Picking up on In Lieu of a Focus Post: March 2, 2015: I also found on the internet a fine rant by the engaged and thoughtful femina spectabilis Frances Coppola attacking another one of my teachers, the vir illustris Olivier Blanchard, saying that his:
call for policymakers to set policy in such a way that linear models will still work should be seen for what it is–the desperate cry of an aging economist who discovers that the foundations upon which he has built his career are made of sand. He is far from alone…
It’s not quite that bad.
A more charitable reading of Olivier is that he wants to make this point:
- Heart attacks have little in common with the common cold.
- You treat heart attacks with by shocking the heart to restart it.
- Heart attacks and the common cold are both diseases that debilitate.
- Nevertheless, to get out the defibrillator pads when the patient shows up with the sniffles will probably not end well.
However, I did always think that the MIT Economics Department made a hideous mistake back in the day. It decided not to replace Charlie Kindleberger with another financial-macro institutional historian. It then doubled down on that when it refused to pay what people–cough, cough, Anne McCants for example–were worth in order to get them to teach its students the institutionalist and Minskyite history they needed to know.
If it had, it would have kept so many of its ex-students from being deaf and blind as 2008 approached. It did not.
That being said, I think that Olivier’s intuition is in large part sound. It should not be beyond the government to make sure that there is enough debt outstanding in the economy that even high-quality short-term debt sells for less than par. And if high-quality short-term debt sells for less than par then there is a powerful and predictable incentive to spend and not hoard cash. And if your banking system allows the central bank to control the stock of cash–then, voila!, the problem of demand management is well on the way to being solved.
To put it another way: as long as you can keep the economy on the upward-sloping rather than the flat part of the LM curve, linear models should be good enough for practical purposes. And the government has mighty fiscal policy and credit policy tools at its disposal that it can use to keep high-quality bonds, even short-term bonds, from going to par.
The key questions of macroeconomic political economy then are not the questions of the construction of nonlinear multiple-equilibrium models that Frances Coppola wants us to study. They are, instead, the questions of why ideological and rent-seeking capture were so complete that North Atlantic governments have not deployed their fiscal and credit policy tools properly since 2008.
- http://coppolacomment.blogspot.co.uk/2015/02/the-failure-of-macroeconomics.html : The Failure of Macroeconomics
- http://www.imf.org/external/pubs/ft/fandd/2014/09/blanchard.htm : Where Danger Lurks
- http://www.nber.org/papers/w14259 (2008): The State of Macro
- http://www.levyinstitute.org/pubs/wp74.pdf (1992): The Financial Instability Hypothesis
- http://coppolacomment.blogspot.co.uk/2014/10/when-floods-fail.html : When the Nile Floods Fail