Macro Models Aren't Useful Now, And That Is Perfectly Fine Brian Romanchuk

There has been a small flurry of publications by neoclassical economists attempting to fit a pandemic into standard frameworks. This is what to be expected, as neoclassical models are frameworks designed to maximise the amount of publications over time. However, aggregated models are not particularly useful right now. This is true both for neoclassical as well as traditional heterodox macro models. The reason is that they do not offer much insight into either forecasting, nor are they useful for policymakers. That will change, but we are not there yet.

I will quickly discuss the two main justifications for looking at macro models....

Bond Economics

Macro Models Aren't Useful Now, And That Is Perfectly Fine

Brian Romanchuk

Introductory Macroeconomics with a Job Guarantee — Peter Cooper

In some earlier posts, a job guarantee is added to an otherwise condensed income-expenditure model. This enables comparisons of steady states under different scenarios akin to the typical exercises conducted in introductory macroeconomics courses. What follows is a summary of the model, bringing together aspects that are dealt with in greater depth – but disparately – elsewhere on the blog, along with brief indications of how the model can be extended to include simple dynamics and short-run price behavior. Links to fuller explanations of various concepts are provided along the way....

heteconomist
Introductory Macroeconomics with a Job Guarantee
Peter Cooper

Michael Hudson — In a struggle between oligarchy and democracy, something must give

Until Nevada, all the presidential candidates except for Bernie Sanders were playing for a brokered convention. The party’s candidates seemed likely to be chosen by the Donor Class, the One Percent and its proxies, not the voting class (the 99 Percent). If, as Mayor Bloomberg has assumed, the DNC will sell the presidency to the highest bidder, this poses the great question: Can the myth that the Democrats represent the working/middle class survive? Or, will the Donor Class trump the voting class?

This could be thought of as “election interference” – not from Russia but from the DNC on behalf of its Donor Class. That scenario would make the Democrats’ slogan for 2020 “No Hope or Change.” That is, no change from today’s economic trends that are sweeping wealth up to the One Percent.

All this sounds like Rome at the end of the Republic in the 1st century BC....

Markets in everything, including political office.

Note: I am refraining from posting links to overtly political posts or articles. While Michael Hudson's post is heavily political in one sense, being about the crisis in the Democratic Party, it is more than that in that it is really a post about political economy, a discipline that has been overshadowed by conventional economics and needs to be revived. While Michael Hudson has a degree in economics and has been involved in finance professionally, it is one of the few political economists operating in this environment, more remarkably as a closet Marxist.

Michael Hudson — On Finance, Real Estate And The Powers Of Neoliberalism
In a struggle between oligarchy and democracy, something must give
Michael Hudson | President of The Institute for the Study of Long-Term Economic Trends (ISLET), a Wall Street Financial Analyst, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, and Guest Professor at Peking University

Also

Important tidbit about US politics.

"Everyone knows" that US general elections are dominated by swing states that are in play. But not many also realize that it comes down in the end to a few swing counties that are in play.

Econospeak

Who Wins Prairie du Chien Wins the White House
J. Barkley Rosser | Professor of Economics and Business Administration James Madison University

Peter Cooper — Macro Dynamics with a Job Guarantee – Part 5: Price Level

So far, in considering a simplified economy with a job guarantee, the focus has been on the demand-determined behavior of output and employment. Prices, in this exercise, have simply been taken as given on the grounds that they are not causally significant in the process. This approach does not require prices to remain constant, though, for given supply conditions, they may well do so over a fairly wide range of output for reasons to be discussed. Nor does it require that prices are necessarily unrelated to output; only that the direction of causation in any aggregate relationship between the two mostly runs from output to prices rather than the other way round. But once attention turns to the issue of price stability, which is of considerable interest to job-guarantee proponents, it becomes relevant to entertain a possible short-run relationship between output and prices. This will provide a basis for identifying potentially price-stabilizing aspects of a job guarantee in the next part of the series....

heteconomist
Macro Dynamics with a Job Guarantee – Part 5: Price Level
Peter Cooper

George A. Akerlof — What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years

This article begins with a review of the two main textbook approaches that had evolved by the early 1960s to incorporate the musings of Keynes: the Keynesian cross from Samuelson’s (1948) introductory textbook and the complete, well fleshed-out model in Gardner Ackley’s (1961) advanced macro textbook. This Keynesian- neoclassical synthesis followed a pattern set by Hicks (1937) by focusing on certain elements of Keynes, while setting aside others. Some potential weaknesses of the specific approach in these models were, at least vaguely, sensed at the time. For example, Hicks had, at least obliquely, mentioned the neglect of inflation expecta- tions. In other cases, the model left out topics that Keynes had treated as important, such as the dangers of financial crises and the role of social norms in wage bargaining, and what these topics implied about the potential importance of multiple equilibria in macroeconomic outcomes. However, the Keynesian-neoclassical synthesis of the 1960s was flexible enough that it encouraged a large body of work. The article will show that this work was based on a style that I call “one-deviation-at-a-timism” (a phrase adapted from Caballero 2010). As I will demonstrate, one-deviation-at-a-time constraints have had real consequences for macroeconomics. For example, they have resulted in lack of attention to financial crashes as a macro topic; they have also resulted in the omission of plausible models with very different core conclusions regarding the effectiveness of macro stabilization.

My concerns can be expressed in the terminology of Thomas Kuhn (1962). What was the dominant paradigm for macroeconomics in the early 1960s? What were its vulnerabilities? What was the resistance to addressing these vulnerabilities? Do these vulnerabilities still remain? I shall address these questions regarding the field of macroeconomics from two intertwined perspectives: my perception of what they were thinking as I began graduate school at MIT in 1962, and my view as I look back on the developments in macroeconomics over the past 57 years.

Journal of Economic Perspectives
What They Were Thinking Then: The Consequences for Macroeconomics during the Past 60 Years
George A. Akerlof

Bill Mitchell — Is the British Labour Party aboard the fiscal dominance train – Part 1?

As I type this (Sunday), I am heading to Brighton, England from Edinburgh. We had two sessions in Edinburgh yesterday (Saturday) and it was great to share ideas with some really committed people. We had to dodge a Hollywood closure of the streets (‘Fast and Furious 9 had commandeered the inner city to film a car or two swerving out of control or whatever, and I hope the city received heaps for the inconvenience to its citizens. But, with the direction now south, and tomorrow’s two events (more later), I am thinking the place of the British Labour Party in the progressive struggle. It doesn’t look good to me. The news overnight has been that the Party’s “head of policy and the author of the party’s last election manifesto” (quoting the Times today) has quit the Party claiming “I no longer have faith we will succeed”. The blame game starts and, as usual, Jeremy Corbyn’s leadership is in focus. The Times cartoon had the caption “They’ve got what it takes to form a government” with two ducks (in Brighton) looking at a sign against a wall saying “Labour Civil War Chaos”. What should we make of all this? My take is this: there is a clear paradigm shift going on in macroeconomic policy thinking. Every day (it seems) a new article pops up with someone claiming monetary policy has run its course and a new era of fiscal policy dominance is the only viable way ahead. That means that the central bank imprimatur on policy – determining whether such policy can continue to be effective and relying on interest rate adjustments etc as the primary counter-stabilisation policy – is over. That means that New Keynesian economics is over. That means that fiscal credibility rules that are neoliberal central are over. And that is why I think British Labour are looking poorly in the polls. They have taken advice from a number of characters who have pushed them into a ‘New Keynesian’ mindset and they are now ‘yesterday’s news’. They have missed the boat on these major shifts that have been going on. That is why they need a major shift in macroeconomic thinking. Only Modern Monetary Theory (MMT) offers a consistent and credible path for them to make that shift....

Bill Mitchell – billy blog

Is the British Labour Party aboard the fiscal dominance train – Part 1?
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

J. W. Mason — In Jacobin: A Demystifying Decade for Economics

(The new issue of Jacobin has a piece by me on the state of economics ten years after the crisis. Since it’s not online yet, I’m posting the full text here, plus a few paragraphs that did not make it in. Even though they gave me plenty of space, and Seth Ackerman’s edits were as always superb, they still cut some material that, as king of the infinite space of this blog, I would rather include.)

J. W. Mason's Blog
In Jacobin: A Demystifying Decade for Economics
JW Mason | Assistant Professor of Economics, John Jay College, City University of New York

Eric Lonergan — MMT and fiscal rules (part I) – a prologue

Finally, a useful MMT critique.

Philosophy of Money
MMT and fiscal rules (part I) – a prologue
Eric Lonergan

Bill Mitchell — Progressive political leadership is absent but required

One of the themes that has emerged in the discussions of the British Labour Party Fiscal Credibility Rule (which should be renamed the Fiscal Incredulous Rule) is when is the right time for a political party to show leadership and start educating the public on new ideas. The Modern Monetary Theory (MMT) project has been, in part, about educating people even if our ideas have been strongly resisted by the mainstream. The mainstream (New Keynesian) paradigm in economics is degenerative (meaning it has little empirical validation) and eventually it will fade into historical obscurity. For many of us that cannot come quickly enough.

The defenders of the Rule argue that progressive politicians have to tread carefully or else the amorphous financial markets will turn on them and destroy their initiatives. The problem is that by kowtowing to the City or Wall Street, the progressive political forces become captured and redundant. Witness the electoral demise of social democratic parties over the last several decades.

The conditions are ripe (see below) for a courageous head-on attack on these financial market elites and educate the public so that they allow elected governments to legislate for all rather than serving the interests of the elites, which has become the norm over the last several decades. The problem is that progressive political forces are also taking advice from mainstream economists who use the tools of neoliberalism. The upshot is that progressive political leadership is absent but desperately required....

Bill Mitchell – billy blog
Progressive political leadership is absent but requiredBill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Lars P. Syll — Wren-Lewis insults medical science

Medicine is to science (biology) as public policy is to economics, that is, an application. Medicine based on evidence-based science is relatively successful in diagnosis, etiology and treatment of disease. Public policy based on conventional macroeconomics is nothing like that in approach or outcomes. If there were an economic science that proves itself relative to public policy, there would not be opposing political factions offering economic arguments to rationalize their conflicting positions.

If the science were "decided" as claimed, the optimal policy would be demonstrable by theory and confirmed by evidence. That is far from the case. For example, the central bank is charged chiefly with maintaining monetary stability. Janet Yellen, the former Fed chair, recently admitted that there is no satisfactory theory of inflation, so the central bank must operate based on discretion rather than a rule. 

As a result there is seldom agreement among the committee or the economists it relies on regarding setting the policy rate. They make an "informed decision" (guess) after joint inquiry and deliberation (although the committee generally follows the lead of the chair). This is the command system that purportedly sets the most important factor in economic policy according to conventional economics. 

Given the dismal record of the central bank continuously hitting its targeted policy rate while also maintaining growth, price stability and full employment (even defined down) seriously questions the so-called science behind the process. This is wizardry rather than science, prediction rather than forecasting.

Simon Wren-Lewis doesn't understand this?

If medicine were like economics, seeking medical treatment would be like going to a witchdoctor.

Lars P. Syll’s Blog
Wren-Lewis insults medical science
Lars P. Syll | Professor, Malmo University

Brad DeLong — THE MUST-READ OF MUST-READS on the links between behavioral finance and macro

THE MUST-READ OF MUST-READS on the links between behavioral finance and macro: John Maynard Keynes (1936): The State of Long-Term Expectation: The General Theory of Employment, Interest and Money: Chapter 12: "If I may be allowed to appropriate the term _speculation for the activity of forecasting the psychology of the market, and the term enterprise for the activity of forecasting the prospective yield of assets over their whole life, it is by no means always the case that speculation predominates over enterprise. As the organisation of investment markets improves, the risk of the predominance of speculation does, however, increase...

Grasping Reality
THE MUST-READ OF MUST-READS on the links between behavioral finance and macro
Brad DeLong | Professor of Economics, UCAL Berkeley

Lars P. Syll — Reformulating the economics curriculum

Econ 101. The standard model is misleading.

Having gone through a handful of the most frequently used textbooks of economics at the undergraduate level today, I can only conclude that the models that are presented in these modern mainstream textbooks try to describe and analyze complex and heterogeneous real economies with a single rational-expectations-robot-imitation-representative-agent.

That is, with something that has absolutely nothing to do with reality.….
For almost forty years mainstream economics itself has lived with a theorem that shows the impossibility of extending the microanalysis of consumer behaviour to the macro level (unless making patently and admittedly insane assumptions). Still after all these years pretending in their textbooks that this theorem does not exist — none of the textbooks I investigated even mention the existence of the Sonnenschein-Mantel-Debreu theorem — is really outrageous.

Lars P. Syll’s Blog
Reformulating the economics curriculum
Lars P. Syll | Professor, Malmo University

Jason Smith — Macro criticism, but not that kind

With all the tired and plain wrong critiques of economics out there that are easily shot down by even the most critical student of economics, I thought I'd try my hand at writing at one that might pass muster. I did write a book, but it was more aimed at taking a new direction; this will be a more specific critique.

First, let me avoid the common mistake of using the word "economics" but then exclusively talking about macroeconomics: my critique is being leveled at macroeconomics (macro). This is not to say I don't also have criticisms of microeconomics or growth theory, but rather let me just focus on macro because that is what most people are interested in. I'm pretty sure the comeback "Auction theory is successful!" isn't really going to cut it with the Post Crash Economics Society or in general anyone who's life was turned upside-down by the Great Recession.

Second, let me avoid the common mistake of saying macroeconomists don't think about X. They do. There's a good chance they've thought about X much more than you have. Instead, let me focus on how macroeconomists think about thinking about X — the context, the spoken and unspoken narratives, the institutional knowledge.

And finally, let me avoid the common mistake of decrying the use of math in economics (this time in general). Mathematics is an extraordinarily useful tool. I know — I'm a physicist. I don't think economists have "physics envy", but the charge does carry a nugget of truth that I'll get to later....

Information Transfer Economics

Macro criticism, but not that kind
Jason Smith

Jason Smith — Money is the aether of macroeconomics

So I've never really understood Modern Monetary Theory (MMT). In some sense, I can understand it as a counter to the damaging "household budget" and "hard money" views of government finances. To me, it still cedes the equally damaging "money is all-important" message of monetarism and so-called Austrian school that manifests even today when a "very serious person" tells you it's really the Fed, not Congress or the President that controls the path of the economy and inflation when neither inflation nor recessions are well-understood in academic macroeconomics. People have a hard time giving up talking about money...

Information Transfer Economics
Money is the aether of macroeconomics
Jason Smith

Lars P. Syll — Where modern macroeconomics went wrong

Experience has shown that assuming a framework based on methodological individualism, microfoundations, and rationality based on utility leading to general equilibrium through the so-called "invisible hand" of market competition generating spontaneous natural order is not fruitful for explaining the macro scale of economic behavior and its results in terms of a general theory.

Assuming that scaled up micro analysis explains macro effects risks the fallacy of composition, at the very least. The whole is more than the sum of its parts owing to the relationships being a key component of the system. Methodological individualism abstracts from relationships.

The fundamental problem arises from liberalism assuming methodological individualism based on ontological individualism. Since this contradicts the conception of human beings as social animals, it leads to paradoxes of liberalism and models that do not correspond to reality either in their construction or output.

This is likely owing to the origin of liberalism in the 18th century, a time when the mechanistic view of science was in vogue owing to the successes of physics in explaining natural phenomena.

Biology began to dominate in the 19th century but economics never caught up by replacing mechanistic model with organic ones.

Lars P. Syll's Blog
Where modern macroeconomics went wrong
Lars P. Syll | Professor, Malmo University

Lars P. Syll — Big — and not so big — ideas in macroeconomics

John Quiggin on Kartik Artheya's Big Ideas in Macroeconomics.

Incidentally, it is often useful to ask, What's the big idea?

Lars P. Syll’s Blog
Big — and not so big — ideas in macroeconomics
Lars P. Syll | Professor, Malmo University

David Glasner — The Standard Narrative on the History of Macroeconomics: An Exercise in Self-Serving Apologetics

During my recent hiatus from blogging, I have been pondering an important paper presented in June at the History of Economics Society meeting in Toronto, “The Standard Narrative on History of Macroeconomics: Central Banks and DSGE Models” by Francesco Sergi of the University of Bristol, which was selected by the History of Economics Society as the best conference paper by a young scholar in 2017.... 

Sergi’s paper is too long and too rich in content to easily summarize in this post, so what I will do is reproduce and comment on some of the many quotations provided by Sergi, taken mostly from central-bank reports, but also from some leading macroeconomic textbooks and historical survey papers, about the “progress” of modern macroeconomics, and especially about the critical role played by “microfoundations” in achieving that progress....

I will focus on two other sections of Sergi’s paper “the five steps of theoretical progress” and “microfoundations as theoretical progress.”...

Uneasy Money
The Standard Narrative on the History of Macroeconomics: An Exercise in Self-Serving Apologetics
David Glasner

Cullen Roche — Why MMT is Important

Modern Monetary Theory (MMT) has been in the news quite a bit in the last few weeks.¹ It’s refreshing to see this considering how bad the state of macroeconomics is. I say this as someone who has been very critical of MMT for many years. I think they overreach on some items, but as a general theory I think they provide a much clearer and more useful picture of the macroeconomy than most mainstream economic schools do. Among the important things they get right:

Pragmatic Capitalism
Why MMT is Important

Cullen Roche

Bill Mitchell — Mainstream macroeconomics credibility went out the window years ago

The Vice President of the European Central Bank, Vítor Constâncio, gave the opening speech – Developing models for policy analysis in central banks – at the Annual Research Conference, Frankfurt am Main, on September 25, 2017. Last time I heard Constâncio speak in person, in Florence 2015, he was in typical Europhile central bank denial. He thought the Eurozone was fine, a great success given the low inflation, inferring that the ECB’s conduct had something to do with that. He didn’t talk about the millions of people that had deliberately been rendered jobless because of the austerity obsession of the Troika, of which his institution was an integral part. Things might be changing a bit as the evidence mounts that the mainstream approach to macroeconomics and monetary theory is moribund, at best. But the changes are really just more of the same. There is no willingness to admit that the whole framework is without merit. The mainstream profession is lost in my view and clutching at anything they can to stay credible. But credibility went out the window years ago.

Bill Mitchell – billy blog
Mainstream macroeconomics credibility went out the window years ago
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — The Price Level Does Not Exist

It appears to be a mistake to refer to the price level when discussing the theoretical properties of an economy; at best, there are a few price levels in play at a given time. If we are referring to the measured level of a price index, such as the Consumer Price Index (CPI) there is no difficulty, however this aggregate price index should not be expected to correspond to any useful theoretical construct. This article explains my logic, and then looks at the practical implications of what appears to be yet another hand-wringing post-Keynesian article about the difficulties with mathematical economics..

As a disclaimer, I have no idea how my comments fit in with the existing academic literature. I had a very brief discussion with Professor Randall Wray at the Modern Monetary Theory Conference on this topic, and it was an issue that he was well aware of. I would guess that it would cause greater anguish among mainstream economists, as it suggests that their preferred policy of inflation targeting is theoretically incoherent...

Refreshing to get some applied mathematicians involved.

Bond Economics
The Price Level Does Not Exist
Brian Romanchuk