORE

Health Insurance, Fairness Norms, and Unemployment

Behavioral Economics and Rationality
Bryan Caplan
Nominal wages rarely fall - even when there's high unemployment.  Part of the reason is regulation, of course.  But even under laissez-faire, employers have to cope with human psychology.  Almost all workers think that nominal wages cuts are unfair.  And... MORE

Should We Forget the Production Function?

Macroeconomics
Arnold Kling
That is the question that occurred to me after reading Tyler Cowen. If the employers don't want you at the high wage, and don't want you at the low wage, what might your perceived MP be, temporarily or not? MP... MORE

Paul Krugman's Switch on the Housing Bubble

Macroeconomics
David Henderson
From advocate to opponent. Advocate: The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when... MORE

Sounds Like PSST

Macroeconomics
Arnold Kling
From the introduction to a new paper by Paul Beaudry and Franck Portier: Changes in measured macroeconomic activity are mainly driven by changes in the volume of trade between individuals. There are two types of causes to changes in volume... MORE

Clive Crook on Monetary Policy

Monetary Policy
Arnold Kling
He writes, The past few weeks have settled, to my satisfaction at least, a long-running debate on this very topic. Rather than targeting inflation, central banks should keep nominal incomes growing on a pre-announced path: say 5 per cent a... MORE

Microfoundations of Unemployment

Labor Market
Arnold Kling
Tyler Cowen writes, Why don't the unemployed lower their wages to find a job? The more tragic you think unemployment is, the greater the puzzle here, and yet the people who stress the tragedy are often least likely to admit... MORE

GDP and Employment in the Current Cycle

Labor Market
Arnold Kling
The latest GDP revisions have tightened the relationship between employment and GDP in this cycle compared to the unrevised data. Some advocates of an AD-AS story are ready to say, "Nothing structural to see here. The aggregate production function is... MORE

Keynesianism as a ZMP Story

Macroeconomics
Bryan Caplan
I'm not a fan of Tyler Cowen's view that many unemployed workers have Zero Marginal Product (ZMP).  Cowen and Lemke:In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their... MORE

A Macroeconomic Puzzle

Macroeconomics
Arnold Kling
Explain why, with unemployment over 9 percent, there has emerged the phenomenon of self-service frozen yogurt shops.... MORE

Models Vs. Hand-Waving

Economic Methods
Arnold Kling
Nick Rowe writes, the answer to the question "what is the effect of a 1% increase in perceived risk on government bonds?" is exactly the same as the answer to the question "what is the effect of a 1% increase... MORE

More Wisdom from CPK

Books: Reviews and Suggested Readings
Arnold Kling
I've finished Manias, Panics, and Crashes, 5th edition. Some thoughts in addition to my previous ones (here and here). p. 55: The Kipper- und Wipperzeit [according to Wikipedia, translates to tipper and see-saw time] of 1619-1623...got its name from the... MORE

The Wisdom of CPK

Books: Reviews and Suggested Readings
Arnold Kling
If I were writing a blurb for the fifth edition of Charles P. Kindleberger's classic Manias, Panics, and Crashes, I would say that "This is the best narrative that has been written about the 2008 financial crisis, and it was... MORE

Hummel on Krugman, Keynes, and Patinkin

Macroeconomics
David Henderson
Indeed, Krugman's presentation doesn't incorporate any of the more sophisticated arguments about the financial system of such old-line, hard-core Keynesians as James Tobin. He moreover completely ignores any possible complications arising from Ricardian Equivalence, essentially knocking down straw-men objections to... MORE

Sumner on the Big Macro Debate

Monetary Policy
David Henderson
Lots of brilliant people talking past each other. Lacking a common language for communication. Welcome to elite macroeconomics, circa 2011. The right doesn't think we need more NGDP [Nominal Gross Domestic Product] and the left doesn't understand that the Fed... MORE

Keynes and Anti-Keynes

Macroeconomics
Arnold Kling
John Taylor writes, In my view, rigidities exist in the real world and to describe accurately how the world works you need to incorporate such rigidities in your models, which of course Keynes emphasized. But you also need to include... MORE

Invoking Irving Fisher

Macroeconomics
Arnold Kling
Lacy Hunt writes, In 1933, Fisher held out some hope that fiscal policy might be helpful in dealing with excessive debt, but within several years he had completely rejected the Keynesian view. By 1940, Fisher had firmly stated to FDR... MORE

Narrating the Financial Crisis

Macroeconomics
Arnold Kling
Scott Sumner raises some challenging points. But the link between the housing bubble and the severe financial panic is much weaker than people realize. And the link between the severe financial panic and high unemployment in 2011 is almost nonexistent.... MORE

The Case for Fiscal Expansion

Macroeconomics
Arnold Kling
There is an argument for fiscal expansion, which is "unemployment is bad, and Republicans are bad for wanting to cut spending, especially when there is a lot of unemployment." However, if you want to change someone's mind, you need something... MORE

The Power of Folk Macroeconomics

Macroeconomics
Arnold Kling
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... MORE

PSST and Aggregation

Macroeconomics
Arnold Kling
On PSST, my former thesis adviser writes via snail mail, Obviously I don't have to be told that there are very many outputs and very many distinguishable inputs. A question arises whether aggregation of some degree is a last resort,... MORE

PSST and Fragility

Macroeconomics
Arnold Kling
Ted, in a comment on this post, asks a number of good questions. How similar is your idea of PSST to David Levine's Production Chains? Thanks for point out this paper. There is a lot of overlap, in that we... MORE

Three Random Links

Macroeconomics
Arnold Kling
Jason Collins writes, Incarceration removes young men from the mating market during their mating prime. As the propensity to commit crime is heritable, the removal of criminals from the mating market will reduce the frequency of the genes associated with... MORE

PSST and the Legal Profession

Macroeconomics
Arnold Kling
From the Wall Street Journal. Mr. Aponte is part of a growing field of itinerant "contract" attorneys who move from job to job, getting paid by the hour, largely to review documents for law firms and corporate clients. These short-term... MORE

Larry Summers vs. PSST

Macroeconomics
Arnold Kling
He gives us a double whammy. He writes in the Financial Times, That the problem in a period of high unemployment, as now, is a lack of business demand for employees not any lack of desire to work is all... MORE

The Long Recalculation

Macroeconomics
Arnold Kling
Justin Wolfers writes, Focus on the red line, and you'll see that the recession began in the final quarter of 2006, not the end of 2007. The red line also fell by more, and over a longer period. And today,... MORE

A Bet on PSST vs. AS-AD?

Macroeconomics
Arnold Kling
Karl Smith is interested in some sort of bet. I, however, will predict that the US will achieve an average 5% real growth [rate] over a sustained period [of] say 12 quarters [or] more starting within five years. Tim Pawlenty... MORE

PSST and Long-term Unemployment

Macroeconomics
Arnold Kling
From CBS news: About 6.2 million Americans, 45.1 percent of all unemployed workers in this country, have been jobless for more than six months - a higher percentage than during the Great Depression. I read this as saying that, relative... MORE

PSST vs. Potential GDP

Macroeconomics
Arnold Kling
The AS-AD paradigm includes a concept called potential GDP. Mainstream macroeconomists sort of force-feed macroeconomic history into AS-AD by talking about "cyclically-adjusted productivity" when they talk about AS and "trend-adjusted GDP" when they talk about AD. Consider the following types... MORE

Entering the Market

Economic History
Arnold Kling
Cambridge University reports on research by economic historian Sheilagh Ogilvie. In some communities in Germany, people recorded their possessions at the time of marriage. This can allow Ogilvie to reconstruct the development of the German economy from 1600 to 1900... MORE

Why do Depressions Occur?

Macroeconomics
Arnold Kling
Brad DeLong writes, When you ask believers in "recalculation" what pattern of production and trade proved to be unsustainable in 2007, they answer: "building so many houses." When you ask believers why the market economy has been unable to sort... MORE

PSST vs. Monetary Walrasianism

Macroeconomics
Arnold Kling
Nick Rowe writes, Why wouldn't a reduction in marginal tax rates on all forms of "nominal interest income" (i.e. all forms of "income" from deferred consumption) have exactly the same effect on Aggregate Demand as an increase in expected inflation?... MORE

PSST as Market Failure

Macroeconomics
Arnold Kling
Noah Smith seems to think of it that way. in a PSST world, there is no invisible hand. This opens the door for a hugely expanded role for government (or other large, centralized actors) in the macroeconomy. If global patterns... MORE

The Trickle-Down Stimulus

Macroeconomics
Arnold Kling
A commenter here writes, So the stimulus was the left's version of "trickle down economics"? Well, Timothy Conley and Bill Dupor write, We estimate the Act created/saved 450 thousand government-sector jobs and destroyed/forestalled one million private sector jobs. Thanks to... MORE

Chapman on Inflation

Macroeconomics
David Henderson
One thing I've always liked about Chicago Tribune columnist Steve Chapman's writing is its high degree of sophistication in economics relative to the usual in regional and even national newspapers. Exhibit A is his column today on inflation. He brings... MORE

Has Someone Not Written This Paper?

Macroeconomics
Arnold Kling
Title: Technological Unemployment in a Stock-Adjustment Model Abstract: Innovation can cause overproduction of consumer durable goods relative to the desired stock. Unemployment can result, until new industries emerge to absorb labor. Think of the auto industry in the 1920s. Given... MORE

Notes from What I've Been Reading

Books: Reviews and Suggested Readings
Arnold Kling
As you know, it's Inventing Ourselves Out of Jobs? America's Debate over Technological Unemployment, 1929-1981., by Amy Sue Bix. It came out in 2000. I ordered it after seeing it referred to in A Great Leap Forward, the book I... MORE

Trade, Mechanization, and Displacement

Growth: Causal Factors
Arnold Kling
James C. Cooper writes, Between 1999 and 2009, these large global corporations pared 2.9 million workers from their U.S. payrolls while adding 2.4 million jobs at their foreign affiliates. That's a reversal from the previous decade, when they boosted payrolls... MORE

Cyclical vs. Technological Unemployment

Macroeconomics
Arnold Kling
Tyler Cowen writes about the hospitality sector of the economy, In terms of absolute levels, business is above where it was before the crisis. At first glance, that should seem enough to support the nominal wage levels of 2007. You... MORE

Field Review

Books: Reviews and Suggested Readings
Arnold Kling
As promised, here is my review essay on Alexander Field's A Great Leap Forward. I think the highlight of the essay is the table that lays out the six eras discussed in the book. How much does the current period... MORE

Debating Monetarism

Macroeconomics
Arnold Kling
Matt Rognlie takes on the monetarists. Note that the comments on the post, including Matt's comments, are where the debate gets elucidated.... MORE

A Bet I Will Make

Finance: stocks, options, etc.
Arnold Kling
Some comments on my post on Social Security challenged me to bet. Here is a bet I am willing to make. It concerns the following proof. 1. national output = national income (note that is true by definition in a... MORE

Keynes and Central Planning

Macroeconomics
Bryan Caplan
The new Keynes-Hayek video has been reviving academic interest in history of thought.  The issue: Was Keynes an advocate of central planning?  This is well outside my expertise, but I can't resist quoting the infamous intro to the German edition... MORE

Keynes v. Hayek, Round 2

Central Planning vs. Local Knowledge
David Henderson
I'll try to hit highlights that other people haven't mentioned (much) on the latest video by John Papola and Russ Roberts. Big picture, though: I think it's even better than the first one, both in content and in "production values."... MORE

Keynes and Hayek, Round 2

Macroeconomics
Arnold Kling
Wow. Mike Munger, a political science professor at Duke, gives an Oscar-caliber performance as a security guard in the opening scene. Keynes argues that we cannot simply sit back and watch unemployment mount up. Hayek argues that the economy is... MORE

Big-Picture Finance Questions

Finance: stocks, options, etc.
Arnold Kling
John Cochrane writes, Most of macroeconomics focuses on variation in a single intertemporal price, "the" interest rate, which intermediates saving and investment. Yet in the recent recession...interest rates paid by borrowers (and received by any investors willing to lend) spiked... MORE

Home Prices During the Great Depression

Macroeconomics
Bryan Caplan
Home prices did amazingly well during the Great Depression.  According to Schiller's index, it looks likes inflation-adjusted prices fell from about 74 to 69 between 1929 and 1933 - about a 7% decline.  By 1940, they were up to about... MORE

David Leonhardt quotes economic historian Alexander Field: In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input Sounds like a jobless recovery. The... MORE

Garett Jones on Ultramasculine Economics

Macroeconomics
Arnold Kling
I heard him give a talk yesterday. He commits what he calls the "Summers heresy" and suggests that there are important gender differences. On mathematical/spatial reasoning, men have a higher mean and, more important, a higher variance. So the upper... MORE

Corporate Profits

Macroeconomics
Arnold Kling
In the comments on other posts, I have seen questions addressed to me about "excessive corporate profits." I am going to answer this question in very basic terms. The way that national income accounting works, we have: net private saving... MORE

What would Scott Sumner Say?

Labor Market
Arnold Kling
Patricia Minczeski writes on the WSJ blog, U.S. wages as measured in the Labor Department's employment report have been largely stagnant over the past few months, despite improvements in the job market. In fact, many industries saw more wage growth... MORE

Michael Mandel Strikes Again

Macroeconomics
Arnold Kling
Is he now this country's most important macroeconomist? Here, he writes, in many of these industries, we actually have physical measures- tons of steel, barrels of oil, bushels of corn-that gives us a check on the BEA numbers (The one... MORE

Key Data for 2009

Macroeconomics
Arnold Kling
First, we learned that business start-ups declined sharply. Now, we learn that job creation was sluggish. I would recommend trying to understand why these phenomena occurred, rather than relying on preconceptions. I think that there is some real work to... MORE

Quiggin's Zombie

Books: Reviews and Suggested Readings
David Henderson
It is disappointing that there is one zombie idea that Quiggin does not bury and still buys into: the idea that a government with a lot of coercive power over people's lives can be trusted to use that power for... MORE

BPEA on line

Books: Reviews and Suggested Readings
Arnold Kling
You can now access the current issue and complete archive of Brookings Papers on Economic Activity. Many classic papers in applied macro are hence made available. Thanks to Ted Gayer for an email pointer, and thanks to Brookings for undertaking... MORE

The Recalculation Story, Brad DeLong Version

Macroeconomics
Arnold Kling
He writes, After the most recent downturn, however--and to a lesser extent after its two predecessors--things have been different. The downturn was not caused by a liquidity squeeze. The Federal Reserve cannot wave is wand and return asset prices to... MORE

Kling wrote, the textbook definition of a liquidity trap is an infinite elasticity of the demand for money. The central bank can expand the money supply to an unlimited degree, without affecting interest rates, output, or prices. Paul Krugman #1... MORE

Crowding Out: A New Subject

Macroeconomics
Arnold Kling
Menzie Chinn writes, It appears to me that real interest rates were undeniably higher during the Reagan administration than during, say, the past four quarters of the Obama administration I see that we have managed to change the topic from... MORE

Liquidity Traps and Unicorns

Macroeconomics
Arnold Kling
The difference being that you might one day see a unicorn. A liquidity trap requires 1. Low nominal interest rates. (The nominal interest rate is the interest rate as stated.) 2. High real interest rates, due to low or negative... MORE

Morning Crankiness, Nobel Laureates Edition

Macroeconomics
Arnold Kling
I am a bit "off" this morning. Ordinarily, my philosophy is "catch them doing something right." If you try to correct people when they do something wrong, they just take offense, and you accomplish nothing. But, nonetheless: Nobel Laureate Paul... MORE

Matt Holzmann writes, Silicon foundries and specialty materials factories were destroyed or damaged with no real chance yet to determine the extent of that damage. But it is certain there will be severe shortages of a number of critical materials.... MORE

Regional Disasters: AS/AD vs. PSST

Macroeconomics
Arnold Kling
Suppose that a natural disaster occurs in one region. How does this affect the rest of the world? In the aggregate supply and demand paradigm, it would seem that the rest of the world benefits from stronger net exports. In... MORE

Summarizing an IMF conference, Olivier Blanchard lists nine points. I will make extended comments below the fold. Here is a crucial sentence: Monetary policy has to go beyond inflation stability, adding output and financial stability to the list of targets,... MORE

Gene Smiley on the Great Depression

Macroeconomics
David Henderson
One of the commenters, mark, on Arnold's post today on the Great Depression noted that Gene Smiley has a book out on it. The book is excellent. I asked Gene to put in a few thousand words the highlights of... MORE

The purpose of this exercise is to test my understanding of Sumner's view of monetary theory and policy. I will do this by putting words in the mouths of Sumner and Taylor. It will be a long post, so it... MORE

The Macro Implications of Monetized Debt

Macroeconomics
Arnold Kling
PIMCO's Bill Gross writes, most of the publically issued $9 trillion of Treasury notes and bonds are now in the hands of foreign sovereigns and the Fed (60%) while private market investors such as bond funds, insurance companies and banks... MORE

Greenspan on the Economy

Macroeconomics
David Henderson
Yesterday, CNBC's Squawkbox had Alan Greenspan on for an extensive interview. The difference between the communication skills of Alan Greenspan as economic commentator and the communication skills of Alan Greenspan as Fed Chairman is like the difference between day and... MORE

Two Basic Macro Questions

Macroeconomics
Arnold Kling
1. Does the Fed matter? Vincent and Carmen Reinhart write, First, spending and pricing decisions are assumed to be based on long-term assessments of real income and real rates of return. Second, changes in monetary policy can only change real... MORE

Keynesian Politics and the Minimum Wage

Macroeconomics
David Henderson
Last month, Alex Tabarrok posted an interesting piece on the failure of Keynesian politics. Let's posit arguendo, he said, that Keynesian economics is correct: during a recession, if the government increases aggregate demand using tax cuts or government spending increases,... MORE

Job Losses vs. Unemployment

Labor Market
Arnold Kling
Christian Stucchio writes, it looks like job losses in construction and manufacturing are huge! In contrast, job losses in finance or business are much smaller, government is flat, and health and education have actually gained jobs! On his post, you... MORE

Scary Data on Private Investment

Macroeconomics
David Henderson
Although the financial-market panic that had flared up in late September 2008 began to subside early in 2009, net private investment continued to fall, becoming negative (-$53 billion, annual rate) in the first quarter of 2009 and even more negative... MORE

Agent-Based Modeling: Promises and Pitfalls

Economic Methods
Arnold Kling
Which of the following impediments to economic adjustment do you believe to be the most important? a) the cost of establishing a new enterprise b) the cost of integrating new workers and equipment into an existing enterprise c) the cost... MORE

David Brooks, Tyler Cowen, and PSST

Growth: Consequences
Arnold Kling
David Brooks writes, In other words, as Cowen makes clear, many of this era's technological breakthroughs produce enormous happiness gains, but surprisingly little additional economic activity. This is Tyler Cowen's Internet story. Lots of value, but not much economic activity.... MORE

What is Economic Activity?

Macroeconomics
Arnold Kling
Maybe I should write something the length of a Kindle single on Patterns of Sustainable Specialization and Trade. Below might be a way to write the opening.... MORE

Excellent Sentences

Macroeconomics
Arnold Kling
From Karl Smith: Getting a job decreases the amount of work it takes to live. That's why jobs are good. This is very consistent with the PSST story. Economic activity consists of people specializing and doing things for one another.... MORE

Another Half-Baked Model

Labor Market
Arnold Kling
This is an attempt to get at the notion of real adjustment costs in a model of Patterns of Sustainable Specialization and Trade. It is something like the Fischer Black model of macro, which influenced Tyler Cowen and me to... MORE

Mankiw vs. PSST

Macroeconomics
Arnold Kling
A commenter on this post points to a paper that Greg Mankiw wrote on real business cycle theory. If workers were unemployed voluntarily in recessions because they were moving to new jobs in other sectors, we would expect high unemployment... MORE

Milton Friedman vs. PSST

Macroeconomics
Arnold Kling
The "natural rate of unemployment, in other words," is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is imbedded in them the actual structural characteristics of the labor and commodity... MORE

Real Adjustment Costs

Macroeconomics
Arnold Kling
I am disappointed by some of the reactions to my macro play. People are not being deliberately obtuse, but they are being obtuse. That is what happens when you are committed to one paradigm and someone tries to suggest something... MORE

A Macro Play in Three Acts

Macroeconomics
Arnold Kling
The characters: Bao, Esteban, Leroy, and Marcel Act One (the boom): Bao and Leroy have opened a restaurant, as have Esteban and Marcel, serving curried baked beans and Pupusas in mushroom-wine sauce, respectively. There is a lot optimism and economic... MORE

Nick Rowe vs. Scott Sumner

Macroeconomics
Arnold Kling
Nick Rowe writes, Monetary disequilibrium theorists will disagree with those Keynesians. We add monetary exchange to the mix. We don't buy and sell output for labour. We don't buy and sell output for bonds. We buy and sell output for... MORE

I am constantly amazed by bloggers and commenters who sneer that I do not understand macroeconomics in general or aggregate demand in particular. Often, the most sneering comments come from people who have no clue about the way economists use... MORE

Light Blogging

Political Economy
Arnold Kling
I have very little time for blogging this week. Here are some things that would interest me if it were a normal week: 1. Ronald Bailey on various studies of how libertarians differ from others in terms of moral outlook.... MORE

The Great Reconfiguration, Again

Growth: Causal Factors
Arnold Kling
Jim Tankersley writes, The Great Recession wiped out what amounts to every U.S. job created in the 21st century. But even if the recession had never happened, if the economy had simply treaded water, the United States would have entered... MORE

The Great Reconfiguration

Labor Market
Arnold Kling
Michael Mandel writes, This first chart shows the change in wage and salary payments by major industry from 2000-2009, adjusted for inflation, using BEA data. We see that healthcare and social assistance generated $210 billion in real wage gains from... MORE

Robert Murphy Thinks I Fell for a Swindle

Austrian Economics
Arnold Kling
He writes, Contrary to Sumner, there is no huge reallocation of construction workers (from January 2006 to April 2008) that Kling or the Austrians must explain. Scott Sumner used housing starts to suggest that most of the decline in housing... MORE

If They Had Asked Me

Labor Market
Arnold Kling
The New York Times asks various folks for their view of why jobs have not come back during this recovery. I recommend taking a longer view of the process. I think that a major reconfiguration of the U.S. economy has... MORE

Nick Rowe notes that Spain and Ireland also have seen unusually high productivity, and hence high unemployment, relative to output during this recession. Here's my guess. It's because all three countries had a big fall in construction. But what's so... MORE

Tyler's impressed that spending and output are up, but employment isn't.  But the simplest story is just that employment is becoming a lagging indicator.*  Consider: After the last "jobless recovery," the unemployment rate still fell to 4.9% by the end... MORE

AS vs. PSST, again

Labor Market
Arnold Kling
The debate is hotting up, as our friends across the pond would say. Some random comments. 1. The Washington Post reports that some on the left want to see older workers encouraged to retire, to make room for young workers.... MORE

Scott Sumner Fights Dirty

Macroeconomics
Arnold Kling
He looks at data. Housing starts peaked in January 2006, and then fell steadily for years: January 2006 -- housing starts = 2.303 million, unemployment = 4.7% --April 2008 -- housing starts = 1.008 million, unemployment = 4.9% --October 2009... MORE

Two Notes on PSST

Macroeconomics
Arnold Kling
1. Some folks on the right are bothered by the term "sustainable" in patterns of sustainable specialization and trade. They seem to be afraid that I am some sort of tree-hugging wuss. Or that I think patterns of trade need... MORE

What Type of Unemployment?

Macroeconomics
Arnold Kling
Brad DeLong writes, It seems fairly clear to me that calling this "structural change" is somewhat of a misnomer. Structural change is when workers find jobs in expanding industries. That happens overwhelmingly during booms. For workers to lose jobs in... MORE

PSST vs. the Aggregate Production Function

Macroeconomics
Arnold Kling
Regular readers know that I am trying to nudge them toward a different paradigm in macroeconomics. I want to get away from thinking of economic activity as spending, and instead move toward thinking of it as patterns of sustainable specialization... MORE

One story of the 1930's, which I discussed recently, is that agricultural workers were displaced by tractors and other forms of mechanization. I find this an interesting story, and I went on to I post Who Will Write This Paper?... MORE

Who Will Write This Paper, No. 2?

Labor Market
Arnold Kling
Title: Fixed Worker Costs and the Distribution of Leisure Abstract: In an earlier paper, we showed that a change in technology can lead to an increase in leisure. In this paper, we explain how an increase in leisure can be... MORE

Complication vs. Complexity

Macroeconomics
Arnold Kling
In an interview, Ben Ramalin says, We treat complex things as if they were merely complicated... distinguished between complicated systems, which can be modeled mathematically, and complex systems, for which there is no mathematical model which can say, if X... MORE

Who Will Write This Paper?

Labor Market
Arnold Kling
Perhaps Cowen and Lemke. Here is my sketch: Title: Technology Shifts and Unemployment Abstract: We present a model in which shifts in technology cause unemployment. There are two types of workers, which we call Type C and Type S. A... MORE

Cowen and Lemke on Unemployment

Labor Market
Arnold Kling
They write, The fact that the United States has pre-crisis levels of output with fewer workers raises doubts as to whether those additional workers were producing very much in the first place. If a business owner fires 10 people and... MORE

Unemployment: Why Don't Employers Fish More?

Macroeconomics
Arnold Kling
I am trying to sort out my thinking on unemployment in the Recalculation Story. I think that a basic question is this: when workers lose jobs because a sector needs to shrink, this creates a pool of unemployed workers. Why... MORE

Bob Murphy has taken the time and trouble to explain and graph my critique of Obama's payroll tax cut.  Nice work, Bob!... MORE

An Indispensable Book

Money
Arnold Kling
I've read through Perry Mehrling's The New Lombard Street, and I need to read it again. Meanwhile, some thoughts. 1. Mehrling is an outstanding and engaging intellectual historian, but he fails to appreciate financial crisis porn. I'll explain below. 2.Tyler... MORE

Rationing and Recalculation

Macroeconomics
Arnold Kling
I offer a new insight into the Recalculation Story. It is inspired by this quote from p.66 of Leuchtenberg's The FDR Years, the essay on the way that many policy makers and pundits were calling on the government to mobilize... MORE

A Barbershop Quartet Metaphor

Macroeconomics
Arnold Kling
In the comments on what I am hoping will be a classic post (my rant against monetarism), Bill Woolsey insists [and Nick Rowe echoes] [if] we see lower demands for nearly all goods, low hires everwhere, low vacacancy rates, reduced... MORE

From the Recommendations for Further Reading column by Timothy Taylor in the Journal of Economic Perspectives fall issue. I eagerly look forward to this regular feature, which was started by the late Bernie Saffran, the beloved Swarthmore economics professor. My... MORE

A Rant Against Monetarism

Macroeconomics
Arnold Kling
Starting with Mark Thoma I landed on a comment by Nick Rowe. My position is that a general glut can *only* be caused by an excess demand for the medium of exchange. Oy. Such confusion. And this is nothing personal... MORE

I know lots of Keynesian economists and lots of right-wing non-economists.  I've spent decades in both worlds.  In the process, I've noticed some recurring macroeconomic miscommunications between the two camps.  Each takes something so much for granted that it can't... MORE

Ricardian Equivalence and Stimulus Failure

Macroeconomics
Arnold Kling
The graph at John Taylor's blog explains stimulus failure. (I wrote about the Cogan-Taylor work earlier, but it bears repeating.) Everyone, including Keynesians, agrees that if Ricardian equivalence holds, then stimulus does not work. Ricardian equivalence means that the folks... MORE

With perfectly flexible wages, it doesn't matter whether tax law says "employees pay" or "employers pay."  Tax incidence depends on supply and demand elasticity, not legislative intent. If wages are nominally rigid, however, the law matters.  If you cut a... MORE

Theory X?

Macroeconomics
Arnold Kling
A new paper by David Levine. capitalist economies by virtue of being efficient employ longer and more specialized production chains than more poorly organized economies. This raises output, welfare and utility, but it also leads to more "crises" than shorter... MORE

My views here may have been unclear. I said it better in my Hydraulic Macro Fable. In a diverse economy with extensive division of labor, it is inefficient to pay people in the form of output. If I am the... MORE

Morning Mark

Finance: stocks, options, etc.
Arnold Kling
Not atypically, I start the morning with links from the indispensable Mark Thoma. 1. Steven Randy Waldman waxes Austro-Keynesian. Read the whole thing. His peroration: It is not technocratic economists who will win the day and pull us out of... MORE

Morning Commentary

Macroeconomics
Arnold Kling
On three links from Mark Thoma, on macro theory, the euro, and the stalled housing market. 1. Nick Rowe writes, If people could trade goods and labour directly at zero transactions costs, without having to use monetary exchange, all Keynesian... MORE

The Phillips Curve as a Straight Line

Macroeconomics
Arnold Kling
In an attempt to view macroeconomics through a 1970 lens, I decided to model the Phillips Curve as a simple linear trade-off, using the period 1956-1968. In those years, the inflation rate averaged 2.19 percent and the unemployment rate averaged... MORE

Macroeconomics with Diffuse Priors

Economic Methods
Arnold Kling
Below, I elaborate on two claims. 1. Macroeconometrics requires the imposition of prior beliefs. 2. If one has diffuse prior beliefs, the correct macroeconomic policies are not easily formulated.... MORE

Macroeconomics, Circa 1970

Macroeconomics
Arnold Kling
According to Prad Krulong, macroeconomists had it and then lost it. They lost it some time after 1970. We had this magic formula, call it M70, and somehow we let it slip from our collective memory. But what was M70?... MORE

The Shifty Economy

Growth: Causal Factors
Arnold Kling
John Hagel writes, the Shift Index focuses on return on assets (ROA) for all public companies in the US since 1965. The bottom line: ROA has collapsed by more than 75% over this period. Thanks to Patri Friedman for the... MORE

Posing the Macroeconomic Question

Macroeconomics
Arnold Kling
Brad DeLong writes, All five of these theories are best taught sympathetically by being taught historically: as long traditions of thought that smart people have used to try to understand a changing and confused world. Thus Minskyism from its nineteenth... MORE

Scott Sumner Explains Himself

Macroeconomics
Arnold Kling
First, he writes, I see a three step process. A monetary shock (money supply or demand) causes flexible asset prices to change immediately (stocks, commodities, exchange rates, etc.) This causes output to rise, and consumer prices and wages respond with... MORE

Latest Employment Data

Labor Market
Arnold Kling
After a report showing a gain of 150,000 jobs last month, Mark Thoma says that the glass is half empty. it could have been worse, but in past recoveries we've had job growth of hundreds of thousands, far more that... MORE

Milton Friedman and the Phillips Curve

Macroeconomics
Arnold Kling
I have agreed to write something on the history of the Phillips Curve, so I may post on the topic from time to time. The heyday of the Phillips Curve was 1956-1969. In that fourteen year period: --unemployment was below... MORE

The Strangest Macro Model Ever

Macroeconomics
Arnold Kling
I think that I usually understand what Paul Krugman is saying, even when I disagree with him. However, I do not think that I understand Why Inflation Targets Need to be Higher well enough to say whether or not I... MORE

By Request: Monetarism and the Great Depression

Economic History
Arnold Kling
The request is for my reaction to the way that economies in the Great Depression seemed to do better after going off the gold standard. Does this provide evidence that monetary easing would help today? In general, macroeconomic data are... MORE

Numbers to Ponder

Macroeconomics
Arnold Kling
From the WSJ Real Time Economics blog, here and here. 1. Banks have an inventory of about 1 million foreclosed homes, plus another 5 million homes where the loans are badly nonperforming. Any way you look at it, that is... MORE

Taylor-Cogan vs....well, Everybody

Fiscal Policy
Arnold Kling
John F. Cogan and John B. Taylor write, Our main finding is that the increase in government purchases due to the ARRA has been remarkably small, especially when compared to the large size of the overall ARRA package. In fact,... MORE

Christina Romer's Contradiction

Fiscal Policy
David Henderson
Here's a paragraph from Christina Romer's op/ed in the New York Times: Now is not the time [to cut the deficit]. Unemployment is still near 10 percent in the United States and in Europe. Tax cuts and spending increases stimulate... MORE

Hummel vs. Bernanke

Monetary Policy
Arnold Kling
Jeffrey Rogers Hummel explains the Bernanke view of financial intermediation but raises a critical question about its policy implications. what distinguishes banks from other financial intermediaries is not merely that deposits are used as money but also that banks, in... MORE

How an Irrational Fad Became Entrenched

Economic Methods
Arnold Kling
Scott Sumner asks, How was it that just a few years later it was almost impossible to get anything published without assuming rational expectations, efficient markets, etc. Let me tell you. For a period of about 5 to 10 years,... MORE

Austerity Within Reason

Fiscal Policy
Arnold Kling
This month's issue of Reason has an article about fiscal tightening moves that did not cause macroeconomic disaster. I discuss the demobilization after World War II. Maurice McTigue discusses New Zealand 25 years ago. David Henderson talks about Canada 15... MORE

The Latest Economics Nobel

Macroeconomics
Arnold Kling
As Tyler reports, it goes to Peter A. Diamond (unqualified to be a Fed governor, according to some self-styled experts), Date T. Mortensen, and Christopher A. Pissarides. A few comments. 1. This appears to be for theories of labor matching.... MORE

Employment: A New Trough

Labor Market
Arnold Kling
The employment situation reported today showed a decline in nonfarm payroll employment. That means that my favorite indicator, labor capacity utilization, is at its lowest level since the recession began. The National Bureau of Economic Research, which uses spending as... MORE

Legally Recalculating

Macroeconomics
Arnold Kling
Larry Ribstein writes, I have been insisting for awhile now that the economy was only the trigger of permanent decline in the demand for Big Law's services. Indeed, the factors cited in the Hildebrandt analysis support this: outsourcing and other... MORE

ABC vs. Recalculation

Austrian Economics
Arnold Kling
A reader asks me to explain the difference. Answer below the fold.... MORE

Finance, TARP, and the Great Recession

Finance: stocks, options, etc.
Arnold Kling
At the unpleasant session yesterday, I did learn something interesting from Doyne Farmer of the Santa Fe Institute, while he was ranting against the state of the art in macroeconomic models. He said that in 2006, the Fed simulated a... MORE

The Keynesian Attraction

Macroeconomics
Bryan Caplan
Keynesians have been a smug bunch from their earliest days.  Here's how Keynes once replied to Hayek:Thus those who are sufficiently steeped in the old point of view simply cannot bring themselves to believe that I am asking them to... MORE

Rothbard on the Depression

Austrian Economics
Arnold Kling
I started to read it. Should I finish? Some excerpts and my comments. the timidity and confusion of Reagonomics make very clear what its choice will be: massive inflation of money and credit, and hence the resumption of double-digit and... MORE

Recalculation differs from textbook structural unemployment. In textbook structural unemployment, there are two GDP factories, one in the north and one in the south. There is a shortage of workers in the south, and there are too many workers in... MORE

Who Said It?

Macroeconomics
Bryan Caplan
Eventually, however, the war spread to the very issue of whether unemployment in recessions in involuntary...  Sweetwater economists began to respond to the natural gravitational pull of the assumptions of optimization and well-functioning markets, which tend to rule out the... MORE

Rebranding Additive Shocks

Macroeconomics
Bryan Caplan
A year ago, I wrote a little-known post called "Additive Shocks."  A week ago, Sumner made my point with more panache:...I don't know about you, but I don't recall reading; "Severe AD shocks are really, really bad, except when the... MORE

The Lost History of Volcker-era Monetary Policy

Economic History
Arnold Kling
Karl Smith writes, Its as close to a test of modern macro theory as we have. We thought if we shrank the growth rate of the money supply we would get a recession but we also lower the rate of... MORE

Alan Blinder Testifies

Macroeconomics
Arnold Kling
He says, the days of what I call the "Field of Dreams" strategy--build a bigger GDP, and the jobs will come--should be over. It's a sensible strategy in many contexts, but it has two serious drawbacks in the present situation.... MORE

Daughter of Lucy

Macroeconomics
Arnold Kling
In August of 2003, I wrote about my preferred economic indicator, which I called a labor capacity utilization index, or LUCY. I want to update it. Back then, I used an index of aggregate hours worked, which I assume meant... MORE

L-data and D-data

Macroeconomics
Arnold Kling
Nick Rowe writes, When we go into a recession, many things become easier to buy and harder to sell. And when we go into a boom, those same things become easier to sell and harder to buy. A recession has... MORE

Did the Recession End 15 Months Ago?

Macroeconomics
Arnold Kling
The official committee of the National Bureau of Economic Research says, "Yes." The New York Times asked "Really?" Many bloggers answered "no." I was one of them. Employment declined by nearly one million workers in the four months after the... MORE

Top Ten Economic Contractions?

Economic History
Arnold Kling
What are the ten most important episodes of economic contraction to study? Some obvious ones: 1. The Great Depression in the U.S. 2. The Great Depression in Europe 3. The Japanese slump of the 1990's and beyond 4. The oil... MORE

A Few Links

Labor Market
Arnold Kling
James Hamilton on the JOLTS data, which I have also been pushing. Caroline Baum on the Kling view of the job creation problem. Arthur Brooks on the Arthur Brooks controversy.... MORE

In Pursuit of Empirical Macroeconomics

Macroeconomics
Arnold Kling
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,... MORE

We Don't Know

Business Economics
Arnold Kling
Russ Roberts discusses some survey data in which small businesses report that their biggest problem is lack of sales. Some economists have leaped on this as a decisive data point demonstrating that the problem in the economy is aggregate demand,... MORE

The Output Gap Story

Macroeconomics
Arnold Kling
Russ Roberts asks whether spending creates prosperity. has foreign aid spending created prosperity in those countries? Usually not. Or maybe never. The money gets spent and then it's over. The multiplier never materializes. And that's because these economies are broken.... MORE

The Dynamics of Creative Destruction

Macroeconomics
Arnold Kling
Dane Stangler and Paul Kedrosky write, When they come into existence, for example, startup firms create, on average, three millions jobs per year. Many of these jobs are lost and new ones are created, but employment at the moment of... MORE

Macroeconomic Costs of Credentialism

Macroeconomics
Arnold Kling
My latest essay: Entrepreneurs in healthcare and education face unusually strong barriers to entry. Both industries are credentials cartels. Licensing and accreditation are key requirements to compete in those fields, and incumbents are in control of the process. In addition,... MORE

Is the Taylor Rule Really a Rule?

Monetary Policy
Arnold Kling
John Taylor writes, The Taylor rule says that the federal funds rate should equal 1.5 times the inflation rate plus .5 times the GDP gap plus 1. Currently the inflation rate is about 1.5 percent and the GDP gap is... MORE

Lawrence Lindsey Vs. Christy Romer

Macroeconomics
Arnold Kling
She says, by June, before the Recovery Act could have had much of an impact, it was 9½ percent. That is, our projection turned out to be wrong even before the Recovery Act had a chance to get off the... MORE

Thomas Sargent, Master Macroeconomist

Economic Methods
Arnold Kling
In an interview, he says, the more dynamic, uncertain and ambiguous is the economic environment that you seek to model, the more you are going to have to roll up your sleeves, and learn and use some math. Pointer from... MORE

Inflation Regimes: the 5.5 percent barrier

Macroeconomics
Arnold Kling
As Bryan offers data for study, let me suggest that in the United States the regime changes somewhere between 5.0 and 6.0 percent for the annualized "core" inflation rate (the CPI excluding food and energy). 1. Take the moving six-month... MORE

The Unemployment Problem

Labor Market
Arnold Kling
Megan McArdle writes, How much unemployment reduction you get for a given amount of stimulus spending is, obviously, at best an imperfect estimation. But let's take the CBO's estimates as representing a rough consensus of those who favor stimulus: for... MORE

How Toggling Works (I Think)

Macroeconomics
Arnold Kling
Bryan asks how I think that the Fed can make big changes in inflation regime but not make small changes within a regime. Again, my thinking is based almost entirely on my reading of postwar U.S. monetary history, which went... MORE

Three Inflation Regimes

Monetary Policy
Arnold Kling
Bryan's question on testing for inflation regimes drew interesting comments. Some notes: 1. The idea that the rate of inflation and its variability are correlated is not original with me. I know the observation was made earlier in the literature,... MORE

Arnold has a novel theory of dual inflation regimes:I don't think that the Fed can fine tune the economy. I think that, at most, it can toggle between two regimes: a regime where inflation is high and variable; and a... MORE

Where I Believe that I was Most Wrong

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong started this one, and Tyler Cowen picked up on it. Megan McArdle has the longest list (which by no means implies that she was the most often wrong.) 1. My way of thinking about the price/rent ratio for... MORE

Monetary Theory Question

Money
Arnold Kling
There has been a lot of drama among monetary theorists in the blogosphere, and I have been waiting for Scott Sumner to join the fray. He writes, Thus the question is never whether low rates unfairly subsidize borrowers, or whether... MORE

Spending vs. PSST

Macroeconomics
Arnold Kling
Mark Thoma articulates the conventional view. It's useful to break down the economy into four major sectors -- households, businesses, government, and the foreign sector...lower consumption growth will be a substantial drag on the economy...looking to housing to lead the... MORE

More Bond Bubble Talk

Finance: stocks, options, etc.
Arnold Kling
At The Economist, pointer from Tyler Cowen. Laurence Kotlikoff writes, current bondholders will get hurt in two ways. The prices of their bonds will fall due to concern about future money creation and the current price level will jump due... MORE

Macroeconomic Puzzles

Finance: stocks, options, etc.
Arnold Kling
Paul Krugman writes, Right now, the Mankiw indicator is -8.5 -- core inflation at about 1, unemployment at 9.5. As you can see, that implies a majorly negative interest rate; what we actually get is zero. He suggests that the... MORE

AD or AS?

Labor Market
Arnold Kling
Minneapolis FRB President Narayana Kocherlakota says, I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of... MORE

The Leamer Indicators

Macroeconomics
Arnold Kling
Now, I am getting to the part of Macroeconomic Patterns and Stories where Leamer gets very conventional. Economic activity equals spending, monetary policy equals the Fed Funds rate, and all the fiscal and monetary dials work as they do in... MORE

Price Discrimination Explains...Macro?

Macroeconomics
Arnold Kling
In chapter 10 of Macroeconomic Patterns and Stories, Ed Leamer writes, in recessions, the most price sensitive customers drop by the wayside, and what remains are the wealthy who don't care much about price. Facing this kind of customer base,... MORE

Leamer on the Current Recession

Macroeconomics
Arnold Kling
Obviously, I am going through Macroeconomic Patterns and Stories chapter by chapter. It is really too bad that he positioned it as a textbook, because I think that the rest of the profession needs to read it. Anyway, he signed... MORE

Idle Chatter from Ed Leamer

Macroeconomics
Arnold Kling
Continuing my relatively unplanned commentary on Macroeconomic Patterns and Stories, chapters 7 and 10 are on idleness. One can think of a recession as resources being idle, and then we wonder why they are idle when they could be productive.... MORE

Momentum in Employment: Why it Matters

Labor Market
Arnold Kling
The other day, I verified Ed Leamer's finding that there is momentum in payroll employment. This is an extremely important finding, as I will explain below. Just as a teaser, I think it strongly supports Tyler Cowen's ZMP story, but... MORE

Which Jobs to Save?

Labor Market
Arnold Kling
Tyler Cowen writes, In a highly specialized modern economy, it is much easier to prevent jobs from being destroyed than to create them again, at least assuming those are "good" jobs in the first place. (Yes, people thought they knew... MORE

Momentum in Employment

Labor Market
Arnold Kling
According to Ed Leamer's Macroeconomic Patterns and Stories, chapter 4, payroll employment is not a random walk. The change in payroll employment in August will be highly correlated with the average change from May through July. This was 26,667, according... MORE

Macro Doubtbook, Installment 11

Macroeconomics
Arnold Kling
The previous installment was here. The installment below discusses macroeconometrics. It is very brief, because I think that the issue is better discussed in the context of the historical perspective that I envision providing in the main part of the... MORE

Seasonal Employment (Not Wonkish)

Macroeconomics
Arnold Kling
Bryan weighs in on an issue of seasonal employment. This issue has produced much controversy among a few wonks. See the post by Mark Thoma. Almost 40 years ago, I was a seasonal teenage worker, in a factory in South... MORE

Trend vs. Random Walk

Macroeconomics
Arnold Kling
I am starting to re-read Ed Leamer's textbook, Macroeconomic Patterns and Stories. Very early, he presents a graph of real GDP from 1955 to 2005 on a log scale, showing that it grows at a trend rate of 3 percent,... MORE

Various Links

Finance: stocks, options, etc.
Arnold Kling
Kevin Villani enters the dispute over what caused the financial crisis on the side of those of us who see misguided policy as a major factor. Philip Greenspun worries about what happens when the marginal product of a worker falls... MORE

Two from the New York Times

Macroeconomics
Arnold Kling
1. Nobel Laureate Edmund Phelps writes, One reform would be to create a First National Bank of Innovation -- a state-sponsored network of merchant banks that invest in and lend to innovative projects. Another would be to improve corporate governance... MORE

Keynes vs. Bohm-Bawerk

Macroeconomics
Arnold Kling
This morning, we will find out whether the recovery remains jobless. Meanwhile, I have an essay, Labor is Capital, that offers an explanation for jobless recoveries. Much of today's American workforce is engaged in roundabout production, which Böhm-Bawerk equated with... MORE

Recalculation Story Watch

Labor Market
Arnold Kling
Joseph Y. Calhoun III points out the Recalculationist implications of Mark Perry's post showing that job openings are increasing much faster than employment. Read for yourself.... MORE

More on the Austerity of 1945-1947

Economic History
Arnold Kling
I dug up two interesting articles. In case I am more interested in this than you are, I will put this post below the fold.... MORE

The Macro Doubtbook, Installment 10

Macroeconomics
Arnold Kling
The previous installment was here. The installment below covers behavioral economics. Recall that the ultimate approach in the Doubtbook will be to stitch together the history of macroeconomic thought with the history of macroeconomic episodes. The opening chapter looks at... MORE

Unemployed Houses: A Recalculation Story

Macroeconomics
Arnold Kling
Alex Tabarrok writes, The U.S. housing vacancy rate--an unemployment rate for home--is at its highest level since at least 1965 (see figure). Why? Is it sticky prices? Lack of aggregate demand? Structural? For labor, the recalculation story says that employment... MORE

"They'll Just Save It."

Macroeconomics
Bryan Caplan
How many times have you heard the following argument in the last two years? Tax cuts/helicopter drops of cash/whatever won't stimulate demand.  People are too nervous to spend.  Whatever you give them, they'll just save it. The problem with this... MORE

What Blinder and Zandi Don't Know

Economic Methods
Arnold Kling
What the Blinder-Zandi paper does is explore the properties of a macroeconometric model. The economics profession abandoned those models thirty years ago, so the tool they are using is like a fossil, frozen in time. Of course, there have been... MORE

How the Blinder-Zandi Study Was Done

Economic Methods
Arnold Kling
Alan Blinder and Mark Zandi used Zandi's econometric model as the basis for a claim that the stimulus and the TARP worked. Thirty-five years ago, I was Blinder's research assistant, doing these sorts of simulations on the Fed-MIT-Penn model for... MORE

Structural Unemployment

Macroeconomics
Arnold Kling
The Economist asks about it. Paul Seabright answers: this recession, more than most, seems likely to have produced a great increase in the mismatch, due to the unsustainable patterns of consumption and investment induced by the credit boom that preceded... MORE

The Recalculation Story: A Summary

Macroeconomics
Arnold Kling
I have had a number of requests for this. I will put it below the fold.... MORE

Expectations, Once Again

Macroeconomics
Arnold Kling
Nick Rowe writes, That's the real dichotomy. Habits never change, vs habits instantly change to be consistent with the new world. And most reasonable economists would want to go somewhere in between those two extremes. If you expect the new... MORE

The Macro Doubtbook, Installment 9

Macroeconomics
Arnold Kling
The previous installment was here. This installment discusses expectations. [UPDATE: This installment happens to contain what I would say is my answer to the question posed today by Tyler Cowen.|... MORE

The Austerity of 1945-1947, a third time

Economic History
Arnold Kling
I want to return to the Vedder-Galloway paper, that I mentioned here. I want to make it clear that I have a lot of problems with that paper, and I will not be basing my own views on it. More... MORE

Robert Solow on Dark Age Macro

Macroeconomics
Arnold Kling
He writes, I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying... MORE

The Austerity of 1945-1947

Economic History
Arnold Kling
Official data are somewhat sparse. I would appreciate pointers to any better data or additional information. I am also curious about what newspapers and magazines were reporting at the time about postwar conversion--how well it was going, what was working,... MORE

Housing Matters

Macroeconomics
Arnold Kling
Vernon L. Smith and Steven Gjerstad write, In the immediate aftermath of most recessions, housing expands more rapidly than any other component of GDP, and inflation falls. Through the first part of the expansion, housing increases and inflation remains low.... MORE

The Macro Doubtbook, Installment 7

Macroeconomics
Arnold Kling
Previous installment is here. The new installment below discusses finance theory. I happen to think that the relationship between macroeconomics and finance is more problematic than the relationship between macro and any other branch of economics. John Hicks writing in... MORE

The ZMP Hypothesis

Labor Market
Arnold Kling
Tyler Cowen writes, In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people? This stylized fact seems to point toward search and recalculation... MORE

The Employment Recovery

Macroeconomics
Arnold Kling
Tyler Cowen asks, Why does it take so long? This isn't one of those West European scenarios where, due to benefits, being unemployed is permanently somewhat attractive alternative for some subset of the work force. Nor is the United States... MORE

Textbook Macro, Sumner's Macro, My Macro

Macroeconomics
Arnold Kling
I use the term "textbook macro" a lot. I want to stop and define it. In textbook macro, sometimes there is excess supply of labor and sometimes there is not. That is the supply side of the economy. The demand... MORE

What is Job Creation?

Macroeconomics
Arnold Kling
Russ Roberts writes, I'm not saying Keynes (or Obama or Larry Summers) is wrong because all spending does is bid up prices and wages. I'm not trying to prove that the stimulus failed. I'm challenging the standard macro textbook story... MORE

Mankiw on the CEA Stimulus Study

Fiscal Policy
David Henderson
Arnold laid out one of the two ways the CEA estimated the effects of Obama's "stimulus" package. Greg Mankiw has a particularly nice statement about the other way. Mankiw writes: That is, the CEA took a conventional Keynesian-style macroeconomic model... MORE

The Stimulus Worked

Macroeconomics
Arnold Kling
The Council of Economic Advisers says so. The reason that the Council has about as much credibility as Baghdad Bob is that chart that everyone has seen showing that unemployment with the stimulus is higher than what they predicted without... MORE

Macro Beliefs and Reality

Macroeconomics
Arnold Kling
I am leaning toward a view of macroeconomics in which firms, households, and government face a collision between beliefs and reality. Beliefs tend to be formed out of habitual observation. If certain types of investments in human and physical capital... MORE

Bryan: Define Money

Macroeconomics
Arnold Kling
Bryan writes, Out of all of Arnold's macroeconomic views, only one strikes me as truly absurd: His skepticism about the ability of central banks to affect nominal GDP and other nominal variables. Here is my problem. Nominal GDP is measured... MORE

Arnold, Money, and Nominal GDP

Macroeconomics
Bryan Caplan
Out of all of Arnold's macroeconomic views, only one strikes me as truly absurd: His skepticism about the ability of central banks to affect nominal GDP and other nominal variables.  The latest example:[A]n increase in the supply of money will... MORE

Modern Finance vs. Portfolio Balance Theory

Finance: stocks, options, etc.
Arnold Kling
The first chapter of the Macro Doubtbook definitely needs a section on the relationship between finance theory and macroeconomics. I think that relationship is an uneasy one. Macroeconomists use what is called "portfolio balance theory" to argue that changes of... MORE

Minsky-Jones Answers Tyler Cowen

Macroeconomics
Arnold Kling
Tyler asks, If aggregate demand is so low, why are profits so high? Garett Jones would say that labor is mostly overhead, and firms have shed a lot of overhead. They are sacrificing growth in future capabilities in order to... MORE

Still Jackasses

Macroeconomics
Arnold Kling
Stephen Williamson writes, From a New Monetarist point of view, a key element of the financial crisis relates to the scarcity of liquid assets. There is one type of liquid asset, which is outside money. Currency and bank reserves play... MORE

Macro Doubtbook, Installment 6

Money
Arnold Kling
Here is the long-awaited section on monetary theory. If you ask me the question, what will happen if the Fed stops paying interest on reserves, my answer would differ from Scott Sumner's. I would say, "Not much will happen in... MORE

Policy Focus

Macroeconomics
Arnold Kling
Scott Sumner is worried about little things like unemployment and fiscal sustainability. Fortunately, our political leaders are not distracted by such trivialities. The Treasury, the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, the 12 Federal Reserve regional banks,... MORE

Monetary Doubtbook, Installment 5

Macroeconomics
Arnold Kling
Here, I talk about capital theory as a path for macroeconomics. Some recent posts are relevant. Tyler Cowen talks about the saving-investment balance. Paul Krugman implicitly says that investment follows what I call in the installment below the "accelerator model"... MORE

Laffer on Unemployment Insurance

Fiscal Policy
David Henderson
Arthur Laffer, whose work I've often respected and who, I think, has been underappreciated by the economics profession, has a piece in today's Wall Street Journal on unemployment insurance (UI). It's titled, "Unemployment Benefits Aren't Stimulus." I wish I could... MORE

Business Dynamics and Macroeconomics

Macroeconomics
Arnold Kling
Tim Kane finds that the tendency for a firm to add or subtract jobs declines with the age of the firm. Much of the job creation on average comes from startup firms. In fact, Kane puts it this way: without... MORE

Saving and Identities

Macroeconomics
Arnold Kling
Yves Smith and Rob Parentau write, Over the past decade and a half, corporations have been saving more and investing less in their own businesses. A 2005 report from JPMorgan Research noted with concern that, since 2002, American corporations on... MORE

Paging Hyman Minsky

Finance: stocks, options, etc.
Arnold Kling
Why Are Firms Saving So Much?, asks The Economist. A number of economists offer thoughts, including Hal Varian, Brad DeLong, and Mark Thoma. Andrew Smithers points to some data. despite the rise in US corporate cash flow, non-financial corporate balance... MORE

Another Macro Metaphor

Macroeconomics
Arnold Kling
Howard Bloom writes, Over three billion years ago, bacteria already had a cycle of boom and bust built into their DNA. The cycle of boom and bust is a search strategy. It's a cycle that uses us to explore the... MORE

Robert Hall Interview

Macroeconomics
Arnold Kling
Mark Thoma points to an interview with Robert Hall, who I consider the Don Sutton of the economics profession.* Read the whole thing. Here are some excerpts from the interview, with my comments. Issuing what appear to be overvalued public... MORE

Various

Macroeconomics
Arnold Kling
Doc Merlin is among those linking to a New York Times story about manufacturers having difficulty finding skilled workers. I would love to say that I find that the story validates my views macroeconomics. Instead, I just find the story...odd.... MORE

Macroeconomics Doubtbook, Installment 3

Macroeconomics
Arnold Kling
This discusses labor markets. I also discussed them in my macro lectures, and I may want to integrate more of that material here. The full installment is below. This was the previous installment. Here is an excerpt of the current... MORE

Temporary Layoffs in Postwar Recessions

Labor Market
Arnold Kling
James Hamilton writes, Suppose you adopted Feldstein's perspective that those individuals who fully expected to get back their old jobs soon are not really unemployed, but should instead be viewed the same way we treat workers who remain employed but... MORE

The Macro Doubtbook, Installment 2

Macroeconomics
Arnold Kling
The first installment was The Northwest Passage. An excerpt from the second installment, called General Equilibrium Theory: suppose that unemployment did not exist, but that instead there was a very low-value job (say, dishwashing) that is always available, at whatever... MORE

The Northwest Passage

Macroeconomics
Arnold Kling
Below are two pages of the hypothetical book on macro. Once (If?) I get to the main part of the book, I will need good sources for analysis of pre-1920's macroeconomic events and for postwar events in other countries.... MORE

Toward a Book on Macroeconomics

Macroeconomics
Arnold Kling
Suppose I were to write a book on macroeconomics. How should it be structured? My goals would be: 1. Explain why controversies in macroeconomics are so difficult to resolve. Explain why it is a mistake to be supremely confident in... MORE

Paul Seabright, GYOB

Macroeconomics
Arnold Kling
Internally at Econlog, GYOB means "get your own blog." It is a term of disparagement used to describe commenters who frequently post comments that are longer than the original post. In the case of Paul Seabright, I am thinking that... MORE

A Theory of Economic Recovery

Macroeconomics
Arnold Kling
Reading Paul Seabright has made me want to once again dismiss the theory of aggregate demand and instead push Recalculation. There are two patterns that must emerge in a complex modern economy. One is a pattern of labor specialization. People... MORE

The Company of Strangers

Books: Reviews and Suggested Readings
Arnold Kling
Notwithstanding my disagreements with Paul Seabright on political economy, the revised edition of The Company of Strangersis one of the best economics books to come out so far this year. I strongly recommend it, particularly if you did not read... MORE

One-Sentence Macro Policy

Monetary Policy
Arnold Kling
Tyler Cowen writes, I believe the "zero bound" is perhaps the single largest "red herring" in the economics profession today. If you understand that sentence, you know everything you need to know about Tyler's case against fiscal stimulus. In case... MORE

John Taylor's Counter-narrative

Finance: stocks, options, etc.
Arnold Kling
He writes, You may not have heard much about the Great Deviation. I define it as the recent period during which macroeconomic policy became more interventionist, less rules-based, and less predictable. It is a period during which policy deviated from... MORE

Catching Up

Books: Reviews and Suggested Readings
Arnold Kling
Various things that came up while I was traveling are discussed below.... MORE

Reynolds: No Evidence for Double Dip Recession

Labor Market
David Henderson
After talking to me about those figures, CNNMoney reporter Tami Luhby wrote, "Though Labor Department statistics say there are 5.5 job seekers for every opening, Reynolds said there is work available if people are willing to relocate or take jobs... MORE

M3 Plummeting

Monetary Policy
David Henderson
The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc. This is from Ambrose Evans-Pritchard in the Telegraph, a British publication. It goes on:... MORE

A Black-Cowen Model of the Recession

Macroeconomics
Arnold Kling
Fischer Black started from a model of efficient markets with diversified investors. However, there is nondiversifiable risk in the economy, there will be times when you get a bad draw. At those times, the value of physical and human capital... MORE

Not as Rich as We Think

Macroeconomics
Arnold Kling
Tyler Cowen writes, This is the era of the rude economic awakening, and Greece is simply an extreme manifestation. The new European bailout plan is a denial of this truth rather than recognition of the new reality that a lot... MORE

Kling Interviewed

Macroeconomics
Arnold Kling
by Rob McClendon. The two segments are each less than ten minutes. They cover a range of topics, from what Nick Schulz and I call Economics 2.0 to bank bailouts to the outlook for employment. Part one. Followed by Part... MORE

Jean Tirole and the Silent Revision

Macroeconomics
Arnold Kling
Jean Tirole writes, Economic theory stresses the necessity for the state to boost industrial and financial sectors during periods of liquidity shortage. [here a footnote reads, "This is an old theme, dating back at least to Keynes and Hicks. For... MORE

The Macroeconomic Reversal

Macroeconomics
Arnold Kling
Nick Rowe writes, Regulation and supervision can never eliminate financial instability. If your faith is contingent on being able to prevent financial crises, you have lost the faith. Read the whole thing. I too am struck by the rapid change... MORE

Scott Sumner on the Great Depression

Macroeconomics
Arnold Kling
The talk is here. Very worthwhile. Near the end he makes the point that when there is a large collapse there is a tendency to blame it on huge imbalances prior to the crash. The "huge imbalances" view is what... MORE

Give One Point to Scott Sumner

Macroeconomics
Arnold Kling
David Leonhardt looks at the behavior of real wages in the latest recession. A big reason wages have held up this time is inflation has been nearly absent. As some economic historians have pointed out to me, there is a... MORE

Musings on Macro

Macroeconomics
Arnold Kling
Russ Roberts interviews Ed Leamer. If you are not already familiar with Leamer's views on econometrics, then you should listen. Leamer has a notion of macro that I think needs more elaboration. He says that in a normal economy, when... MORE

The Minsky-Jones Forecast Looks Good

Macroeconomics
Arnold Kling
Two months ago, I wrote, The standard forecast is, "employment has been less than what we expected, so let's assume it will continue to be less than expected." My forecast is that the recalculation is just getting started, and we... MORE

Theory vs. History

Fiscal Policy
Arnold Kling
Nick Rowe writes, If it prints money and is not in a recession, or has inflation, then that is a problem. Printing money will make inflation worse, and that's a problem. But it's a negative feedback problem. The inflation will... MORE

In 12th grade, I took a one-semester economics course.  My high school didn't have A.P. econ (though I took the test on my own initiative), so the course was a little dumbed down.  Actually, to be blunt, the teacher didn't... MORE

Mundell as Sumnerian?

Macroeconomics
Arnold Kling
Sean Rushton writes, Part Two of Mundell's analysis is the most intriguing and least understood aspect. He argues that, as the real-estate bubble burst, large quantities of fresh liquidity were demanded by the public and banks. In summer 2007, the... MORE

My Recollections of the 1970s

Economic History
David Henderson
Bryan's question is tough to answer. In the culture and in the media, things are so much better now, in the sense that the mainstream media feel the need to contend with libertarian and free-market ideas. They didn't feel that... MORE

The Seventies

Economic History
Arnold Kling
Bryan writes, I'm too young to remember much about the politics and economics of the Seventies. From books, though, I get the impression that American political economy was in complete disarray The first thing that I would say is that... MORE

I'm too young to remember much about the politics and economics of the Seventies.  From books, though, I get the impression that American political economy was in complete disarray: high inflation, high unemployment, crazy price controls, regulatory explosion, crushing taxes,... MORE

Nominal Wages and Behavioral Postulates

Macroeconomics
Bryan Caplan
Tyler's not satisfied by the traditional nominal rigidities explanation for continuing high unemployment:It's also the case that the rate of new job creation has been especially low.  Yet the nominal wages on those jobs-to-be are not constrained by previous contracts... MORE

Christina Romer vs. Bloggers

Macroeconomics
Arnold Kling
The CEA Chairwoman does not take on anyone by name, but She writes, in my view the overwhelming weight of the evidence is that the current very high -- and very disturbing -- levels of overall and long-term unemployment are... MORE

A Few Quick Hits

Economics of Education
Arnold Kling
Again, I am pressed for time, so not many comments. 1. Tyler Cowen points to a story about an LSU professor teaching a biology course for non-majors who gave bad grades and was removed from teaching the class. LSU cited... MORE

Some Comments on Recalculation

Macroeconomics
Arnold Kling
A friend writes to say that Recalculation sounds like an interesting theory, but he finds it hard to explain to others. Below are some thoughts.... MORE

The Depression that Wasn't

Economic History
Arnold Kling
Burt Folsom, Jr. and Anita Folsom write, [President Roosevelt's] key advisers were frantic at the possibility of the Great Depression's return when the war ended and the soldiers came home. I mentioned this in my post on Roger Farmer's book.... MORE

What I'm Reading

Books: Reviews and Suggested Readings
Arnold Kling
How the Economy Works, by Roger Farmer. The publisher sent me a review copy. Farmer seems to be trying to accomplish what I have tried to do with a series of blog posts on macroeconomics. That is, he wants to... MORE

A Simple Reply to Krugman on Austrian Economics

Austrian Economics
Arnold Kling
Paul Krugman writes, why isn't there similar unemployment during the boom, as workers are transferred into investment goods production? He says he has asked this before, and he has. I have answered it before, and he has never responded. The... MORE

Average Prices, AS and AD

Macroeconomics
Arnold Kling
Scott Sumner writes, The recession was caused by a severe AD shock, i.e. falling NGDP. If it had been caused by an AS shock then the recession would have been accompanied by higher inflation. It would really help if people... MORE

What I'm Reading

Austrian Economics
Arnold Kling
Macroeconomic Theory and its Failings, edited by Steven Kates. The publisher, Edward Elgar, prices its hardbacks out of reach for ordinary readers. I assume that their target buyers are libraries. I received a review copy. The book consists of essays... MORE

Did the Financial Crisis Matter?

Finance: stocks, options, etc.
Arnold Kling
Dean Baker says no. Spain is noteworthy because it now has an unemployment rate of more than 19%, the highest rate in any of the wealthy countries. Spain did not have a financial crisis. In fact, its well-regulated financial system... MORE

Forecast for a Minsky-Jones Economy

Macroeconomics
Arnold Kling
The Wall Street Journal reports: The Monster Employment Index surged in February, with increases across a range of geographies and job categories, suggesting that employers are starting to emerge from a long hibernation. The Index, compiled by online job service... MORE

GDP Fetishism

Macroeconomics
David Henderson
Econlib's featured article this month is GDP Fetishism by me. Opening graf: When economics professors teach the basics of Gross Domestic Product (GDP), we usually caution our students that it is not a good measure of welfare. Unfortunately, many economists... MORE

Demand Stimulus in a Jones-Minsky Economy

Macroeconomics
Arnold Kling
In a Garett Jones economy, a worker represents an investment. A firm can vary its production without adding or subtracting workers. At the margin, what workers do is provide additional capabilities, what Jones calls organizational capital. In a Hyman Minsky... MORE

Sentences to Ponder

Macroeconomics
Arnold Kling
Eric S. Raymond writes, We've spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker -- which meant the minimum revenue-per-employee threshold below which hiring doesn't make sense has crept up and up... MORE

Keynesian Questions

Macroeconomics
Bryan Caplan
My questions for DeLong sparked two good non-DeLong questions in the comments:From Steve Roth:Employers *are* more likely (than employees) to put the money under their mattress.Perhaps not literally. But actually/practically.Employers spend a smaller percentage of marginal earnings on immediate consumption... MORE

How I Think About Keynesian Economics

Macroeconomics
Arnold Kling
By the way, my panel appearance on jobs is now up on C-span (I start about 45 minutes in. Also, I saved some of my thoughts for the Q&A, which starts about 64 minutes in.) In this post, I want... MORE

Questions for DeLong

Macroeconomics
Bryan Caplan
David Henderson replied to this comment by Brad DeLong, but I'm still trying to figure out what Brad's saying.  To requote:So is your argument really that if not for the stimulus package wages would be falling--and falling wages would be... MORE

Theories of the Recession

Macroeconomics
Arnold Kling
Mark Gertler and Nobuhiro Kiyataki write, As balance sheets strengthen with improved economics conditions, the external …finance problem declines, which works to enhance borrower spending, thus enhancing the boom. Along the way, there is mutual feedback between the …financial and... MORE

Macroeconometrics and Science

Economic Methods
Arnold Kling
Menzie Chinn writes, the forecasts are generated using old-fashioned models in the spirit of the neoclassical synthesis (demand determined in short run, supply determined in the long run) with (as I understand it) backwards looking expectations rather than model-consistent expectations.... MORE

Mood and Macro

Macroeconomics
Bryan Caplan
Sumner writes:I'm not convinced mood swings are as obvious as they might seem.  I've argued that the stock market crash of 1929 was a rational response to the sudden awareness that we were rushing headlong into Depression.  I wonder if... MORE

Should Macroeconometric Models be Outlawed?

Economic Methods
Arnold Kling
Sometimes, people want something so badly that there is money to be made selling them a defective product. Werner Troesken's paper (full version here) on the history of quack medicines offers an example. No matter how many of these medicines... MORE

Models and Hunches

Economic Methods
Arnold Kling
I am possibly going to speak on a panel in a few weeks on the issue of U.S. unemployment. I am thinking of trying to convey two ideas (is that too many? I only have ten minutes). 1. Do not... MORE

Caplan Influences Schumer and Hatch?

Macroeconomics
Arnold Kling
Senators Charles E. Schumer and Orrin G. Hatch write, Starting immediately after enactment, any private-sector employer that hires a worker who had been unemployed for at least 60 days will not have to pay its 6.2 percent Social Security payroll... MORE

Wage Freeze for Government Workers

Macroeconomics
Arnold Kling
If Josh Barro had not written this: As states and localities continue to fight budget crises, they have an opportunity to close gaps by freezing employee wages. Because public employee compensation rose too fast over the last three years, they... MORE

Kling vs. Sumner, Continued

Macroeconomics
Arnold Kling
Scott Sumner writes, If NGDP falls 8% below trend, then nominal wages must also fall 8% below trend to maintain full employment, regardless of what is happening to real wages. So I think his story of the past year really... MORE

Sumner and Tobin

Macroeconomics
Arnold Kling
Scott Sumner cites James Tobin on the virtues of the Fed targeting nominal GDP. I wish Tobin had lived long enough to have something to say about the role of money in the current financial crisis. As you know I... MORE

Morning Commentary

Macroeconomics
Arnold Kling
Daniel Little discusses Seeing Like a State, which is something of a cult classic among some Masonomists. Thanks to Mark Thoma for the pointer. Well worth a read. Bill Woolsey says that it is obvious why we had a such... MORE

The Credit Crunch Story

Finance: stocks, options, etc.
Arnold Kling
John Cochrane tells it, and he says, Now that the short-termcredit crunch is over, the recession seems likely to be followed by a quick recovery, at least if the government does not get in the way with too many counterproductive... MORE

Why Such a Deep Recession?

Macroeconomics
Arnold Kling
Several economists, not just Scott Sumner, have argued that the recession is too deep and too broad to be explained by the Recalculation Story. I think that there are many weaknesses in the Recalculation Story. It is far from a... MORE

Two Scott Sumner Posts

Macroeconomics
Arnold Kling
First I am so used to NGDP targeting be attacked from the right that I forget that it has no supporters on the left. Recall that conservatives usually support inflation or price level targeting, and think that NGDP targeting is... MORE

Crisis Commentary

Finance: stocks, options, etc.
Arnold Kling
Ricardo Caballero writes, By 2001, as the demand for safe assets began to rise above what the U.S. corporate world and safe mortgage‐borrowers naturally could provide, financial institutions began to search for mechanisms to generate triple-A assets from previously untapped... MORE

I doubt that Arnold's Recalculation story is more than a smidge of the current world recession.  But I can certainly imagine shocks where he'd be dead on - and there are few shocks I enjoy imagining more than the triumph... MORE

Two Follow-ups

Macroeconomics
Arnold Kling
1. On the current state of the economy, Mark Thoma highlights the employment-to-population ratio. Here is his chart: I think he is right to push this, because I find it a more reliable indicator than the unemployment rate. The graph... MORE

Interview with Raghuram Rajan

Finance: stocks, options, etc.
Arnold Kling
Interesting throughout. Thanks to Mark Thoma for the pointer. I agree with much of Rajan says, so I want to highlight the sentence with which I agree the least. On the role of government in the housing market, he says... MORE

Real Recovery

Growth: Causal Factors
Arnold Kling
Robert Samuelson writes, What scars will the Great Recession leave? We are already seeing some. Americans are moving less than at any time since World War II, reports demographer William Frey of the Brookings Institution. People are tied to existing... MORE

Bernanke's Speech to the AEA

Finance: stocks, options, etc.
Arnold Kling
He says, Slide 4 shows that the version of the Taylor rule based on forecast inflation (in green dots) explains both the course of monetary policy earlier in the past decade as well as the decision not to respond aggressively... MORE

Krugman on the State of the Economy

Macroeconomics
Arnold Kling
From his Nobel AEA meeting lecture. It should have been easy to put the evidence of a mammoth housing bubble together with the concepts of third-generation crisis theory to see how a nasty deleveraging cycle could occur without the "original... MORE

Tyler Cowen writes, We're also seeing job losses in virtually every sector. It's not for instance a "sectoral shift away from services and into matchstick production and tungsten." It's a shift out of jobs which are revealed as unprofitable and... MORE

Various Follow-ups

Growth: Causal Factors
Arnold Kling
These relate to recent discussions on this blog. 1. Clifford Winston and Robert Crandall on market failure and government failure, from Forbes last October. 2. A review of an optimistic book by Gregg Easterbrook. Mark Perry ties this back to... MORE

Stimulus Without Multipliers

Fiscal Policy
Arnold Kling
Paul Krugman provides an analysis showing arithmetically that the fiscal stimulus will have a declining contribution to GDP growth, even as stimulus spending increases. What is interesting to me about this analysis is that the concept of a multiplier has... MORE

Another Recalculation Theorist

Macroeconomics
Arnold Kling
Joseph Lawler writes, The beauty of the structural change theory of jobless recoveries is that it is testable. If hiring is determined by shifts in what the economy produces, then the data will show that permanent layoffs outnumber temporary layoffs... MORE

Brad DeLong's Dangerous Modeling

Macroeconomics
Arnold Kling
From a short paper he calls Picking up Nickels: The more speculators ex ante expect bailouts and the more speculators are impressed with their own cleverness, the more hesitant should the central bank be about providing monetary accommodation. The paper... MORE

Menzie Chinn's Course on the Crisis

Finance: stocks, options, etc.
Arnold Kling
The syllabus looks interesting, but I think there are two topics that I would emphasize more if I were teaching it. 1. How did we get here? Most people seem to start their history of the crisis in about 2007... MORE

Cyclical Monetary Theory

Macroeconomics
Arnold Kling
Read Scott Sumner's post. I would distill it as arguing that macroeconomics and monetary theory follow a cyclical pattern. 1. During good times, such as the Great Moderation, a view develops that the monetary authority can stabilize the economy by... MORE

Correcting a Favorite Textbook Author

Macroeconomics
Bryan Caplan
Maybe I'm just misinterpreting this passage, but I feel the need to correct one of my favorite textbook authors.  Alex Tabarrok writes:A fall in wages increases the incentive to hire (call this the substitution effect) but it decreases the income... MORE

The Dining Room Table Responds

Macroeconomics
Bryan Caplan
Penny: He's a really good-looking guy, and I thought he was kind of cheesy at first... Billy: [quietly] Trust your instincts. Penny: But, he turned out to be totally sweet. Sometimes people are layered like that. There's something totally different... MORE

Paul Krugman repeats his argument that wage cuts are an individually rational but socially destructive way to reduce unemployment.  His motive: To quash a politically impossible effort to cut the minimum wage.  Paul does address the real balance effect, but... MORE

The Job Assignment Problem

Macroeconomics
Arnold Kling
Alan S. Blinder writes, The last two quarters were even more extreme: Productivity in the nonfarm business sector grew at a shocking 8.1% annual rate. There are two possible explanations. One: The last two quarters were among the most technologically... MORE

Double-Digit Inflation Bet With Bob Murphy

Macroeconomics
Bryan Caplan
I'm a sucker for a good Simpsons reference.  Here's a great one from Bob Murphy:It may smack of paranoid conspiracy theories to some readers, but as the principal in the Simpsons said when the students overheard him predicting that they... MORE

The Source of my Anti-Monetarism

Macroeconomics
Arnold Kling
Alex Tabarrok forwards Paul Krugman's citations of the late Paul Samuelson on the ineffectiveness of monetary policy, due to high substitutability between Federal reserve liabilities and other assets. Alex says that Samuelson sounds like me. Clearly, the causality runs from... MORE

Canadian Recalculation?

Macroeconomics
Arnold Kling
Mike Moffatt wants to know if I see Stephen Gordon's analysis as supporting the Recalculation Story for Canada. Gordon writes, the manufacturing sector is where most of the damage occurred. Even though it employed fewer than one worker in eight... MORE

Monetary Thought Experiments

Macroeconomics
Arnold Kling
Scott Sumner writes, Why would doubling the supply of currency cause people to hold twice as much currency in real terms? Here is my thought experiment. Suppose that the government retired lots of $10 bills, giving $5 bills in exchange,... MORE

Question for Recalculationists, Round 3

Macroeconomics
Bryan Caplan
Unless I've unfairly overlooked someone, it looks like no recalculationist answered my original question - namely, "By what percentage do real GDP and employment fall if nominal GDP unexpectedly declines by 5%?"  Arnold comes the closest.In this example, I would... MORE

Question for Recalculationists, Round 2

Macroeconomics
Bryan Caplan
Arnold answers my question with another question:[W]hy does nominal GDP suddenly fall by 5 percent?Let's keep it simple: The public freaks out for no good reason and responds by trying to increase cash balances, and the Fed doesn't accomodate.... MORE

Question for Recalculationists

Macroeconomics
Bryan Caplan
Suppose that the modern U.S. economy faced no out-of-the-ordinary recalculation problems.   By what percentage do real GDP and employment fall if nominal GDP unexpectedly declines by 5%?P.S. If you're wondering why I'm asking...... MORE

Karl Smith looks at gross job flows and ask whether they support or refute the Recalculation Story. We can think of three reasons for people to lose jobs. First, normal churn, in which people shift out of declining firms and... MORE

My Two Ideas on Jobs

Labor Market
Arnold Kling
1. Cut pay for state, local, and Federal workers. Many people worry about governments having to cut back on employment. They see this as an argument for higher government spending. However, it is actually a much stronger argument for cutting... MORE

I mention Scott Sumner a lot on this blog. Why? Because I see him as sticking up for mainstream macroeconomics. I myself have been pushing a non-mainstream idea, sort of a muddle between Leijonhufvud and Hayek that I call the... MORE

Scott Sumner Back to Normal

Macroeconomics
Arnold Kling
That is, he is saying things I disagree with. 1. Between July and November 2008 the Fed adopted an ultra-tight monetary policy. 2. Real interest rates on indexed 5 year T-bonds rose from 0.5% to 4.2% 3. The tight money... MORE

The CBO Has Not Changed Macro Models!

Macroeconomics
Arnold Kling
This is not big news, but Derek Thompson writes as if it is. The CBO came out today with a new report on the effect of the stimulus, or the American Recovery and Reinvestment Act (ARRA). The conclusion is that... MORE

I Agree with Scott Sumner

Macroeconomics
Arnold Kling
On most monetary issues, I don't. But I like this post, where he comes out four square in favor of using the monetary base as his measure of the money supply. So when people start asking me about the banking... MORE

The Great Depression as a Recalculation

Growth: Consequences
Arnold Kling
In an interview, Bruce Greenwald says, Basically, in the Depression a huge sector of the economy that everyone had always regarded as central, died. And it dies for an almost virtuous reason. That sector of course is agriculture. Because productivity... MORE

Macro and the Organizational Capital Model

Macroeconomics
Arnold Kling
Robert Shiller writes, Consider this possibility: after all these months, people start to think it's time for the recession to end. The very thought begins to renew confidence, and some people start spending again -- in turn, generating visible signs... MORE

Axel Leijonhufvud, Recalculation Theorist

Macroeconomics
Arnold Kling
What I call the Recalculation Story has many origins. One of them is Axel Leijonhufvud. He recently wrote, The economy is an adaptive dynamical system. It possesses the self-regulating, "equilibrating" properties that we usually refer to as "market mechanisms". But... MORE

Dominating the Narrative

Economic History
Arnold Kling
Will Wilkinson writes, Ygesias says, "I believe that absent the [TARP] bailout, we'd be looking at even higher unemployment today." I think this is a plausible claim. But I don't know of a satisfactory way to evaluate it. It's plausible... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
Paul DeGrauwe writes, My contention is that the rational expectations models are the intellectual heirs of these central planning models. Not in the sense that individuals in these rational expectations models aim at planning the whole, but in the sense... MORE

No Bubbles Here. Move Along Now

Macroeconomics
Arnold Kling
WSJ Real Time Economics reports on a speech by the Fed's Don Kohn, Our abilities to discern the 'correct' values of assets is quite limited. At present, however, the prices of assets in U.S. financial markets do not appear to... MORE

A Minsky Recovery?

Labor Market
Arnold Kling
As always, there are conflicting views on the economic outlook. Daniel Gross is optimistic. In the third quarter, productivity--econospeak for companies doing more work with the same amount of labor--rose at a 9.5 percent annual rate... But just as hamsters... MORE

Mankiw's Text Hints at Yes, But The Answer is No One of the standard claims made about the 1970s is that a major contributor to inflation and low growth was OPEC. In his excellent textbook, Macroeconomics, 6th ed., for example,... MORE

More Scott Sumner

Macroeconomics
Arnold Kling
He writes, I think that one thing that separates me from other macroeconomists is that I see short run changes in NGDP as being powerfully impacted by changes in future expected NGDP. Thus if the expected level of NGDP one,... MORE

Macroeconomic Disconnects

Macroeconomics
Arnold Kling
Scott Sumner brings up some difficulties for anyone who would argue that monetary policy is not a sufficient tool for fighting the recession. He is not arguing from his yet-to-be-articulated new paradigm. He is stating traditional macro.... MORE

Charting Structural Economic Change

Labor Market
Arnold Kling
If all goes well this link will take you to an article (with cool charts!) where I make an empirical case for telling the Recalculation story rather than pretending that we have the same economy that existed in the 1930's... MORE

Wisdom Worth Repeating

Macroeconomics
Arnold Kling
Tyler Cowen repeats a tweet, and I will too. It comes from Masonomist Garett Jones. Workers mostly build organizational capital, not final output. This explains high productivity per 'worker' during recessions. This is yet another difference between the labor force... MORE

Reducing Real Compensation

Labor Market
Arnold Kling
Alex Tabarrok highlights a post by David Beckworth on the sharp decline in nominal spending in 2008-2009. Alex writes, We could use some inflation to get back on track. Nominal wages are simply not flexible enough to get the job... MORE

Thoughts on the Macro Paradigm

Macroeconomics
Arnold Kling
Scott Sumner's latest deserves comment. Before I do that, however, I want to say that yesterday I was trying to teach the consequences of paying interest on reserves to my bright high school students. They got, correctly, that paying interest... MORE

Financial Markets vs. Kling

Finance: stocks, options, etc.
Arnold Kling
Paul McCulley writes, a bull flattening bias of the Treasury curve, with longer-dated rates falling toward the near-zero Fed policy rate, can be viewed as a consensus view that the level of the output/unemployment gap plumbed during the recession is... MORE

Morning Links

Macroeconomics
Arnold Kling
1. David Warsh offers a suggestion for the most prestigious female economist. The answer is probably Carmen Reinhart, of the University of Maryland, when measured by citation counts, the yardstick commonly used to gauge professional fame. Reminder that you can... MORE

Additive Shocks

Macroeconomics
Bryan Caplan
A common complaint about Sumner is that he ignores important real shocks, such as the "Recalculation Problems" that Arnold keeps pushing.  I'm still not convinced that recalculation is a big deal, though this graph that Arnold's promoting is the kind... MORE

The Stimulus and the Economy

Fiscal Policy
Arnold Kling
John Taylor cuts through the BS. the latest Department of Commerce estimates of ... the improvement in GDP growth from the first to second quarter. Growth improved by 5.7 percent (from -6.4 percent to -0.7 percent). Private investment was by... MORE

A Recalculation Data Point

Macroeconomics
Arnold Kling
From David Altig, via Mark Thoma. This statistic, the percentage of job losses that are permanent, is a useful way to distinguish Keynesian recessions from Recalculations. In a Keynesian recession, you are temporarily laid off because of excess inventories and... MORE

The Recalculation Model in a Journal

Macroeconomics
Arnold Kling
Brad Cornell writes (don't expect the link to work smoothly) The recession is due primarily to a widespread mismatch between current conditions and previous plans, relationships, and contracts. As a result, consumer desires, resources, and production technology are also misaligned.... MORE

James Hamilton Estimates a Phillips Curve

Macroeconomics
Arnold Kling
He finds, the forecast of the model for the average inflation rate between 2009:Q4 and 2011:Q4 is -0.5%. ...If for further evidence on inflationary expectations you looked at the gap in yields between nominal Treasuries and TIPS, you'd say inflation... MORE

On "job creation"

Macroeconomics
Arnold Kling
Mort Zuckerman writes, the US lost 44m jobs in the last two decades of the 20th century, but simultaneously created 73m private sector jobs. A stunning 55 per cent of the total workforce was in new jobs by the turn... MORE

Russ Roberts points out that only a small fraction of the $787B fiscal stimulus has been spent.  I've long scoffed at government inefficiency, but it never occurred to me that a full pork barrel could be so slow to empty. ... MORE

Certainty, Uncertainty, and Macro

Macroeconomics
Arnold Kling
Steven Randy Waldman writes, A housing boom, any kind of boom, is attended by an increase in certainty. Information is stimulus, confusion is contraction. A bust occurs when the market is unsure of everything, when market participants perceive better risk-adjusted... MORE

Economic Models, the Bond Market, and Monetary Policy

Finance: stocks, options, etc.
Arnold Kling
In a comment on this post, Bryan asked whether I should not be betting on treasury-indexed securities. I'll answer that one below the fold. What I have been thinking about is this. 1. In general, I do not think that... MORE

A Sentence to Ponder

Macroeconomics
Arnold Kling
Gap-based theories of inflation were badly discredited in the 1970s. That is James Bullard. Pointer from WSJ real time economics. To the Krugmans and DeLongs of the world, it is intuitively obvious that with unemployment approaching 10 percent we... MORE

More Scott Sumner

Macroeconomics
Arnold Kling
Here. after July 2008 there were many other indicators that money was far too tight. About this time the dollar began rising sharply against the euro; and commodity prices began a sharp decline. Real interest rates rose from less than... MORE

This Time Really Is Different

Macroeconomics
Bryan Caplan
Many people compare today's recession to the last big one in 1980-82.  But Scott Sumner keeps insisting that this one is different.  At risk of re-inventing the wheel, I decided to take a look at the nominal GDP (NGDP) data... MORE

More on Recalculation and Asymmetry

Macroeconomics
Arnold Kling
James Hamilton writes, I'd like to add a paper I published in 1988. There I presented a model in which unemployment arises from a drop in the demand for the output of a particular sector. The unemployed workers could consider... MORE

Afternoon Commentary

Finance: stocks, options, etc.
Arnold Kling
1.Paul Krugman ask another question. why does it have to be a return to shadow banking? The banks don't need to sell securitized debt to make loans -- they could start lending out of all those excess reserves they currently... MORE

Scott Sumner, on One Foot

Monetary Policy
Arnold Kling
From his own blog I have a very unconventional way of thinking about the monetary transmission mechanism. A monetary shock is essentially a change in the future path of the money supply relative to velocity, in other words, a change... MORE

Paul Krugman asks a Question

Macroeconomics
Arnold Kling
He argues that the Recalculation story falls apart when you ask why, say, a housing boom -- which requires shifting resources into housing -- doesn't produce the same kind of unemployment as a housing bust that shifts resources out of... MORE

Recalculation and State and Local Relief

Fiscal Policy
Arnold Kling
Tyler Cowen finds and responds to some criticisms of the Recalculation story. Avent and Yglesias suggest that Kling is making up his own macro but the innovation is simply to call the adjustment process "recalculation," to give it a more... MORE

M as a weighted average

Money
Arnold Kling
How does monetary policy work? Think of it this way: Fiscal policy adds or subtracts government liabilities. Monetary policy swaps government liabilities.... MORE

Morning Commentary

Fiscal Policy
Arnold Kling
Most of these are links in posts by Mark Thoma. Richard Robb says that letting Lehman fail really did cause big problems. However, he concedes, There is plenty of room to debate the larger counterfactual: if the government had never... MORE

Money as a Store of Value

Macroeconomics
Arnold Kling
A commenter asks how I reconcile my assertion that money is a store of vaue with my view that macroeconomics should not emphasize the role of money as a store of value. It is only the second view--that money is... MORE

Monetary Theory, Once Again

Macroeconomics
Arnold Kling
Josh Hendrickson and a reader raise interesting questions.... MORE

Whose Macro is Bizarre?

Macroeconomics
Arnold Kling
Thanks to Mark Thoma for keeping the debate going. In a defense of what Paul Krugman would call Dark Age Macroeconomics, David Beckworth unleashes that most medieval of weapons, the dreaded Vector Autoregression. More on that below the fold. Also... MORE

Responses to Two Critics

Macroeconomics
Arnold Kling
I have been making the following claims about macro.... MORE

Read the whole thing. He likes the Recalculation story, which he points out he articulated last December. But he doesn't really buy my bizarre monetary theory. He writes, "I see the Fed as controlling nominal gdp but not always real... MORE

Bizarre Monetary Theory, Once Again

Macroeconomics
Arnold Kling
Bill Woolsey writes, it is not difficult to see that a large shift in the composition of demand would result in larger shifts in resource utilization, higher structural unemployment, and slower growth in the productive capacity of the economy. For... MORE

Elves and Helicopters

Macroeconomics
Arnold Kling
Bryan asks, Could the central bank hit a 20,000% nominal growth target, plus or minus 1000%? No. Certainly not next quarter. Maybe it come close if it aimed for such a target in 2014. Consider two thought-experiments, one involving elves... MORE

My Bizarre Monetary Theory, Continued

Macroeconomics
Arnold Kling
Before I respond to Bryan's comments, let me first recommend the two Scott Sumner papers that he mentions. This paper develops a theory that cultural values drive economic policy, which in turn drives economic outcomes. It is an interesting complement... MORE

Arnold's Bizarre Monetary Econ

Macroeconomics
Bryan Caplan
I'd like to think that I'm misunderstanding Arnold's views on monetary econ.  But in his latest post, he states his position quite clearly.  He begins with the uncontroversial:The Federal Reserve can manipulate some market interest rates by printing money and... MORE

I Deny (the significance of) MV = PY

Macroeconomics
Arnold Kling
Jeffrey Rogers Hummel writes, Orthodox monetarists attributed such shocks to declines in the rate of monetary growth, whereas traditional Keynesians blamed declining autonomous expenditures. Both of these sources are captured in the well known equation of exchange: MV = Py,... MORE

Predictability of Crises

Macroeconomics
Arnold Kling
Gilles Saint-Paul writes, any macroeconomic theory that, in the midst of the housing bubble, would have predicted a financial crisis two years ahead with certainty would have triggered, by virtue of speculation, an immediate stock market crash and a spiral... MORE

Kling on the State of Macro

Macroeconomics
Arnold Kling
Let me tell my story using the following table, which shows the primary causes of economic fluctuations according to different economists.: Animal Spirits,Liquidity PreferenceMonetary ShocksProductivity ShocksRecalculationKeynes, Akerlof-Shiller, KrugmanLucas, Dornbusch, Fischer, BlanchardPrescottClower, Leijonhufvud, Hayek, Kling Macro practitioners (the people who report... MORE

John Quiggin on Macro

Macroeconomics
Arnold Kling
He writes, The appealing idea that macroeconomics should develop naturally from standard microeconomic foundations must be recognised as a distraction. In its place, we must accept, in the language of systems theory that macroeconomic phenomena are emergent, arising from complex... MORE

Laidler and Sumner on the State of Macro

Macroeconomics
Arnold Kling
Will WIlkinson notifies me of Scott Sumner's essay at Cato Unbound. Self-recommending, with interesting commentators lined up. On a related note, David Laidler writes, The point of [Keynes'] liquidity preference theory was that money, whose use as a means of... MORE

Blog on Causes of the Crisis

Macroeconomics
Arnold Kling
I am definitely going to be a subscriber to this new blog. Thanks to Will Wilkinson for the pointer. Several of the initial posts are pushback at Paul Krugman's piece on what economists got wrong. Nobel Laureate Vernon Smith chimes... MORE

The Recalculation Model, Simplified

Macroeconomics
Arnold Kling
First, I note that Paul Krugman is sounding Austrian. In a follow-up to his longer piece, he writes, the economy is a complex system of interacting individuals -- and these individuals themselves are complex systems. Neoclassical economics radically oversimplifies both... MORE

Krugman vs. Blanchard on the State of Macro

Macroeconomics
Arnold Kling
Paul Krugman writes, contra Olivier Blanchard, that The state of macro, in short, is not good. I agree with his diagnosis. But his prescription, to return to some sort of old-time Keynesian religion, is too vague. It would be precise... MORE

Ed Leamer's Head Fake

Books: Reviews and Suggested Readings
Arnold Kling
Ed Leamer's new book is called Macroeconomic Patterns and Stories: A Guide for MBA's. I do not know why he positioned it as a guide for MBA's. It is clearly a treatise, aimed at the economics profession, to try to... MORE

Hydraulic Macro: A Fable

Macroeconomics
Arnold Kling
I came up with this while thinking of a way to explain the Keynesian model to my high school class. But scroll to the end to see comments related to the recalculation model.... MORE

Did Armageddon Happen?

Macroeconomics
Bryan Caplan
Several people in both Sweden and the U.S. have asked me if the bail-outs of 2008 saved us from "financial Armageddon" or "financial Götterdämmerung."  My question: What does Armageddon look like?  Suppose there had been no bail-outs, and everything that's... MORE

Earthquake Science

Economic Methods
Arnold Kling
Mark Thoma writes, even though earthquakes cannot be predicted, at least not yet, it would be wrong to conclude that science has nothing to offer. First, understanding how earthquakes occur can help us design buildings and make other changes to... MORE

The Best Question I Heard Yesterday

Macroeconomics
David Henderson
I sat in on Jeff Hummel's graduate course in Monetary Theory at San Jose State University last night. In the first part of the lecture, Jeff gave a quick tour through macroeconomics: the various schools of thought plus what various... MORE

More Thoughts on the Great Recalculation

Macroeconomics
Arnold Kling
In a comment on an earlier post, Hal Varian writes, The recalculation model is appealing, but is there any empirical evidence for it? I don't think that the 1930s would provide useful evidence since the production patterns after the Great... MORE

Correction on Krugman

Macroeconomics
David Henderson
On May 18, in discussing Paul Krugman's analogy between a baby-sitting coop and the general economy, I wrote, quoting my Reason review of Krugman's The Return of Depression Economics: But nowhere does Krugman mention that another way to solve a... MORE

A Fact for Tyler Cowen

Macroeconomics
Arnold Kling
The New York Times reports, While the private sector has shed 6.9 million jobs since the beginning of the recession, state and local governments have expanded their payrolls and added 110,000 jobs For some reason, Tyler buys into the Paul... MORE

Rethinking Macroeconomics, Continued

Macroeconomics
Arnold Kling
Two links to discuss in this post. First, David Altig discusses the "output gap," which I put in scare quotes because it is a concept that I am about to attack. Pointer from the indispensable Mark Thoma, who also provided... MORE

Not Your Father's Real Business Cycle

Macroeconomics
Arnold Kling
Two helpful critiques of my post on non-hydraulic macro. I will address both of them in more detail below, but let me start by questioning the label "real business cycle model." Back before I tuned out of academic macro, Franco... MORE

My Economic Forecast

Macroeconomics
Arnold Kling
It is here. This is a very difficult thing for me to do, because economic forecasting is done under the hydraulic paradigm that I think we should try to abandon. Anyway, a sample: Traditionally, fiscal stimulus would increase the demand... MORE

An Alternative to Hydraulic Macro

Macroeconomics
Arnold Kling
Mainstream macroeconomics is "hydraulic." There is something called "aggregate demand" which you adjust by pumping in fiscal and monetary expansion. I wish to reject this whole concept of macroeconomics. Instead, I want to get economists to think about unemployment in... MORE

Scott Sumner vs. Milton Friedman

Macroeconomics
Arnold Kling
Tyler Cowen writes, Professor Sumner's views differ from the monetarism of Milton Friedman by emphasizing expectations rather than any particular measure of the money supply. Allow me to expand on the history of monetary thought embedded in that statement.... MORE

Me on KQED-FM

Macroeconomics
David Henderson
I'll be talking about the economy on KQED-FM, 88.5 in San Francisco at 9:05 a.m. You can listen live. Update: BTW, this is PDT. Goes to 10:00 a.m. PDT. Can call in at 866-733-6786.... MORE

The Economy and the News Cycle

Macroeconomics
Arnold Kling
Friends of mine have asked me lately how badly President Obama's economic policies are working. My reply is that it is way too soon to tell. I would expect that by now, the effect of Obama Administration policies on unemployment... MORE

I recently pointed out that back in the good old days, Krugman would have graciously granted that a payroll tax hike is an especially bad idea when unemployment is high.  In response, Kevin Drum notes that the tax hike doesn't... MORE

Relative to what a consensus forecast might have predicted last October, it appears that: --Banks are doing somewhat better than expected --GDP has fallen about as far as expected --employment has fallen more than expected If this is a fair... MORE

What Caused the Panic?

Macroeconomics
David Henderson
In one of his posts today, Bryan asks us to consider Scott Sumner's thoughts in response to an earlier post by Bryan. (BTW, like many of the other bloggers, I'm now hooked on reading Sumner's thoughts. He has that perfect... MORE

Shorter Scott Sumner

Monetary Policy
Arnold Kling
Bryan points to a Scott Sumner's monetarist credo. Think of it as a simplification of the Taylor rule. The Sumner Rule is, if the consensus forecast of nominal GDP growth is below 5 percent, then loosen up. Presumably, if the... MORE

Sumner's FAQ

Macroeconomics
Bryan Caplan
Every economist alive should read Scott Sumner's FAQ on macroeconomics.  You give him ten minutes; he'll give you a fresh, incisive perspective on the world.  Highlights:6.  Isn't the real problem . . . ?No, the real problem right now is... MORE

Ed Glaeser on New York

Growth: Causal Factors
Arnold Kling
He sounds like Richard Florida. New York has bright, creative people, yada-yada. I think that most of the cyclical movement in the economy comes in businesses that are not all that creative--manufacturing, construction, and strip-mall businesses. Folks in Washington have... MORE

In the Press

Economics of Health Care
Arnold Kling
David Leonhardt talks about the real issue in health care spending (it's not administrative costs). Tyler Cowen calls the column "superb." I would give it no more than a B, because the question is posed in terms of which centralized... MORE

Defending what Paul Krugman Wrote

Macroeconomics
Arnold Kling
In 2002, he passed along a joke that the economy needed a housing bubble. Krugman is controversial, so the post generated comments on this blog and elsewhere, some of which are overly "gotcha" in character. Some points I would make:... MORE

Things I'm Glad I Never Said

Macroeconomics
Arnold Kling
Paul Krugman, writing in August of 2002: To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan... MORE

Sumner: An Embarassment of Riches

Macroeconomics
Bryan Caplan
I could devote a dozen posts to Scott Sumner's latest essay-length entry.  But I'll limit myself to the highlights:Stop worrying about inflation....Laffer is too good an economist to say anything blatantly false, but the entire tone of his WSJ piece... MORE

Audience Questions, 2

Macroeconomics
Arnold Kling
Why is a FICA cut better than a federally-funded sales tax holiday? The latter: - affects everyone, not just workers - is progressive - encourages consumption without delaying deleveraging The big advantage of a sales tax holiday is that,... MORE

Audience Questions

Macroeconomics
Arnold Kling
Feel free to put constructive questions in the comments. Here are two questions that I recently received, one on health care and one on Keynesian economics. On health care, actually two questions: You asked thequestion why is health care something... MORE

More on the Fischer Black Model

Finance: stocks, options, etc.
Arnold Kling
Some more thoughts on Fischer Black's model of business cycles, following up on my earlier post on Tyler Cowen's piece. 1. Black thinks of us as living in a CAPM world. There is no reward for idiosyncratic risk (risk that... MORE

Forecasting

Macroeconomics
Arnold Kling
Tyler Cowen writes, "Dormant inflation" will spring to life, at some point quite rapidly, and the Fed will choose to tighten. Five to six percent inflation for a while would be OK but we will be faced with the prospect... MORE

More on Matt Yglesias

Macroeconomics
David Henderson
Arnold has posted below on Matt Ygelesias's criticism of the view that macroeconomics requires a microeconomic foundation. There's more to say. First, check out comment #21 by one, Matt Rognlie, on Yglesias's site. It's quite good. I was surprised when... MORE

Some Intellectual History for Matt Yglesias

Macroeconomics
Arnold Kling
He writes, the decision has been made to somewhat arbitrarily impose the view that macro models must be grounded in micro foundations. Readers of this blog know that I would be the last person to defend economic methods in macro... MORE

Lectures on Macroeconomics, No. 16

Macroeconomics
Arnold Kling
This lecture will describe inflation as a fiscal phenomenon. You have heard that inflation is, anywhere and everywhere, a monetary phenomenon. This lecture will take a more nuanced view. The conventional wisdom would say that we can run large deficits... MORE

Did Obama Restore Confidence?

Macroeconomics
Bryan Caplan
One non-Obama-loving economist I know nevertheless gave him credit for "restoring confidence."  I agree that confidence is coming back.  But does Obama deserve the credit?  The obvious alternative is that panic, like grief, normally fades away a few months after... MORE

The Fiscal Policy Lag

Fiscal Policy
Arnold Kling
Keith Hennessey has another must-read post. I believe the Administration made an enormous mistake in its legislative implementation of the stimulus. As a result, the boost to GDP will come six to nine months later than it needed to (maybe... MORE

Lectures on Macroeconomics, No. 15

Macroeconomics
Arnold Kling
This lecture is on the household's "make or buy" decision. The more we outsource production, the more economic activity there is. In a recession, we cut back on outsourcing.... MORE

What is the GDP Gap?

Macroeconomics
Arnold Kling
Doug Elmendorf writes, the difference between the economy's actual and potential output will average 7 percent of GDP (which is equivalent to about a trillion dollars) this year and next, and that gap in output will not close until 2013.... MORE

Krugman's Baby-Sitting Analogy

Macroeconomics
David Henderson
This is another in an open-ended series on strengths and weaknesses in Paul Krugman's writing. In a 1999 review of Krugman's The Return of Depression Economics, I wrote: One of Krugman's strengths is his talent for analogies that help readers... MORE

Funniest Macro Line of the Month

Macroeconomics
Bryan Caplan
The prize goes to Scott Sumner for:[I]f you are going to use research by a brilliant Nobel-Prize winning new Keynesian economist in order to attack discredited ideas, then makes sure the discredited ideas being attacked are not... your own.Still, if... MORE

I just read Bernanke's 2004 piece on "The Great Moderation."  It's written by the wise Bernanke I remember, not the embarassment he's become.   In hindsight it's tempting to treat Bernanke's analysis as pure delusion.  But in the end, I bet... MORE

This Changes Nothing

Macroeconomics
Bryan Caplan
"When the facts change, I change my mind."  The crash of 2008 has brought Keynes' famous line back into popular use.  But should it have done so?  Here's my claim:Nothing that happened in the last two years should have significantly... MORE

The Inflation Illusion?

Macroeconomics
Bryan Caplan
Once I finish refinancing my 30-year fixed-rate mortgage at a ridiculously low nominal rate, a giant inflationary surprise would probably be in my best interest.  But Scott Sumner says I shouldn't get my hopes up.  The first and foremost of... MORE

Krugman's Hooverite View on Wages

Macroeconomics
David Henderson
My fellow blogger Bryan has done an admirable job of laying out the problems with Paul Krugman's recent piece on wage inflexibility. I have three things to add. First, Bryan points out that "Krugman forgets that wage rigidity is the... MORE

Why Wage Cuts Are Good For Aggregate Demand

Macroeconomics
Bryan Caplan
Krugman's repeating his argument that wage cuts are individually rational, but collectively irrational:[M]any workers are accepting pay cuts in order to save jobs. What's wrong with that?The answer lies in one of those paradoxes that plague our economy right now.... MORE

Ed Leamer

Macroeconomics
Arnold Kling
He is one of the most interesting economic thinkers out there, and Russ Roberts does a nice job interviewing him. The podcast covers the lack of knowledge that we have about macroeconomics, the fact that so many business cycles seem... MORE

More Thoughts on Masonomics

Macroeconomics
Arnold Kling
Tyler and Alex have new textbooks on micro and macro. Both begin with the same anecdote. In 1787, the British government had hired sea captains to ship convicted felons to Australia...On one voyage, more than a third of the males... MORE

Cry Panic!

Macroeconomics
Bryan Caplan
Yesterday I quoted Scott Sumner: "I believe that the depression was caused by events that took place in September and October, when the markets actually crashed," and replied:I'm strongly tempted to second Scott.  My main proviso: He's got to let... MORE

Scott Sumner's False Dichotomy

Finance: stocks, options, etc.
Arnold Kling
Bryan likes what Scott says here. Read Scott's whole post yourself, so that you do not necessarily take my reading of it. Anyway, he comes close to saying that you either have to believe in efficient markets or you ought... MORE

When You Put It That Way, Scott...

Macroeconomics
Bryan Caplan
I can't believe how much excellent material Scott Sumner hides "below the fold."  A prime example: Whenever I read opinion pieces by almost any macroeconomist-- Keynesian, monetarist, new Classical, Austrian, etc, there is almost invariably a point where alarm bells go... MORE

Crisis Dialogue

Macroeconomics
Bryan Caplan
My co-author Scott Beaulier shares a funny but informative dialogue with his lawyer here.  Excerpt:LAWYER: So you're an economist at Mercer?ME: Yep.LAWYER: What do you think of this crisis?ME: Well, I'm really concerned about the long-run effects it will have. ... MORE

Financial Crises, Debt Finance, and Emerging Economies

Finance: stocks, options, etc.
Arnold Kling
Ravi Balakrishnan and others write, Evidence from past systemic banking crises in advanced economies (the US in the 1980s and Japan in the 1990s) shows that the decline in capital flows to emerging economies tends to be sizeable. Since then,... MORE

Mark and Me on Macro

Macroeconomics
Arnold Kling
on bloggingheads. We both express some humility about what macroeconomics can do. The New York Times decided to extract the section on bank bailouts.... MORE

Carrying Hyman Minsky's Torch

Macroeconomics
Arnold Kling
Robert J. Barbera's new book is called The Cost of Capitalism. On p. 182-183, he writes, For Minsky, government activism, to thwart the deflationary effects of banking crises, is the cost of capitalism, In the preface, he writes, Minsky's thesis... MORE

In Defense of Macroeconomists

Macroeconomics
Arnold Kling
Menzie Chinn makes the case. How can one incorporate the idea of the importance of the banking system (separate from its importance to the money creation process)? One very simple static model is provided by a twenty year old paper... MORE

Single-Lever Macro

Macroeconomics
Arnold Kling
Scott Sumner has an excellent post on his concerns with IS-LM theory. I endorse most of it, but I want to point out where I disagree. He writes, Michael Woodford and I agree on one thing; changes in the expected... MORE

Geanakoplos on Leverage Cycles

Finance: stocks, options, etc.
Arnold Kling
David Warsh points to this lecture. variation in leverage has a huge impact on the price of assets, contributing to economic bubbles and busts. This is because for many assets there is a class of buyer for whom the asset... MORE

The Banana Subsidy Bubble?

Macroeconomics
Bryan Caplan
Remember the Fable of the Banana Subsidy?  Government subsidizes bananas.  People buy a ton of bananas and store them on their roofs.  The bananas weigh so much that their roofs collapse.  Then people say, "It's the government's fault!" - which... MORE

The Case for Killing Textbook Macro

Macroeconomics
Arnold Kling
Seeing two posts today on macro, I am ready to share Nassim Taleb's despair.... MORE

Linkfest

Macroeconomics
Arnold Kling
Tyler Cowen is everywhere. Here he gives what I call (borrowing the term from Steve Roach) the tallest pygmy theory of America in the world economy. The major Austrian banks, for instance, have loans to eastern Europe equal to as... MORE

Review Essay on Macroeconometrics

Economic Methods
Arnold Kling
A while back, I mentioned this essay by Jesús Fernández-Villaverde, which at the time was not on line. Now it is there. I think it gives a useful history and perspective on macroeconometrics. Note in particular his discussion of the... MORE

James Hamilton on the Oil shock of 2007-2008

Energy, Environment, Resources
Arnold Kling
Highly Recommended. Back in September, when Congress was getting to ready to vote on TARP, I was in a Congresswoman's office arguing futilely against it. One of my lines was that I thought that most people were more adversely affected... MORE

Edward Leamer on Housing and Macro

Macroeconomics
Arnold Kling
He has a new book, which sounds very interesting (but expensive). I've been re-reading his 2007 paper. My comments follow.... MORE

What A Sensible Keynesian Would Say

Macroeconomics
Bryan Caplan
I'm not sure if James Hamilton would call himself a "Keynesian," but this is exactly what sensible Keynesians should say:I emphasize that I am decidedly not suggesting that either fiscal or monetary policy stimulus are capable of solving all of... MORE

Tale of Two Islands

Growth: Causal Factors
David Henderson
Stanford University economists Peter Blair Henry and Conrad Miller recently published an interesting NBER Working Paper in which they compare economic policy and economic performance between Jamaica and Barbados. Henry and Miller point out that in Jamaica, the People's National... MORE

Great Lines from Bob Solow

Macroeconomics
David Henderson
On February 25, I posted some lines from an Arjo Klamer interview with Bob Lucas and promised to post some of my other favorites. The interview with Bob Solow of MIT has a lot of my favorites. All of these... MORE

Stossel Clip

Macroeconomics
Bryan Caplan
Alas, none of my words made the final Stossel clip on the bailout, but my colleague Pete Leeson and GMU alumna Lydia Ortega get good lines in.  Next time, maybe I'll get a haircut and see if that helps. :-)P.S.... MORE

Waldman on Financial Intermediation

Finance: stocks, options, etc.
Arnold Kling
Read the whole thing. I am proud that he claims to have been inspired by my Future of Macroeconomics post, but he obviously has been thinking about this stuff for quite some time.... MORE

Paradox of Thrift

Macroeconomics
David Henderson
Both Arnold and Bryan have weighed in on the paradox of thrift. Arnold's response was to my mention of Bob Murphy's refutation of Steve Fazzari. Jeff Hummel read Arnold, Bryan, and Bob Murphy and wrote me the following: The essence... MORE

The Future of Macroeconomics

Macroeconomics
Arnold Kling
Three predictions: 1. There will be much less emphasis on monetary policy, and much more emphasis on financial institutions and financial regulatory policy. 2. There will be much less emphasis on fiscal policy, and much more emphasis on sectoral reallocation... MORE

A Textbook Perspective on Current Events

Macroeconomics
Arnold Kling
James Kwak points to an online chapter by Charles Jones. Like a decadent buffet at an expensive hotel, securitization involves lumping together large numbers of individual financial instruments such as mortgages and then slicing and dicing them into different pieces... MORE

She writes, though the current recession is unquestionably severe, it pales in comparison with what our parents and grandparents experienced in the 1930s. Last Friday's employment report showed that unemployment in the United States has reached 8.1%--a terrible number that... MORE

Change I Believe In

Macroeconomics
Bryan Caplan
Writing in the Washington Times, my former student Ben Powell advocates change I can believe in: America's move to act swiftly and boldly misses the point. Bank bailouts and fiscal stimulus bills don't work because they strive to maintain the... MORE

Recommended Reading

Finance: stocks, options, etc.
Arnold Kling
Ben Bernanke on the future of bank regulation. there is some evidence that capital standards, accounting rules, and other regulations have made the financial sector excessively procyclical--that is, they lead financial institutions to ease credit in booms and tighten credit... MORE

bloggingheads

Finance: stocks, options, etc.
Arnold Kling
Russ Roberts and I discuss current events. I felt awkward, and so I didn't feel particularly good about it afterward. The bloggingheads folks think that the best clip is here. Constructive suggestions welcome.... MORE

Eeyore's Economic Outlook

Fiscal Policy
Arnold Kling
Ken Rogoff writes, As debt mounts and the recession lingers, we are surely going to see a number of governments trying to lighten their load through financial repression, higher inflation, partial default, or a combination of all three. Read the... MORE

DeLong vs. Boldrin

Fiscal Policy
Arnold Kling
Gregory Clark moderates. There is almost no enlightenment, but plenty of rhetorical metaphors. For example, about 38 minutes in, Boldrin says, "If the guy has a broken nose, you don't put a band-aid on his butt." I stopped listening shortly... MORE

Sober Words from Barro

Macroeconomics
David Henderson
In yesterday's Wall Street Journal, Bob Barro points out that the stock market crash could portend another depression. I had never been able to answer students who asked me what distinguishes a depression from a recession except that it's more... MORE

Signs of Deflation

Macroeconomics
Arnold Kling
That is how I read Michael Bryan and Brent Meyer. the sharp drop in the flexible component of the core CPI is another clear indication of the strong disinflationary pressure on retail prices in recent months. Over the past four... MORE

The Monetary Mechanism

Macroeconomics
Bryan Caplan
Arnold continues to surprise me. In reply to Scott Sumner, my co-blogger asks: "[I]f you suddenly found yourself with twice as much cash in your wallet, would you double your spending?"This is a good question, but it has a standard... MORE

On Monetarism

Macroeconomics
Arnold Kling
In a comment on this post, Scott Sumner writes, If the Fed doubled the money supply would you suddenly change your preferences and want to hold twice as much cash in your wallet? To which I retort: if you suddenly... MORE

Greg Mankiw Gets Technical

Economic Methods
Arnold Kling
He writes, The purpose of this picture is to show that deeper-than-average recessions are followed by faster-than-average recoveries. (Similar evidence was compiled in the 2005 Economic Report of the President, Chapter 2.) This evidence might be taken as evidence in... MORE

Jim Rogers: What He's Saying, Where He's Gone

Macroeconomics
Bryan Caplan
Jim Rogers, investment biker and co-founder with Soros of the Quantum Fund, says we should let AIG fail:"Suppose AIG goes bankrupt, it is better that AIG goes bankrupt and we have a horrible two or three years than that the... MORE

Vertical LM is Not Vertical AS

Macroeconomics
Bryan Caplan
Arnold writes:I think it really is possible to have fluctuations in employment. Bryan's thinking applies in a frictionless economy that is always at full employment, but I don't think it applies in reality.Frankly, this is a straw man.  I believe... MORE

Murphy on the Paradox of Thrift

Macroeconomics
David Henderson
Fellow blogger Arnold Kling has weighed in on the paradox of thrift. Arnold states: Robert P. Murphy and Bryan seem to me to be confusing things. Murphy starts with an illustration of the paradox of thrift from Keynesian economist Steve... MORE

Back to Basics

Macroeconomics
Arnold Kling
Robert P. Murphy and Bryan seem to me to be confusing things.... MORE

Fiscal Futility: Helping Brad Understand

Macroeconomics
Bryan Caplan
Brad DeLong pleads perplexity:I simply do not understand their arguments that government spending cannot boost the economy. As far as I can tell, they are simply burying their heads in the sand.At the start of 1996, the US unemployment rate... MORE

Department of Double Standards

Macroeconomics
Bryan Caplan
All ideology aside: If the government had followed a laissez-faire policy for the last six months, and output, employment, housing, and financial markets stood exactly where they stand today, what fraction of people would conclude that "Events decisively prove that... MORE

Taking Krugman's Side

Monetary Policy
Arnold Kling
Goodness knows, I don't want to. I still think he owes me a correction--and in fact an apology--in his column for putting in quotation marks an inaccurate, misleading, and distorted version of something I said. But here is Tyler Cowen... MORE

Scott Sumner Cries Out

Macroeconomics
Arnold Kling
He wants the Fed to do whatever it can to try to get prices headed up rather than down. His best argument: What do we have to lose?: We can get rid of interest on bank reserves (and consider a... MORE

Shlaes and Mandel

Macroeconomics
Arnold Kling
At the Kauffman forum that I attended in Kansas City the other day, I thought that the most interesting comments, neither of which I agreed with, were offered by Amity Shlaes and Michael Mandel, who blog here and here, respectively.... MORE

Macroeconomic Identity Politics

Macroeconomics
Bryan Caplan
I've already faulted Fama for misuse of the macroeconomic identity GDP=C+I+G+NX.  Now TheMoneyIllusion takes the War On Misleading Tautology to a new level:When I discuss the effect of monetary stimulus on aggregate demand with other economists, I notice that they... MORE

Great Lines from Bob Lucas

Macroeconomics
David Henderson
The first book review I did for Fortune, in 1984, was of Arjo Klamer's Conversations with Economists. In future posts, I'll quote some of my favorite quotes from Bob Solow and from others. Here's my favorite passage from the interview... MORE

Evening Commentary

Fiscal Policy
Arnold Kling
From Brad DeLong, Michele Boldrin, Clive Crook, and David Brooks. Thanks to Greg Mankiw for the first two pointers. Comments below.... MORE

What Would Keynes Do?

Fiscal Policy
Arnold Kling
I write, If you follow the news media, you may think that the economics profession is divided into two camps: the majority, who favor the stimulus bill; and a minority, who are against any stimulus. In fact, there are many... MORE

Misplaced Priorities

Finance: stocks, options, etc.
Arnold Kling
Consider the following list of candidates for government assistance, via financial bailout or stimulus: a) banks and other financial institutions b) the nonfinancial business sector c) underwater homebuyers d) other consumers e) state and local governments In my view, (b)... MORE

Amar Bhide Monday

Growth: Causal Factors
Arnold Kling
In the Wall Street Journal, he writes, The depressions and panics of the 19th century ended without any fiscal stimulus to speak of, as did the gloom that followed the stock-market crash of 1987. Countercyclical fiscal policy may or may... MORE

We Coulda Had a Payroll Tax Holiday

Macroeconomics
Bryan Caplan
Tim Kane wisely notes that we could have had a one-year payroll tax holiday for the cost of Obama's fiscal stimulus program:What's amazing is that much of the rest of the bill's stimulus does not actually enter the economy until... MORE

Evening Commentary

Fiscal Policy
Arnold Kling
Tyler Cowen writes, In my opinion the sophisticated Keynesian view is still that the stimulus won't work. Great, great sentence. Has Jeff Frankel joined the ranks of the deranged? What he writes strikes me as not terribly different from what... MORE

Anti-Economist Bias Yes, Conservative Bias No

Macroeconomics
Bryan Caplan
Media Matters reports that almost none of the economic "experts" pontificating on Obama's economic plan are actually economists:Media Matters purposefully used a broad definition of "economist" to be inclusive, coding as an economist any guest who has a master's degree... MORE

Quoted Out of Context Again

Fiscal Policy
Arnold Kling
[UPDATE Feb. 13 2:40 PM eastern time: Andrew Sullivan of The Atlantic has done the gentlemanly thing and withdrawn the racism charge. Adam Serwer of The American Prospect has apologized for not taking into account the full context. ] I... MORE

My Analysis Is...

Macroeconomics
Bryan Caplan
Arnold wants me to explain why "two-thirds of the American people think they could do a better job on the economy than Congress."  My take is that a lot of Americans want an even more populist approach to the crisis. ... MORE

The 1930's and Today

Economic History
Arnold Kling
The Washington Post reports on how economists are still debating the 1930's. We are, but I bet I could get a pretty broad swath of economists, left and right, to agree to the following: 1. The steps that Roosevelt took... MORE

Economics does not equal Macroeconomics

Macroeconomics
Arnold Kling
Clive Crook writes, Mr Krugman gives liberals the economics they want. Mr Barro gives conservatives the same service. They narrow or deny the common ground. Why does this matter? Because the views of readers inclined to one side or the... MORE

Macroeconometrics: The Lost History

Economic Methods
Arnold Kling
A first version is here. I was thinking of submitting something like this to the AEA's new Journal Macroeconomics. Suggestions for improvement are welcome.... MORE

The Stimulus and Black Swans

Fiscal Policy
Arnold Kling
I wrote this for Cato. The present scenario analysis highlights two black swans. The first one is Depression Averted, under which a stimulus keeps the economy from falling in a downward spiral of layoffs and shutdowns. The other black swan... MORE

Getting to Recovery

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, I have in my research instead stressed technological frictions. For example, when spending on cars abruptly falls, there is a physical, technological challenge with getting the specialized labor and capital formerly employed in manufacturing cars into some... MORE

Jones on CNN Money

Macroeconomics
Bryan Caplan
My wise colleague Garett Jones has the office next to mine, so I can question him just by shouting.  (We've got thin walls in Carow Hall).  But now that Garett's writing for CNN Money, it's getting much easier for people... MORE

John Maynard Keynes writes, So far as employees are concerned, reductions in contributions are more likely to lead to increased expenditure as compared with saving than a reduction in income tax would, and are free from the objection to a... MORE

Morning Reading

Fiscal Policy
Arnold Kling
Greg Mankiw writes I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I think if you put leading economists into a room to negotiate on... MORE

Who is Advising these Guys?

Finance: stocks, options, etc.
Arnold Kling
Ed Glaeser does not like the Republican mortgage plan any more than I do. I am not sure that plan is still alive. It may have been superceded by another ill-conceived idea, a tax break for home buyers. See Tyler... MORE

Two Critiques of Macroeconometrics

Economic Methods
Arnold Kling
Menzie Chinn writes, A key reason for the academic disenchantment with these types of models included the view that the identification schemes used were untenable (e.g., why is income in the consumption function but not in the investment?). Another source... MORE

CBO Stimulus Estimates

Fiscal Policy
Arnold Kling
Doug Elmendorf writes CBO estimates that the Senate legislation would raise output by between 1.4 percent and 4.1 percent by the fourth quarter of 2009; by between 1.2 percent and 3.6 percent by the fourth quarter of 2010; and by... MORE

Akerlof and Shiller Heart Higgs?

Behavioral Economics and Rationality
Arnold Kling
George A. Akerlof and Robert J. Shiller do not come to praise mainstream macroeconomics. Keynes' followers rooted out almost all of the animal spirits...that lay at the heart of his explanation for the Great Depression...They...minimized the intellectual distance between The... MORE

Morning Commentary (Feeling Angry)

Finance: stocks, options, etc.
Arnold Kling
Three things to be angry about this morning. 1. The Obama Administration's plans to save banks. I outsource my comments to Yves Smith. Thanks to Mark Thoma for the pointer. 2. Alan Blinder and David Leonhardt confusing stimulus with class... MORE

Morning Reading (Somewhat Depressing)

Finance: stocks, options, etc.
Arnold Kling
Compare this: Officials said the GOP was coalescing behind a proposal designed to give banks an incentive to make loans at rates currently estimated at 4 percent to 4.5 percent. Fannie Mae and Freddie Mac, which were seized by the... MORE

Temporary vs. Permanent

Fiscal Policy
Arnold Kling
Tyler Cowen weighs in on an issue that has been bouncing around the blogosphere. Overall the Keynesian effects can mean either the permanent or the temporary spending boost has a bigger effect and there are also a number of ways... MORE

My Current Outline

Fiscal Policy
Arnold Kling
For my talk at the anti-stimulus conference. Still a work in progress.... MORE

Consumers or Businesses?

Fiscal Policy
Arnold Kling
Hall and Woodward write, One problem with the employment stimulus is that the funds go in the first instance to the owners of businesses and not to consumers generally. This criticism applies to my preferred stimulus, which is to take... MORE

Me on ABC-TV

Fiscal Policy
David Henderson
I was interviewed this afternoon by ABC-TV for Good Morning America. It will play tomorrow (Saturday) morning. Check your local listings. The issue was the "stimulus" package. I found the questions unusually good. We'll see what gets used.... MORE

Masonomists in the Media

Fiscal Policy
Arnold Kling
Ever wondered what Russ Roberts would do as President? He writes, I am recommending the elimination of the payroll tax... --Eliminating all corporate welfare. Corporate welfare rewards those corporations that excel at lobbying rather than serving their customers. Eliminating it... MORE

Reply to Robert Waldmann

Macroeconomics
Arnold Kling
He writes a long post that agrees with some of what I write and disagrees with some of my views.... MORE

An Anti-Stimulus Conference

Upcoming Events
Arnold Kling
See the invitation below. My theme will be "what certified macroeconomists think about the stimulus bill."... MORE

Recommended Reading

Fiscal Policy
Arnold Kling
Justin Wolfers writes, there are about three papers written on monetary policy for each paper mentioning fiscal policy. And there are only a few dozen papers written on the multiplier each year. He has more data. Jerry Muller writes, a... MORE

Harding's Stimulus Plan

Macroeconomics
David Henderson
Floccina writes: David Henderson, Arnold Kling & Bryan Caplan, I would love to read your take on Jim Powell's article about the 1920-1921 depression. Is Jim Powell showing huge bias? Can we learn anything that would be helpful in the... MORE

Podcasts

Fiscal Policy
Arnold Kling
Cato's Caleb Brown recently recorded me in two podcasts. My thoughts on multipliers and stimulus are here (this link may be more reliable). You will also find a link to my recent podcast on co-ordinated health care (I linked to... MORE

Economists Against the "Stimulus"

Fiscal Policy
David Henderson
Posted from San Francisco airport while I'm en route to San Antonio. Today's New York Times carries a full page ad, paid for by the Cato Institute, with a strong statement against President Obama's stimulus package. It quotes his statement:... MORE

Minskynomics

Macroeconomics
Arnold Kling
as explained by yours truly.... MORE

From Dark Age to Renaissance

Macroeconomics
Arnold Kling
I'm feeling somewhat lonely these days. My understanding of macroeconomics is closer to that of Paul Krugman, Mark Thoma, and Brad DeLong than it is to that of Robert Barro, John Cochrane, or Eugene Fama. And yet I am a... MORE

Timely? Temporary?

Fiscal Policy
Arnold Kling
Douglas Elmendorf, the head of the Congressional Budget Office, writes, CBO estimates that enacting the bill would increase federal budget deficits by $169 billion over the remaining months of fiscal year 2009, by $356 billion in 2010, by $174 billion... MORE

Brad DeLong and Kevin Murphy, in English

Fiscal Policy
Arnold Kling
$100 of Government SpendingMurphy's EstimatesDeLong's EstimatesKeynes Effect$50$150Housework Effect-$25-$30Galbraith Effect-$25$0Feldstein Effect-$80-$33The Bottom Line-$80$87 I explain here. [UPDATE: I made two errors in the initial numbers. I believe it is correct as of Jan. 27, 1:40 PM EST]... MORE

John Cochrane Muses on Monetary Theory

Macroeconomics
Arnold Kling
John Cochrane has posted an essay on his take on the economy, stimulus, and so on. I think he gets muddled in several places.... MORE

Forum Today on Financial Crisis

Upcoming Events
David Henderson
Here's an announcement from the Naval Postgraduate School, where I teach. Bottom line: it live streams this afternoon. The times are PDT. It will go in the order below; I will be last. Each of us will present for 15... MORE

Hummel on Fed

Monetary Policy
David Henderson
Monetary economist Jeff Hummel has posted today a detailed exposition of recent Fed policy. The two most interesting things to me are: (1) The money supply is increasing. This fact undercuts one part of the "monetary policy is impotent" view... MORE

What's with the Economics Profession?

Fiscal Policy
Arnold Kling
Will Wilkinson writes When I see Delong more or less indiscriminately trashing everyone at Chicago, or Krugman trashing Barro, etc., what doesn't arise in my mind is a sense that some of these guys really know what they're talking about... MORE

Who Knows Macro?

Fiscal Policy
Arnold Kling
Tyler Cowen does not like the tone of the stimulus debate. A highly respected anti-stimulus economist puts up some anti-stimulus evidence in a highly imperfect test (in Barro's defense, he did cover more than just WWII). The anti-stimulus economist is... MORE

Two Good Links from Megan

Fiscal Policy
Arnold Kling
1. A panel at The University of Chicago, featuring John Huizinga (my former classmate at MIT), Kevin Murphy, and Robert Lucas. Huizinga makes three points. First, we are hearing a lot of Keynesian macro being tossed around now, and it's... MORE

Morning Reading

Finance: stocks, options, etc.
Arnold Kling
The Wall Street Journal reports on how TARP funds went to politically-connected banks. Barney Frank does a cameo. Andy Harless might agree with what I wrote here (but he might not). Pointer from Mark Thoma. Robert Barro draws an apt... MORE

Talking Points on Stimulus

Fiscal Policy
Arnold Kling
For Seattle public radio, 10:20 AM Pacific Time today. I will add a link to a recording, probably within the next 24 hours. My main theme is that we should have a small, temporary stimulus, not a permanent shift of... MORE

The Case for Stimulating Profits

Fiscal Policy
Arnold Kling
I am going to endorse the idea that Bryan Caplan called smart stimulus. if you cut employers' share of the payroll tax, this puts money in employers' hands, not workers'. But the indirect effect is to reduce the labor surplus;... MORE

Becker on Over-Hasty Conversion

Macroeconomics
Bryan Caplan
"When the facts change, I change my mind," say Keynes.  But how do you explain people who change their minds when faced by facts they should have known all along?  Gary Becker wants to know:As Posner and others have indicated,... MORE

Boo, Eugene Fama

Macroeconomics
Arnold Kling
Readers of this blog know that I am against the Paulson/TARP bailout thingy and against a big stimulus. Some of you may also have read that distinguished (some would say Nobel caliber) financial economist Eugene Fama has a new blog,... MORE

Priceless Macro, Part Two

Fiscal Policy
David Henderson
On Saturday, January 12, the Obama Presidency-Elect (I can't think of a less clunky term) sent out, "The Job Impact of the American Recovery and Reinvestment Plan," by Christina Romer and Jared Bernstein. It would qualify for Arnold Harberger's term... MORE

Priceless Macro, Part One

Macroeconomics
David Henderson
At a Carnegie-Rochester conference I attended over 30 years ago, when I was an assistant professor at the University of Rochester B-school, Arnold Harberger criticized a pile of economists' papers on Latin American development. One of his criticisms still stands... MORE

If you go to an old-fashioned Keynesian macro text, it will explain that raising taxes and spending by equal amounts increases total spending.  How is this possible?  Well, if the Marginal Propensity to Consume=a, then the gross positive effect on... MORE

Collected Macro Lectures

Macroeconomics
Arnold Kling
I have collected my series of fourteen macro lectures, previously delivered as blogs posts, in one place, called Lectures on Macroeconomics. Also, you can listen to Steve Fazzari and Russ Roberts explain Keynesian economics.... MORE

Lectures on Macroeconomics, No. 14

Macroeconomics
Arnold Kling
This lecture looks at a recession as an information problem. It is a synthesis of a number of the ideas mentioned in previous lectures.... MORE

Why is the Economy Doing Poorly?

Fiscal Policy
Arnold Kling
Tyler Cowen gives eight reasons, and then concludes First, a large fiscal stimulus addresses factor #8 but fares poorly in alleviating the other problems. Of course it may give a band-aid for #5 or #6 and you can tell other... MORE

I'm surprised to learn that a payroll tax cut actually has some political traction.  A few insiders are even highlighting its unique benefits:"Cutting the payroll tax is a great idea. It not only puts money back in people's pockets --... MORE

Be Careful What You Wish For

Fiscal Policy
Arnold Kling
Nick Schulz emailed me this paragraph from the Bureau of Labor Statistics: Eleven of the most populous metropolitan areas are composed of 34 metropolitan divisions, which are essentially separately identifiable employment centers. In November, Detroit-Livonia-Dearborn, Mich., again registered the highest... MORE

Smart Stimulus, II: The Healy Grant

Macroeconomics
Bryan Caplan
Here's another clever stimulus idea.  The source is Andrew Healy, who explained it to me over pizza right the day before Christmas.  I'm not sure if he actually advocates it, but here it is:The federal government temporarily picks up the... MORE

The Stimulus and the Somme

Fiscal Policy
Arnold Kling
Mark Thoma gives us Joseph Stiglitz and Martin Feldstein being interviewed by Charlie Rose. I listened to it last night, and I found it so chilling that it adversely affected my sleep. Two issues stand out. 1. Both of them... MORE

Forbes.com just published my article, "Will the Real Christina Romer Please Stand Up?" I'm not thrilled with the title because it seems to hint that Professor Romer has been hypocritical and, as far as I know, she hasn't been. But... MORE

It's Funny Because It's True

Macroeconomics
Bryan Caplan
My colleague John Nye says "Japan's Phillips Curve Looks Like Japan" is the funniest paper ever published in economics.  I think I prefer Alan Blinder's "The Economics of Brushing Teeth." But I'm enough of an egomaniac to present for your... MORE

Smart Stimulus

Macroeconomics
Bryan Caplan
With flexible prices, many tax cuts are equivalent to each other.  If wages instantly adjust, for example, it doesn't matter whether you cut the employers' share of the payroll tax, the employees' share, or the whole thing.  The recipient of... MORE

morning commentary

Macroeconomics
Arnold Kling
Paul Krugman says that we need a big fiscal stimulus. He writes, Unemployment is currently about 7 percent, and heading much higher; Obama himself says that absent stimulus it could go into double digits. Suppose that we're looking at an... MORE

Lectures on Macroeconomics, No. 13

Fiscal Policy
Arnold Kling
Having reached the unlucky number of 13, it is fitting to talk about multipliers and model estimates.... MORE

The Crisis Prophet Speaks

Macroeconomics
Bryan Caplan
Robert Higgs, my favorite crisis prophet, has wisdom for the self-styled free-market economists who freaked out during the past few months:Back in my days as a professor, I always endeavored early in the course to teach my students the fundamental... MORE

Lectures on Macroeconomics, No. 12

Macroeconomics
Arnold Kling
This lecture speculates on some possible behavioral economics of booms and recessions. The idea is that herd behavior (buying at the top, selling at the bottom) is a form of procrastination.... MORE

Larry Summers, Neo-Galbraithian

Fiscal Policy
Arnold Kling
He sets out criteria for a stimulus package. Investments in an array of areas -- including energy, education, infrastructure and health care -- offer the potential of extraordinarily high social returns while allowing our country to address some long-standing national... MORE

Gullibility, Madoff, and Fiscal Stimulus

Behavioral Economics and Rationality
Arnold Kling
Stephen Greenspan, a psychiatrist who lost money in the Bernard Madoff scam, writes, Gullibility is a sub-type of foolish action, which might be termed "induced-social." It is induced because it always occurs in the presence of pressure or deception by... MORE

Lectures on Macroeconomics, No. 11

Macroeconomics
Arnold Kling
This lecture discusses what I think of as the Leijonhufvud interpretation of macroeconomics as an attempt to characterize an economy that is far from classical equilibrium.... MORE

Banana Republic Economics, Continued

Finance: stocks, options, etc.
Arnold Kling
Carmen Reinhart and Ken Rogoff write, We find that banking crises almost invariably lead to sharp declines in tax revenues as well significant increases in government spending (a share of which is presumably dissipative). On average, government debt rises by... MORE

Theory, Explanation, and Policy

Macroeconomics
Arnold Kling
Josh Hendrickson writes, there are many so-called Keynesians who have been out there promoting policies that are quite the opposite. They have been promoting the re-capitalization of banks, forcing banks to lend, automotive bailouts, and a push toward developing "green"... MORE

Which Sector Should Lead?

Macroeconomics
Arnold Kling
Tyler Cowen writes, I think markets are failing to solve an economic calculation problem. The economy needs some new things to do but another bubble will not work, much of finance is frozen or contracting, and economic and political uncertainty... MORE

Patterns of Financial Crises

Finance: stocks, options, etc.
Arnold Kling
Michael Bordo writes, A well known tradition in monetary economics which goes back to the nineteenth century and in the twentieth century was fostered by Wesley Mitchell ( 1913), Irving Fisher (1933), Hyman Minsky( 1977), Charles Kindleberger and others. It... MORE

DeLong vs. Kling

Macroeconomics
Arnold Kling
He writes, The only answer I can think of is for the U.S. to then become the world's largest private-equity fund: they lend us their money, and we then invest the money back in their economies--in industries and companies that... MORE

Lectures on Macroeconomics, No. 10

Macroeconomics
Arnold Kling
A long-standing controversy in monetary theory and macroeconomics involves the question, "Is it money, or is it credit?" In most of the macro theory of the past thirty years, the focus is on money. This is nice because you get... MORE

I Believe in Quantitative Easing

Finance: stocks, options, etc.
Arnold Kling
James Hamilton writes, Will [purchases of mortgage securities and other assets by the Fed] succeed if we just do it on a sufficiently large scale? I'm not at all convinced that it would. Our standard finance models treat interest rate... MORE

Janeway on McArdle's Law

Finance: stocks, options, etc.
Arnold Kling
In an interview, William Janeway says, When I was a kid growing up in this business in the 1970s, we thought of illiquidity and insolvency as two fundamentally different conditions. You were illiquid if the expected net present value of... MORE

Banana Republic Economics

Finance: stocks, options, etc.
Arnold Kling
A reader emails, what is a sustainable level of US debt % to GDP? I usually think of our debt as government debt. But adding up total private and public debt, we have something like 350 percent for a debt-GDP... MORE

Financial Panic

Finance: stocks, options, etc.
Arnold Kling
Felix Salmon writes, In times of turmoil, we start worrying less about not having enough money in 20 years, and more about not having enough money in 20 weeks. (What if I lose my job? What if my investments fall... MORE

John Taylor: The Fed Done It

Macroeconomics
Arnold Kling
He is a leading macroeconomist, and he is out with a serious paper, in which he blames the Fed for excessively low interest rates from 2002-2004. Pointer from James Hamilton, who does not agree. Hamilton writes, I feel he overstates... MORE

Why I Think the Multiplier is Large

Macroeconomics
Arnold Kling
Mark Zandi says A payroll tax holiday and a permanent payroll tax credit would be effective tax cuts, particularly if designed to help harder-pressed lower- and middle-income households and smaller businesses. Tyler Cowen also favors payroll tax cuts. I like... MORE

The Economic Outlook

Macroeconomics
Arnold Kling
I'm trying to sort through my thoughts on the economic outlook.... MORE

Brad DeLong on the Crisis

Finance: stocks, options, etc.
Arnold Kling
He writes, In normal times, our models predict, with the ability to diversify portfolios that exists today the risk discount on assets like corporate equities should be around 1% per year. It is more like 5% per year in normal... MORE

Lectures on Macroeconomics, No. 9

Macroeconomics
Arnold Kling
The nonfinancial sector wants to hold risk-free short-term assets and issue risky long-term liabilities. To accommodate this, the financial sector does the opposite. If the financial sector suddenly contracts, the nonfinancial sector gets stuck with an asset mix that is... MORE

Thoughts on the Employment Situation

Labor Market
Arnold Kling
Bloomberg reports, Factory payrolls fell 85,000 after decreasing 104,000 in October. The return of 27,000 striking machinists at Boeing Co. last month helped limit the drop, economists said... Payrolls at builders dropped 82,000 after decreasing 64,000. Financial firms decreased payrolls... MORE

Inflation as Generic Debt Forgiveness

Finance: stocks, options, etc.
Arnold Kling
Ken Rogoff writes, Price inflation forces creditors to accept repayment in debased currency. Yes, in principle, there should be a way to fix the ills of the financial system without resorting to inflation. Unfortunately, the closer one examines the alternatives,... MORE

Crowding Out or Crowding In?

Macroeconomics
Arnold Kling
Greg Mankiw writes, I am not sure how convinced I am by these findings. And even if they are correct, I am not sure what model I should use to explain them and to what extent that model would apply... MORE

One-paragraph Macro

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong writes, In normal times, when one investor wants more liquidity or safety, another will be willing to take on duration and risk, and they will simply swap portfolios at current market prices. But in abnormal times, they cannot:... MORE

Should We Penalize Liquidity Preference?

Finance: stocks, options, etc.
Arnold Kling
Greg Mankiw says that it is time to re-read Keynes, and Tyler Cowen is ready to take him up on it. One important Keynesian idea is liquidity preference. In textbooks, an increase in liquidity preference means that people want to... MORE

Why I Was Wrong

Finance: stocks, options, etc.
Arnold Kling
Did I fail to foresee the financial crisis? Absolutely. Brad DeLong gives some reasons that also go for me. I was "expecting," in the sense of anticipating that it was they were both likely enough and serious enough that public... MORE

This lecture looks at private monetary instruments and their relationship to government monetary instruments.... MORE

The Origins of Money

Economic History
Arnold Kling
In contrast to my militaristic account, we have Nick Szabo: Local but extremely valuable trade was, this essay argues, made possible among many cultures by the advent of collectibles, by the time of the Upper Paleolithic. Collectibles substituted for otherwise... MORE

Morning Commentary

Finance: stocks, options, etc.
Arnold Kling
negative interest rates; FDIC thoughts on the housing bubble in 2004; Cecilia Rouse over Austan Goolsbee?; Greg Mankiw's Macro Quiz... MORE

Is Zero a Lower Bound for Interest Rates?

Monetary Policy
Arnold Kling
Suppose that the Federal Funds rate falls to zero. Does that mean that we are in the infamous liquidity trap, in which the Fed is powerless to use open market operations to affect the economy? I think not, and I'm... MORE

Lectures on Macroeconomics, No. 7

Macroeconomics
Arnold Kling
With this lecture, I start to look at the second great puzzle of macroeconomics. How does the financial sector affect the real economy? Before one can answer that question one needs to examine the fundamental role of money and credit.... MORE

Here's James Hamilton at his most dismissive:Some of my colleagues still talk of the possibility of a liquidity trap, in which the central bank supposedly has no power even to cause inflation. Their theory is that interest rates fall so... MORE

Lectures on Macroeconomics, No. 6

Labor Market
Arnold Kling
The main theme of this lecture is economic policy and labor market adjustment. My conjecture is that in our post-industrial economy, conventional Keynesian policies do not operate as they do in an industrial economy. Another issue is that the natural... MORE

For Future Reference

Finance: stocks, options, etc.
Arnold Kling
Megan McArdle writes Money is weird. Finance is weird. There is no other industry that is, first, so tightly coupled, and second, severely affects every other industry in the country. She Is trying to ward off cognitive dissonance over the... MORE

Lectures on Macroeconomics, No. 5

Macroeconomics
Arnold Kling
So far, I have focused on unemployment as a problem of adjustment. In this essay, I review the history of the Dotcom recession, and I focus on the index of aggregate hours worked as an indicator of macroeconomic performance. According... MORE

Lectures on Macroeconomics, No. 4

Labor Market
Arnold Kling
This lecture covers an important issue: why do firms adjust by cutting workers rather than by cutting wages?... MORE

Lectures on Macroeconomics, No. 3

Labor Market
Arnold Kling
In this lecture, I get to the punch line and offer my explanation of unemployment. Markets are constantly in adjustment, with the number of people in different occupations changing. Usually, the task of adjustment and adaptation goes remarkably smoothly. Occasionally,... MORE

Lectures in Macro, No. 2

Macroeconomics
Arnold Kling
I continue to focus on the issue of unemployment. In this lecture, I want to emphasize two things. One is the problems with popular intuition that jobs are scarce. The other is the wide variety of jobs, and hence labor... MORE

Lectures in Macroeconomics, No. 1

Macroeconomics
Arnold Kling
These lectures will cover macroeconomics as I think it should be taught, not the way it is normally taught. The focus is not on model-building. The focus is on the two most troubling questions in macro. 1.How is it that... MORE

Future Scenarios for Economics

Economic Education
Arnold Kling
Tyler Cowen writes, The consulting incomes of finance economists will fall and fewer talented people will go into finance. Speaking fees will fall since fewer economists will give talks at hedge funds. The relative status of macroeconomists will rise and... MORE

Are We in a Liquidity Trap After All?

Macroeconomics
Bryan Caplan
A while back, I argued that we're not in a liquidity trap.  But then Greg Mankiw pointed out that the two series on his webpage had different endpoints, leaving the matter again in doubt.  Now Jeff Hummel says that excess... MORE

We're Not in a Liquidity Trap

Macroeconomics
Bryan Caplan
Mankiw shows two diagrams that many will misinterpret as evidence that we're in a Keynesian liquidity trap.  What's a liquidity trap?  Roughly speaking, it's a situation where monetary policy has no effect on aggregate demand because interest rates are too... MORE

A Pat on the Back for Macro

Macroeconomics
Arnold Kling
It comes from Olivier Blanchard. a largely shared vision both of fluctuations and of methodology has emerged. Not everything is fine. Like all revolutions, this one has come with the destruction of some knowledge, and suffers from extremism, herding, and... MORE

Good Issue of JEL

Macroeconomics
Arnold Kling
Ordinarily, I don't care much for the Journal of Economic Literature, the American Economic Association's periodical selection of survey articles and book reviews. But the September 2008 issue is excellent. If any diligent commenters can find links to any of... MORE

Two Quick Takes

Macroeconomics
Arnold Kling
1. Tyler Cowen asks Will the commercial paper market dry up? The Fed had to deal with this in 1970, when the Penn Central Railroad went bankrupt. In this narrative, "the Fed's index finger started to bleed" from dialing up... MORE

Where are the Macro Theorists? Help Me Out

Economic Education
Arnold Kling
What macroeconomic theory says that we run the risk of a Depression if we don't have a bailout? Try to come up with an argument that is either already in a textbook or that you would put in a textbook.... MORE

How I Lost My Macro Religion

Macroeconomics
Arnold Kling
At lunch, Nick Schulz asked me what Robert Hall is known for. I said that Hall changed my view of macroeconomics. Even today, Hall's work influences how I think about global warming. So pull up a chair, grab a cup... MORE

The Macro Tangle

Macroeconomics
Arnold Kling
Tyler Cowen writes, The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. I think that there are a lot of macroeconomists who instinctively would prefer more U.S.... MORE

An Economic Disaster?

Macroeconomics
Arnold Kling
In a meandering interview, Russ Roberts and Robert Barro talk about disasters. Barro wonders why, given history, we would presume that the probability of an economic disaster is low. I guess short-term history for the United States, meaning the last... MORE

Macro Without Aggregate Demand

Macroeconomics
Arnold Kling
I have two essays out today. The first one is called The Depressive Realism Economy. It now appears that we were living in a dream world a few years ago, with oil prices unsustainably low and house price inflation unsustainably... MORE

Ken Rogoff Calls for a Slow-Down

Macroeconomics
Arnold Kling
He writes, governments are clawing to stretch out unsustainable booms, further pushing up commodity prices, and raising the risk of a once-in-a-lifetime economic and financial mess. All this need not end horribly, but policy makers in most regions have to... MORE

Kotlikoff Inspects the Mechanism

Macroeconomics
Bryan Caplan
You might think this passage would be from Econ Journal Watch's "Inspecting the Mechanism" column, but you'd be wrong:A recent experience says it all. I was asked to discuss three papers presented at a session of the American Economic Association... MORE

When I was a strongly Austrian-influence undergraduate, I scoffed at people who downplayed inflation by saying, "Well, if you ignore food and fuel..." It seemed like a sleazy effort to cover up a government-created problem by refusing to count a... MORE

The Trouble with Macro

Economic Education
Arnold Kling
My earlier post suggesting a macro-less economics major drew some interesting comments. I agree with those who say that a student should choose courses on the basis of the professor rather than the topic--that was exactly the advice I gave... MORE

Modern Recessions

Macroeconomics
Arnold Kling
Robert Hall writes, One of the most important facts about the modern recession is at all sectors of the labor market slacken at the same time. . .Each of the seven major sectors—even including government—were recruiting to fill far fewer... MORE

I Still Hate Monetary Theory

Macroeconomics
Arnold Kling
On an earlier thread, a commenter wrote: 1) What happens to the value of the dollar when new forms of money, like credit cards, are introduced? I expect you'd say that the value of the dollar would fall, but this... MORE

Why I am an Austro-Keynesian

Austrian Economics
Arnold Kling
A commenter on an earlier post points me to Steven Horwitz: As excess supplies of money work their way through the market, they cause differential effects on prices. Some go up by a lot, some only by a little. These... MORE

The Muddle that is Macro

Macroeconomics
Arnold Kling
Without irony, Greg Mankiw points to both John Makin, arguing in the Wall Street Journal for loose money, and Martin Feldstein, arguing the next day for tight money. Meanwhile, today's Washington Post has a story with a typical headline: Economy's... MORE

Junk Macroeconomic Science

Macroeconomics
Arnold Kling
Several days ago, Greg Mankiw linked to a list of top economists according to some objective criteria related to published work. I was familiar with most of the top 150, at least to the point of being able to identify... MORE

Hamilton: Trade-offs, Not Tightropes

Macroeconomics
Bryan Caplan
James Hamilton is one of the few macroeconomists whose short-run forecasts never sound like quackery. His latest analysis is full of insight:Some analysts are saying that Fed Chair Ben Bernanke is walking a tightrope-- if he does not drop interest... MORE

Stimulus?

Macroeconomics
Arnold Kling
I spell out my current thinking on macroeconomics. Over the past twenty years, Keynesian forecasters, such as Morgan Stanley's Stephen Roach, have predicted many phantom recessions--slumps that never took place. In order to remain attractive, the picture of Keynesian economics... MORE

Boudreaux vs. Macro

Macroeconomics
Arnold Kling
Don Boudreaux writes, Government cannot create genuine spending power; the most it can do is to transfer it from Smith to Jones. If the Treasury sends a stimulus check to Jones, the money comes from taxes, from borrowing, or is... MORE

Stimulus: The Mainstream View

Macroeconomics
Arnold Kling
Peter Orszag does his job, offering the mainstream view on economic stimulus. When the constraint on short-term growth is aggregate demand, as appears to be the case today, both monetary and fiscal policy can help by boosting spending. i. On... MORE

Financial Crises and Real Growth

Macroeconomics
Arnold Kling
Alex Tabarrok writes, Forget the talk of recession. The world is about to enter a new era in which miracle drugs will conquer cancer and other killer diseases and technological and scientific advances will trigger unprecedented economic growth and global... MORE

Singapore: "Automatic Stabilizers" Done Right

Macroeconomics
Bryan Caplan
Tax cuts are a popular cure for unemployment, but there are strong reasons to doubt that they are a good way to achieve this goal. As I explained a while back:Where does the money come from? If the central bank... MORE

A lot, but Tyler's written a very fine postcard version:The Austrian story is that "the government distorted price signals to the market." Are those two accounts really so different? Do we need metaphysics to resolve that question? Take the classic... MORE

What do You Expect?

Macroeconomics
Arnold Kling
Tyler Cowen asks, when inflation comes, why doesn't the expectation of that inflation lead to proportional increases in nominal interest rates, thus keeping the real rate constant? The question seems ill-posed.... MORE

Am I a heterodox Keynesian?

Macroeconomics
Arnold Kling
Probably. Politically, I'm in a different place, obviously, and I'm not heavily invested in macro as a subject. But how else would you label someone who believes the following: 1. Textbook macro is misguided. 2. The most useful insights in... MORE

What Would a Hedonistic Economy Look Like?

Macroeconomics
Bryan Caplan
In Stumbling on Happiness, Daniel Gilbert skewers the belief that money buys happiness - then defends this error as a Noble Lie:If no one wants to be rich, then we have a significant economic problem, because flourishing economies require that... MORE

Why No Oil Shock Effect?

Macroeconomics
Arnold Kling
Olivier Blanchard and Jordi Gali write, Since the 1970s, and at least until recently, macroeconomists have viewed changes in the price of oil as as an important source of economic fluctuations, as well as a paradigm of a global shock,... MORE

James Hamilton at a Fed Conference

Macroeconomics
Arnold Kling
At Econbrowser, James Hamilton has many interesting posts from the annual Fed conference at Jackson Hole, where the housing kerfluffle drew a lot of attention. In one post, he writes, But if it were the case that all these institutional... MORE

Inflationary Disagreement

Macroeconomics
Bryan Caplan
Mankiw, Reis, and Wolfers have a neat empirical paper on beliefs -and disagreement - about inflation: In most standard macroeconomic models, people share a common information set and form expectations rationally. There is typically little room for people to disagree.... MORE

Euro Bet

Macroeconomics
Bryan Caplan
I made a wager this weekend while I was at a Liberty Fund conference in Chicago. Fellow participant Jeremy Rabkin of Cornell made quite a few predictions about the non-future of the EU that struck me as overconfident. When he... MORE

While I was considering an offer to teach intermediate macro, I thought about how I would do it. I would teach it in history-of-thought terms, showing how ideas grew out of the context of their times. 1. 1920's Hyperinflations--the first... MORE

WIN and the PBC

Macroeconomics
Bryan Caplan
I'm too young to remember, but my memory still instantly links Ford with his risible "Whip Inflation Now" (WIN) buttons. The same memory inspires James Hamilton to write an inspired account of the famed Burns-Nixon Political Business Cycle (PBC). I... MORE

AEA Meeting Papers

Macroeconomics
Arnold Kling
Here is the complete list. The ever-creative Nobel Laureate George Akerlof writes, —a realistic norm regarding consumption behavior will make consumption directly dependent on current income, in violation of the neutrality of consumption given wealth; —a realistic norm will make... MORE

Bernanke to Friedman

Macroeconomics
Bryan Caplan
Here's what my teacher Ben Bernanke told Milton Friedman on his 90th birthday: Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna:... MORE

Phelps and the Nobel

Macroeconomics
Arnold Kling
I once joked that Edmund Phelps would have won the Nobel Prize if he were Scandinavian (I probably made that joke when Finn Kydland was annointed). Today, Phelps won it, anyway. Phelps was mentioned in econlog blog posts for his... MORE

My Favorite Economic Indicator

Macroeconomics
Arnold Kling
Apparently, the echo chamber of left-wing macro pundits has pronounced a recession to be imminent. For example, Nouriel Roubini writes, Given the recent flow of dismal economic indicators, I now believe that the odds of a U.S. recession by year... MORE

Old-time Macro Religion

Macroeconomics
Arnold Kling
Greg Mankiw talks about analysis by Ray Fair which says that Bush Administration economic policy kept the recession that he inherited from being much worse. Fair assesses the impact of monetary and fiscal policy during the recovery from the recent... MORE

I Hate Monetary Theory

Macroeconomics
Arnold Kling
Bryan writes, People adjust their borrowing to interest rates all the time. But cash balances? That's hard to believe. Who cares? In practice, the Fed has its famous three tools--the discount rate, the reserve requirement(s), and open market operations. In... MORE

What Responds to Interest Rates?

Macroeconomics
Bryan Caplan
In our continuing dialogue, Arnold observes that: The Fed supplies bank reserves. Mechanically, it goes into the "repo" market, which is the market for loans collateralized by Treasury securities. When the Fed wants to expand the money supply, it goes... MORE

Bryan's Right

Macroeconomics
Arnold Kling
He's right that with zero interest elasticity, the Fed could still expand the money supply. Just think of the old helicopter drop. However, I do not think that Bryan's personal money demand function is the ultimate determinant of interest elasticity.... MORE

Back to the Macro Text

Macroeconomics
Bryan Caplan
Arnold writes: The textbook answer, which Bryan gave but rejected, is that interest rates go up, the demand for money falls, and the fall in the demand for money acts like an increase in the supply of money--nominal GDP goes... MORE

Macroeconomists Behaving Badly

Macroeconomics
Arnold Kling
I can't believe what I've been seeing in the thread that Bryan started here and updated most recently here. So far, if this were a question on an intermediate macro test, nobody gets full credit.... MORE

Two weeks ago I emailed Mankiw a question about fiscal policy, referencing one of my previous posts. Mankiw replied (June 7). Then Brad DeLong responded to Mankiw (on June 15, updated June 17). DeLong's post in turn apparently provoked a... MORE

Mankiw on Fiscal vs. Monetary Policy

Macroeconomics
Bryan Caplan
The noble Mankiw has a thoughtful reply to a question from me about the effect of fiscal and monetary policy on nominal GDP. (The question is based on one of my old posts): How far off is the vertical LM... MORE

Macroeconomics and Confirmatory Bias

Economic Methods
Arnold Kling
Greg Mankiw has written an outstanding new essay that reviews the history of thought in macroeconomics. I don't know where he is planning to give this paper, but I wish I could be a discussant. Here is a brief excerpt.... MORE

Macroeconomics Standing on One Foot

Macroeconomics
Arnold Kling
Greg Mankiw summarizes textbook macroeconomics in seven equations. I am not sure what I believe about macroeconomics these days. But let me Fisk the model from the perspective of what I believed when I was a Keynesian.... MORE

Stuck on 1968

Macroeconomics
Arnold Kling
From my latest essay. In 1968, Milton Friedman was on the fringe of respectability. His Presidential Address to the American Economic Association in 1967 could not have been more defiant of the conventional wisdom. At that time, economists thought that... MORE

Even Bigger Than Arnold Thinks

Macroeconomics
Bryan Caplan
Arnold's right that high labor productivity growth over the past five years is a big story. But this fact is even more impressive because labor productivity is normally procyclical. That means that during recessions, labor productivity typically falls (or at... MORE

Acyclical Creative Destruction

Macroeconomics
Bryan Caplan
Schumpeter famously praised the "creative destruction" of the market: The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial... MORE

Bernanke's Nomination

Macroeconomics
Bryan Caplan
My teacher Ben Bernanke has been nominated as Greenspan's replacement. While some libertarians think he's the Antichrist, in reality he's about the best that libertarians could reasonably hope for. As I wrote a few months back: I was a student... MORE

Tyler's Tough Macro Test

Macroeconomics
Arnold Kling
Tyler Cowen has some tough macroeconomics questions, including Which aspect of the macroeconomy does real business cycle theory find most difficult to explain? I would say that the apparent success of Keynesian stabilization policy in the United States since 1945... MORE

A Parallel Fallacy

Macroeconomics
Bryan Caplan
How would you respond to someone who said the following? GDP by definition is consumption plus investment plus government spending - C+I+G. Therefore increasing government spending increases GDP. The right answer, of course, is that higher G only increases GDP... MORE

NRO is 90 Degrees Off

Macroeconomics
Bryan Caplan
When Tom Nugent of National Review Online tells us: Will private borrowers be crowded out [by increased government deficits]? Impossible. The causation is “loans create deposits,” as taught on day one of every traditional money and banking class. The act... MORE

Jackson Hole Macro

Macroeconomics
Arnold Kling
At Jackson Hole, Alan Greenspan said, The rising prices of stocks, bonds and, more recently, of homes, have engendered a large increase in the market value of claims which, when converted to cash, are a source of purchasing power. Financial... MORE

Personal Saving and Corporate Saving

Macroeconomics
Arnold Kling
Perhaps Jan Loeys and others at J.P. Morgan have the solution to some macroeconomics puzzles. The real driver of this saving glut in recent years has been the corporate sector. Between 2000 and 2004, the switch from corporate dis-saving to... MORE

Fiscal Policy: Flipping the Presumption

Macroeconomics
Bryan Caplan
Since the 1970's, one of the main controversies in macroeconomics has been whether nominal variables affect real variables. A classic example: Does the inflation rate (a nominal variable) affect employment (a real variable)? The answer that emerged from this debate... MORE

Ludwig von Bernanke

Macroeconomics
Bryan Caplan
Where did Ludwig von Mises say the following? [T]he U.S. government has a technology, called a printing press... that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S.... MORE

Macro Reading List

Macroeconomics
Arnold Kling
Tyler Cowen writes, I will be teaching Ph.d. macro this fall. Here is a draft of my reading list. Comments are open and further suggestions are welcome I think that macro tends to get too buried in theory. I like... MORE

Macro Econoblog

Macroeconomics
Arnold Kling
I was asked to do a WSJ Econoblog on the state of the economy. I do not have strongly-held views on macroeconomics, so there was not much disagreement between me and my "opponent," John Irons. Guess which one of us... MORE

What is a Modern Recession?

Macroeconomics
Arnold Kling
Robert Hall writes Unemployment rises not because of a bulge of layoffs but because workers entering job search—from previous jobs, from school, and from home activities—experience unusual difficulty in finding jobs. Among other things, this means that stories on layoffs,... MORE

So Many Blogs

Macroeconomics
Arnold Kling
There are a lot of great economics blogs that are not on our blogroll. For example, there is David Altig's Macroblog, which I had not heard of until today, when Altig was paired with Alex Tabarrok (of Marginal Revolution in... MORE

Worrying About Demand

Macroeconomics
Arnold Kling
Robert J. Samuelson writes, First, the economy is bound to lose the stimulus of rising consumer debt. ...Second, the benefits from defeating double-digit inflation are fading. His argument is that without the boost to consumer demand from increased borrowing and... MORE

Kydland and Prescott win Nobel

Macroeconomics
Arnold Kling
This year's Nobel Prize in economics was awarded to Finn E. Kydland and Edward C. Prescott for their work on time inconsistency of economic policy and real business cycles. The press release describes these discoveries as If economic policymakers lack... MORE

Privatizing Keynes

Macroeconomics
Michael Munger
by Michael Munger Guest Blogger John Maynard Keynes observed, only partly tongue in cheek, that the solution to unemployment is jobs, any jobs: If the Treasury were to fill old bottles with bank notes, bury them at suitable depths in... MORE

Interest Rate Debate

Monetary Policy
Arnold Kling
Brad DeLong argues, There is a 5m-worker gap between household-survey employment today and what it would be if the employment-to-population ratio were at its average level for 2000. This suggests that we are extraordinarily far from anything that could be... MORE

Economic Attribution Error

Macroeconomics
Arnold Kling
During an election year, a President is assumed to control the economy. For example, Paul Krugman writes, For three years many economists have argued that the most effective job-creating policies would be increased aid to state and local governments, extended... MORE

Reagan's Economics in Context

Supply-side Economics
Arnold Kling
I decided to put my thoughts into a longer essay. When Ronald Reagan defeated Carter's re-election bid, "incomes policies" were a proven failure. Notwithstanding Milton Friedman's comments quoted above, by 1980 it took a lot less courage to stand by... MORE

Presidents and Jobs

Macroeconomics
Arnold Kling
How many jobs can a President create? Former Clinton Administration economist Jeffrey Frankel says that "The answers don't fit into a stump speech." He writes, [The Democratic Presidential candidate's] proposals are good economics, and they come by their populist ring... MORE

Jobs Come Marching

Labor Market
Arnold Kling
In my favorite musical, The Music Man, there is climactic scene in which the mayor calls for Professor Harold Hill to be tarred and feathered. "Where's the band?" the mayor shouts rhetorically. "Where's the Band?" Whereupon the boys in the... MORE

Employment Forecasting, continued

Macroeconomics
Arnold Kling
A while back, Paul Krugman published a graph that appeared to show that the employment forecasts of the Bush Administration were implausible. Drawing the same graph, but using an earlier start date, James K. Galbraith refutes that analysis. As Galbraith... MORE

Employment Forecasting

Macroeconomics
Arnold Kling
I argue that criticizing the Administration's employment forecasts is hypocritical. suppose you were to do a blindfold test. Give an economist the actual output growth of 7.8 percent over three years (roughly 2.5 percent per year) and ask the economist... MORE

Jobs and Tax Cuts

Fiscal Policy
Arnold Kling
Noam Scheiber argues that the Bush tax cuts in fact were stimulative. Liberals in Congress and at places like the Economic Policy Institute complain that the Bushies should have targeted the bulk of their tax cuts toward the working poor... MORE

Recession Dating

Macroeconomics
Arnold Kling
There is a silly controversy concerning when the recession began. The White House has argued revisions last year to economic data meant the fourth quarter of 2000 would be more accurate, a change that would shift the start of the... MORE

Keynesians and Monetarists

Macroeconomics
Arnold Kling
I turn out to be more Keynesian than Brad DeLong, at least in an old-fashioned sense. In a long and interesting post, Brad DeLong finds little difference between new Keynesians and monetarists. The former he describes as believing in five... MORE

Finance and Macroeconomics

Finance: stocks, options, etc.
Arnold Kling
Tyler Cowen recommends two articles by Perry Mehrling on the relationship between the theory of finance and monetary theory/macroeconomics. One of the articles is a nice summary of the work of Fischer Black. What Black did was to conceive of... MORE

Bond Market

Finance: stocks, options, etc.
Arnold Kling
Brad DeLong wonders why the bond market isn't punishing the Bush Administration harder for its fiscal sins. He lists a number of possible explanations, including 1. The people who matter in financial markets are expecting either (a) that there will... MORE

Phelps on the Great Displacement

Macroeconomics
Arnold Kling
Edmund S. Phelps looks at one of my favorite topics: parallels between the current economy and the Great Depression. Each boom was caused by the advent of a new general-purpose technology -- commercially available electric power in the '20s, the... MORE

The 1990's Bubble Economy

Finance: stocks, options, etc.
Arnold Kling
William Nordhaus reviews two books on the economy of the 1990's. One of the books, by Janet Yellen and Alan Blinder, apparently finds little evidence that economic policy was a major factor in the rapid economic growth of that era.... MORE

Labor Market Surveys Diverge

Macroeconomics
Arnold Kling
The Bureau of Labor Statistics uses two different surveys to measure job growth. The latest report shows that for the last two months, the household survey shows an increase of just over one million jobs. The payroll survey shows an... MORE

Labor Market Issues

Macroeconomics
Arnold Kling
Today's New York Times has two opinion pieces on the labor market. Pessimist Steve Roach does not believe that the productivity growth that we are seeing is real or lasting. we are woefully underestimating the time actually spent on the... MORE

Knife-edge Macroeconomics

Macroeconomics
Arnold Kling
One of the more irritating tropes in economic journalism is the "knife-edge" metaphor. A reporter will write a news-analysis piece that breathlessly explains that the Federal Reserve is on a knife edge, with recession on one side and inflation on... MORE

Jobs and Creative Destruction

Macroeconomics
Arnold Kling
W. Michael Cox and Richard Alm look at the data on gross flows in the labor market. New Bureau of Labor Statistics data covering the past decade show that job losses seem as common as sport utility vehicles on the... MORE

Bernanke on the Jobless Recovery

Macroeconomics
Arnold Kling
Federal Reserve Board Governor Ben S. Bernanke offers his views on current issues in macroeconomics. He points to research which suggests that the household survey of employment, which shows a stronger labor market than the payroll survey, may be misleading.... MORE

Credit Bush for Recovery?

Macroeconomics
Arnold Kling
Is a real economic recovery underway? If so, do President Bush's tax cuts deserve credit? These questions have been raised by Paul Krugman and others. When I was a young economist working in the forecasting section of the Federal Reserve... MORE

Lessons of the Great Depression

Macroeconomics
Arnold Kling
In this essay, I summarize what I have been reading about the Great Depression and its implications for today. The Depression certainly was an era of displacement. In fact I have borrowed the very term "displacement" from the late economic... MORE

The Great Depression

Macroeconomics
Arnold Kling
The Great Depression continues to be a fascinating period to study. As Thomas Sowell points out, the myth is well entrenched that the New Deal pulled the economy out of the Depression. Only now has a book been written in... MORE

Meltzer on the Labor Market

Macroeconomics
Arnold Kling
In an earlier post, I asked, What is the likelihood that some of the weak job growth and strong productivity growth of the past two years is in part a statistical mirage? Allan Meltzer says that the likelihood is high.... MORE

Minimum Wage and CEO Pay

Income Distribution
Arnold Kling
Marc Brazeau asks (see Steve Antler's site), Two common arguments against raising the minimum wage are possible inflationary effects and job loss. Why aren't these issues raised in relation to executive compensation? I think that the conventional wisdom is that... MORE

The Two Labor Market Surveys

Macroeconomics
Arnold Kling
The U.S. Department of Labor uses two different surveys of the labor market. As Alan Reynolds put it, When government officials asked people if they had a job last month, 137.6 million said "yes." But when employers were asked, they... MORE

Grading the President in Macro

Macroeconomics
Arnold Kling
What grade should President Bush earn in macroeconomics? Brad DeLong writes, As a short-run employment- and demand-generating program, an objective grade would be a D if not an F. It was about cutting the taxes of the rich, improving incentives... MORE

Labor Market Puzzle

Macroeconomics
Arnold Kling
The latest labor market data show that aggregate hours worked fell again in August. This means that LUCY, my indicator of labor capacity utilization, also dropped. The longer that this productivity-cushioned recession continues, the more of a puzzle it presents... MORE

Structural or Cyclical Unemployment?

Macroeconomics
Arnold Kling
I continue to think that the term jobless recovery should be replaced by productivity-cushioned recession. Meanwhile, Erica L. Groshen and Simon Potter have written more about the phenomenon. we look for evidence that structural change played a dominant role in... MORE

Comment of the Week, 2003-08-27

Macroeconomics
Arnold Kling
On the topic of the economic impact of the New Deal, Patrick Sullivan pointed to an interesting article by Cole and Ohanian. They make two points. One is that the recovery from the downturn of 1929-1933 was unusually weak. The... MORE

Did the Bush Tax Cut Fail?

Macroeconomics
Arnold Kling
This group of economists with strong Democratic Party ties says that we needed fiscal policy that provided more stimulus in the short run and a lower deficit in the long run. Robert Solow says, There are three characteristics you want... MORE

Did the New Deal Fail?

Macroeconomics
Arnold Kling
Cato's Jim Powell makes the case against the New Deal. Among the material Powell cites: Richard K. Vedder and Lowell E. Gallaway, in their 1997 study Out of Work, estimated that by 1940 unemployment was eight points higher than it... MORE

Productivity and Labor Utilization

Macroeconomics
Arnold Kling
Brad DeLong has influenced my thinking on the current state of the economy. In a recent post where he looks at data on output relative to hours worked, he writes, CEA Chair Greg Mankiw said last week that the 3.5%... MORE

Is the Recession Over?

Macroeconomics
Arnold Kling
I say that the recession continues, according to an indicator of capacity utilization in the labor market. From March of 2001 through November of 2001 -- the respective dates for the beginning and the end of the recession, according to... MORE

Many Interest Rates

Monetary Policy
Arnold Kling
Graham Turner claims to offer magical monetary manipulations. A year and a half after the Japanese government introduced its first fiscal stimulus, the yield curve (10-year Japanese government bond yields minus the discount rate) had steepened by nearly 2 percentage... MORE

Bubbles and Macroeconomics

Macroeconomics
Arnold Kling
In this essay, I discuss two alleged bubbles and what they might imply for U.S. macroeconomics. Why do foreign investors invest so heavily in dollar-denominated assets and bear the risk of a decline in the dollar? Personally, I think it... MORE

Common Sense Macroeconomics

Macroeconomics
Arnold Kling
Robert Solow favors common sense over exotic theory. On the concerns about deflation in the U.S., he writes, If you look at the hundreds of prices that are tracked by the Bureau of Labour Statistics as elements of the consumer... MORE

Temporary Dividend Tax Cut?

Fiscal Policy
Arnold Kling
Jacob Levy criticizes the Senate's proposed temporary tax cut on dividends. The arguments in favor of repealing the dividend tax have to do with removing distortions from the capital markets and from the incentives faced by corporations, and with improving... MORE

Deflation-fighting and Depreciation

Macroeconomics
Arnold Kling
Continuing the discussion that began with the thread Liquidity Trapped?, we can add opinions from Richard Berner of Morgan Stanley and Victor Canto of the Cato Institute. Canto writes, The data make a compelling case that we are on the... MORE

Liquidity Trapped?

Macroeconomics
Arnold Kling
The threat of deflation and/or a liquidity trap has been discussed in a number of places recently. Columnist Robert J. Samuelson writes, Global demand remains weak; surplus capacity discourages new investment; gluts depress prices. Deflation could be dangerous: Lower prices... MORE

Rethinking Keynes

Macroeconomics
Arnold Kling
In Would Keynes Change His Mind?, I suggest that some key elasticities in the economy have changed since Keynes wrote. Today, the economy is more elastic than it was in the 1930's. Today's recession is a far cry from the... MORE

Reconstructing Iraq

Macroeconomics
Arnold Kling
The future of Iraq's economy is suddenly a topical issue. I wrote, The new government in Iraq should encourage the growth of a private sector, by keeping taxes and regulation on businesses to a minimum. However, for the next several... MORE

Israel's Public Sector

Macroeconomics
Arnold Kling
Israel is an example of a country where there is a need to confront government spending. The cooperation of the public sector is essential to the success of an economic plan to cut spending, said Treasury wage director Yuval Rachlevsky... MORE

Central Bank Timidity

Macroeconomics
Arnold Kling
Morgan Stanley's Steve Roach writes about the timidity of the European Central Bank. Incrementalism doesn’t work in combating deflation. That was one of the key lessons that the research staff of the Federal Reserve drew in a widely noted paper... MORE

Comment of the Week, 2003-03-06

Macroeconomics
Arnold Kling
Jim Glass cited an essay by Eugene Steuerle called Do We Really Need More Stimulus? The total decline in fiscal posture for 2003 alone comes to around $500 billion. Compare this to the size of the economic decline...the total decline... MORE

Feldstein for Fiscal Stimulus

Macroeconomics
Arnold Kling
Martin Feldstein, writing in the Wall Street Journal (subscription required), makes the case for fiscal stimulus. The shift of the cyclically adjusted federal budget from a $108 billion surplus in 2001 to a $117 billion deficit in 2002 added $225... MORE

The Budget Debate

Macroeconomics
Arnold Kling
Columnist Robert J. Samuelson describes the Budget debate as each side trying to embarrass the other, without ever confronting the truly important budget issues What both sides are trying to avoid discussing, according to Samuelson, is the anomalous structure of... MORE

The Deficit Argument

Macroeconomics
Arnold Kling
Kevin Hassett believes that the U.S. budget deficit is a matter more of politics than economics. On the issue of deficits and interest rates, he writes My own view is that there are many close substitutes for U.S. government bonds... MORE

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