90% or more of professional economists think times of high unemployment are cases of a disease that can be cured by strategic interventions to rebalance financial markets. They disagree about how and what those rebalancing policies should be. But they agree that there is a cure
That's comforting. They all have solutions, albeit solutions that are wildly different. In the middle ages if you didn't feel well a doctor would give you a variety of orthogonal cures: laxatives, emetics, bloodletting, herbs. If they didn't have a cure they could not have make a career out of it.
Of course, the best cure back then was to drink lots of fluids and rest; basically, ignore the quacks and do nothing. It's similar for macroeconomic problems, where prior to Herbert Hoover, the federal government would not do much, and growth rates were as high as ever in our history.
With all the plans in the stimulus pipeline, and vast amounts of health care and financial regulations passed but not implemented (or written), doing nothing is not going to happen in the US any time soon.
7 comments:
a friend once challenged me to find a period other than the (european) middle ages in which doctors were a net negative to health. one wonders if future generations will say the same thing about the progressive era, economists, and prosperity....
(after some thought, i was unable to meet his challenge.)
Well, the nostrums that DeLong favors have long been discredited by the research. Fiscal multipliers are low, unstable and at times negative.
The most interesting perspective on how we got to this point is Gorton's thinking on shadow banking and the panic of 2007. The implication of this work - an inference that Gorton himself does not seem to make - is that money has become endogenous. The fed can tinker at the margins with the economics of the regulated banking sector vis-a-vis the shadow banking sector and that's about it. QE2 then becomes an exercise in fiddling with the term structure of treasury debt after the fact - something the treasury itself can easily do given the volume of refinancing.
Macroeconomics is a pseudo science that attempts to establish fictitiously stable relationships between constructs that are ill-defined and/or unmeasurable. It is obsessed with the image of some Wizard of Oz figure in the bowels of the government that can make everything OK by spinning the dials and pulling the levers. All he needs is the right operating manual.
The key to making things better is microeconomic policy. The government needs to stop muddying up the waters and to reverse the tidal wave of regulation it has unleashed on the economy. For the long run it needs to back out of the mortgage business, wind down entitlement promises that cannot be kept, cut marginal tax rates, credits and deductions and voucherize education and government funded medical care.
"It is obsessed with the image of some Wizard of Oz figure in the bowels of the government that can make everything OK by spinning the dials and pulling the levers."
There is only one dial, labeled "money", and it's turned all the way to the right but some maniac named Krugman keeps screaming that you need to keep turning. And the dial isn't even hooked up.
Yep, that's about where we are.
Aaron, maybe macroeconomists should adopt the doctors' dictum; first, do no harm.
wikipedia is annoyingly sparse on historical perspective on it, but the "12th-century Byzantine manuscript" illustrating the article suggests that swearing the Hippocratic Oath was as much a part of medicine during the period in question as at any other time.
Right, economists are all a bunch of charlatans. Anyone with a bit of common sense understands that the banking crises and real estate bubbles that have plagued the entire first world over the past few years were all attributable to political correctness and ACORN, and that the main driver of increased unemployment is an overly generous benefits scheme. Back to basics, everyone.
"Ignore the quacks and do nothing" is not an option with fiat money. The Fed buys and sells stuff, creating and destroying money as it does so. Doing nothing, I suppose, would correspond to freezing the Fed's balance sheet. The last time we had a non-growing monetary base for an appreciable length of time, the Great Depression was the result.
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