(Early) Monday DeLong Smackdown Watch: Has Macroeconomics Gone Right?

U.S. Real GDP since 2009

After three years, how is this working out?…

Paul Krugman (2013): The Neopaleo-Keynesian Counter-counter-Counterrevolution: “OK, I can’t resist this one — and I think it’s actually important…

…Brad DeLong reacts to Binyamin Appelbaum’s piece on Young Frankenstein Stan Fischer by quoting from his own 2000 piece on New Keynesian ideas in macroeconomics, a piece in which he argued that New Keynesian thought was, in important respects, a descendant of old-fashioned monetarism. There’s a lot to that view. But I’m surprised that Brad stopped there, for two reasons. One is that it’s worth remembering that Fischer staked out that position at a time when freshwater macro was turning sharply to the right, abandoning all that was pragmatic in Milton Friedman’s ideas. The other is that the world of macroeconomics now looks quite different from the world in 2000.

Specifically, when Brad lists five key propositions of New Keynesian macro and declares that prominent Keynesians in the 60s and early 70s by and large didn’t agree with these propositions, he should now note that prominent Keynesians–by which I mean people like Oliver Blanchard, Larry Summers, and Janet Yellen–in late 2013 don’t agree with these propositions either.

In important ways our understanding of macro has altered in ways that amount to a counter-counter-counterrevolution (I think I have the right number of counters), giving new legitimacy to what we might call Paleo-Keynesian concerns. Or to put it another way, James Tobin is looking pretty good right now. (Incidentally, this was the point made by Bloomberg almost five years ago, inducing John Cochrane to demonstrate his ignorance of what had been going on macroeconomics outside his circle.)

Consider Brad’s five points:

  1. Price stickiness causes business cycle fluctuations: You clearly need price stickiness to make sense of the data. However, there is now widespread acceptance of the point that making prices more flexible can actually worsen a slump, a favorite point of Tobin’s.

  2. Monetary policy > fiscal policy: Not when you face the zero lower bound — and that’s no longer an abstract or remote consideration, it’s the world we’ve been living in for five years. And Tobin, who defended the relevance of fiscal policy, is vindicated.

  3. Business cycles are fluctuations around a trend, not declines below some level of potential output: This view comes out of the natural rate hypothesis, and the notion of a vertical long-run Phillips curve. At this point, however, there is wide acceptance of the idea that for a variety of reasons, but especially downward nominal wage rigidity, the Phillips curve is not vertical at low inflation. Again, a very Tobinesque notion, as Daly and Hobijn explain.

  4. Policy rules: Not so easy when once in a while you face Great Depression-sized shocks.

  5. ‘Low multipliers associated with fiscal policy’: Ahem. Not when you’re in a liquidity trap.

I do think this is important. Among economists who are actually looking at recent events, not doing a see-no-Keynes, hear-no-Keynes, speak-no-Keynes act, there has been a strong revival of some old ideas in macroeconomics. It’s not just new classical macroeconomics that’s in retreat; we’re also seeing, within the Keynesian camp, a distinct if polite rise of Neopaleo-Keynesianism.

I must say I find myself distinctly less optimistic than Paul here. After three years:

  • We seem to me to have had no influence on policy: IS-LM says that if the Federal Reserve wants to be able to respond to the next adverse macroeconomic shock we need a looser fiscal policy in order to normalize interest rates during this expansion. The Federal Reserve is ignoring IS-LM.

  • While it is true you no longer hear people outside of what I call “Chicago” talking about how DSGE is a progressive research program, you do hear nearly everybody still talking about it as if it were a harmless fetish and a useful neutral ground to frame the discussion.

  • As far as actual serious work as to what emergent properties we can expect from what characteristics of our really-existing structure of markets? We have made no progress…

December 18, 2016


Brad DeLong
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