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February 4, 2013

Latest Posts from Economist's View

Latest Posts from Economist's View

Posted: 30 Dec 2012 12:06 AM PST
Posted: 29 Dec 2012 02:43 PM PST
Brad Delong:
Why Next to No Political Reaction to the Second Gilded Age?, by Brad DeLong: ...During the Gilded Age of the 1890s and 1900s you had strong political movements saying "something is going remarkably wrong with this, this isn't the country we thought we were going to live in"...
Brad DeLong: ...As a result in the First Gilded Age you had two political movements. The Democratic, left, farmer, labor, semi-socialist, Populist Movement on the one hand. The mixed bipartisan Democratic and Republican, urban, Progressive Movement on the other. Both of them were desperately eager to change America, to repair the flaws of the Gilded Age, to reduce inequality, to make the economy work for everybody--or at least for every white guy--and even to grant women the vote.
They wanted this so much so that someone like Republican President Theodore Roosevelt--as aggressively a partisan an animal as you would ever see--would place his loyalty to the Republican cause second to his loyalty to his progressive principles for American reform. He was happy denouncing Democrats as communist anarchists, but equally happy denouncing rich republicans as "malefactors of great wealth" who desperately needed to be controlled.
Theodore Roosevelt wove his political career out of being head of the Republican party and head of the Progressive Movement. And at the end non-Progressive Republican President Taft simply offended him one time too many, and Roosevelt decided to blow up the Republican Party and hand the presidency to Woodrow Wilson from 1912-1920.
That was the history of America from 1880-1920 or so. After 1920 you do get a Republican Gilded Age resurgence under Harding, Coolidge, Hoover--very corrupt, especially under Harding. But by the late 1920s Progressivism is rising again--even Hoover is running as a Progressive. Then when the Great Depression comes Franklin Roosevelt comes in and he takes the entire progressive agenda off the shelf and promptly begins to implement it.
We haven't had anything like that over the past thirty years.
And here I'm simply going to throw up my hands and say that I don't know why.
It's in a great mystery to me. As an economic historian I like to look at political economic patterns from the past and to say we should learn from these and generalize them and take them as providing some insight into the present and the future. In general, we economic historians are extraordinarily successful. There are lots of lessons to be drawn from the first age of globalization for the second. There are lots of lessons to be drawn from the high school-ization of America for the college-ization of America and for education elsewhere in the world. There are lots and lots of lessons to be drawn from the Great Depression for today.
But the political economy of Gilded Ages? Why the first Gilded age produces a Populist and a Progressive reaction and the second, so far, does not? There I throw up my hands and say that my economic historian training betrays me. I have no clue as to what is going on here.
(This is speculative, but I'll give it a shot) I would certainly start by noting the different levels of initial national wealth -- we started from a much higher base this time -- and the presence of social insurance. If we didn't have food stamps, unemployment compensation, and other private and public social backstops to help people through tough times, and a relatively high level of initial wealth to rely upon, the effects would have been much more severe and the response to the Great Recession might have been more like the response to the Great Depression. But as Brad notes, it wasn't just the reaction to the Great Depression that produced a populist movement, it existed before the Great Depression hit. I think you can see elements of a populist movement in recent decades, but it's nowhere as strong as prior to the Great Depression. Again, I think part of this is different levels of initial wealth and the existence of a large middle class, but maybe there is something else too.
I think it matters a lot whether we think of inequality as arising from a problem in the system as a whole, or as the result of individual failures. When people think it's the system as a whole -- the rich and powerful are scheming to hold everyone else down (e.g. robber barons) -- mass movements are more likely than when it is viewed as simply the failings of individuals. I think many people viewed the last few decades as a time of great opportunity. If you weren't rich, or at least doing very well, it was because you hadn't tried hard enough. Anyone who wanted a decent job could get one if they were willing to put out the requisite effort. The Great Recession changed that somewhat, but even now many people want to blame our problems on the poor decisions of individuals, some even try to cast blame for the recession on the decisions of low income households to try to buy houses, rather than some inherent failure within the capitalist system.
Let me back up. Prior to the Great Depression, there was a battle between those who believed the system was at fault (and hence pushed populist remedies) versus those who thought some people were simply less capable and destined to be poor no matter what we did to help them -- it was the duty of the head of the household to provide for their family, and those who didn't were looked down upon. They must not be trying hard enough, they were lazy, etc. But the Great Depression made it clear that trying hard wasn't always sufficient. People who had been able to support their families their whole lives, and were determined to do so during the depression no matter what it took, couldn't. It wasn't a matter of individual effort, or how hard one tried, these was simply no work to be found for great numbers of "upstanding" citizens.
If the people who were known to be willing to do whatever it took to provide for their families could not, then it must be the system, not the individual that was a fault and this was a key idea that allowed social insurance to be passed after the Great Depression. The money wasn't going to no good, lazy people who didn't deserve it, it was going to people who deserved to be helped when the capitalist system, which was known to cycle ruthlessly through booms and busts, let them down. People needed insurance against events that were out of their individual control.
This time around, it came as a bit of a shock that they system could still let us down. Many people thought we were beyond Great Depressions/Recessions -- hence the claim above that most failings prior to our recent troubles were viewed as individual rather than the fault of the system. But even though people began to realize it wasn't always a matter of individual effort and ability, since we already have many social insurance protections in place the outcry this time isn't to produce a bunch of new social insurance programs to protect the vulnerable as it was after the Great Depression. Instead, it led to a renewed realization of the value of social insurance (at least I hope this is true) and the fight presently is to maintain or expand what we already have versus scaling back our social protections. I think that, without the Great Recession, our social insurance programs would be even more vulnerable than they are presently. Thus, unlike Brad, I think there have been noticeable effects in shoring up "populist" support for these types of programs. But where I agree, and what I see as puzzling, is why the reaction from those who depend upon these programs hasn't been even stronger. Why are these programs vulnerable at all?
Posted: 29 Dec 2012 02:36 PM PST
Simon Wren-Lewis continues the conversation on the state of academic macroeconomics:
Is academic macroeconomics flourishing?, by Simon Wren-Lewis: How do you judge the health of an academic discipline? Is macroeconomics rotten or flourishing? ...[A]cademic macroeconomics appears all over the place, with strong disputes between alternative schools.
Is this because the evidence in macroeconomics is so unclear that it becomes very difficult to judge different theories? I think the inexact nature of economics is a necessary condition for the lack of an academic consensus in macro, but it is not sufficient. (Mark Thoma has a recent post on this.) Consider monetary policy. I would argue that we have made great progress in both the analysis and practice of monetary policy over the last forty years. One important reason for that progress is the existence of a group that is often neglected - macroeconomists working in central banks.
Unlike their academic counterparts, the primary goal of these economists is not to innovate, but to examine the evidence and see what ideas work. The framework that most of these economists find most helpful is the New NeoClassical Synthesis, or equivalently New Keynesian theory. As a result, it has become the dominant paradigm in analyzing monetary policy.
That does not mean that every macroeconomist looking at monetary policy has to be a New Keynesian, or that central banks ignore other approaches. It is important that this policy consensus should be continually questioned, and part of a healthy academic discipline is that the received wisdom is challenged. However, it has to be acknowledged that policymakers who look at the evidence day in and day out believe that New Keynesian theory is the most useful framework currently around. I have no problem with academics saying 'I know this is the consensus, but I think it is wrong'. However to say 'the jury is still out' on whether prices are sticky is wrong. The relevant jury came to a verdict long ago.
It is obvious that when it comes to using fiscal policy in short term macroeconomic stabilization there can be no equivalent claim to progress or consensus. The policy debates we have today do not seem to have advanced much since when Keynes was alive. From one perspective this contrast is deeply puzzling. The science of fiscal policy is not inherently more complicated. ...
What has been missing with fiscal policy has been the equivalent of central bank economists whose job depends on taking an objective view of the evidence and doing the best they can with the ideas that academic macroeconomics provides. This group does not exist because the need to use fiscal policy for short term macroeconomic stabilization is occasional either in terms of time (when the Zero Lower Bound applies) or space (countries within the Eurozone). As a result, when fiscal policy was required to perform a stabilization role, policymakers had to rely on the academic community for advice, and here macroeconomics clearly failed. Pretty well any outside observer would describe its performance as rotten.
The contrast between monetary and fiscal policy tells us that this failure is not an inevitable result of the paucity of evidence in macroeconomics. I think it has a lot more to do with the influence of ideology, and the importance of what I have called the anti-Keynesian school that is a legacy of the New Classical revolution. The reasons why these influences are particularly strong when it comes to fiscal policy are fairly straightforward.
Two issues remain unclear for me. The first is how extensive this ideological bias is. Is the over dominance of the microfoundations approach related to the fact that different takes on the evidence have an unfortunate Keynesian bias? Second, is the degree of ideological bias in macro generic, or is it in part contingent on the particular historical circumstances of the New Classical revolution? These questions are important in thinking how this bias can be overcome.
When people ask if evidence matters in economics, I often point to the debate over the New Classical model's prediction that only unexpected changes in monetary policy matter for economic activity. These models, with their prediction that expected changes in monetary policy are neutral, cleverly allowed New Classical economists to explain the correlations between money, output, and prices in the data without admitting that systematic policy mattered. Thus, these models supported the ideological convictions of many on the right -- government intervention can make things worse, but not better. (Unexpected policy shocks push the economy away from the optimal outcome, so the key was to minimize unexpected policy shocks. This led to things like the push for transparency so that people would anticipate, as much as possible, actual policy moves.)
At first, the evidence seemed to support these models (e.g. Barro's empirical work), but as the evidence accumulated it eventually became clear that this prediction was wrong. Mishkin provided key evidence against these models through his academic work (see, for example, his book A Rational Expectations Approach to Macroeconometrics: Testing Policy Ineffectiveness and Efficient-Markets Models), so I am not as convinced as Simon Wren-Lewis that the difference between monetary and fiscal policy is due solely to the existence of technocratic, mostly non-ideological central bank economists letting the evidence take them where it may. That certainly mattered, but is seems there was more to it than this.
The evidence that Mishkin and others provided was a key reason these models were rejected (it was also difficult to simultaneously explain the magnitude and duration of business cycles with unexpected monetary shocks as the sole driving force), but when it comes to fiscal policy, as noted above, evidence has not trumped ideology to the same degree. One of the reasons for this, I think, is that it's difficult to find clear fiscal policy experiments in the data to evaluate. And when we do (e.g. wars), it's difficult to know if the results will hold at other times. But I can't really disagree with the hypothesis that if an institution like the Fed existed for fiscal policy, there would be a much bigger demand for this information, and that demand would have produced a much larger supply of evidence.
But I am not so sure the difference is "central bank economists whose job depends on taking an objective view of the evidence" so much as it is that these institutions produce a demand for this type of research, and academics respond by supplying the information that central banks need. So the question for me is whether it's the lack of ideology of central bank economists (many of whom are academics), or the fact that their existence creates a large demand for this type of information. Maybe it's both.

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