Sociology vs. Complacency in the Failures of Macroeconomics
8/19/09 12:44 PM
Grasping Reality with Both Hands The Semi-Daily Journal of Economist Brad DeLong: A Fair, Balanced, RealityBased, and More than Two-Handed Look at the World J. Bradford DeLong, Department of Economics, U.C. Berkeley #3880, Berkeley, CA 94720-3880; 925 708 0467; delong@econ.berkeley.edu. Weblog Home Page Weblog Archives Econ 115: 20th Century Economic History Econ 211: Economic History Seminar Economics Should-Reads Political Economy Should-Reads Politics and Elections Should-Reads Hot on Google Blogsearch Hot on Google Brad DeLong's Egregious Moderation August 09, 2009
Sociology vs. Complacency in the Failures of Macroeconomics Mark Thoma asks: Ask the right questions: [T]he important question is why policymakers didn't take the possibility of a major meltdown seriously. Why didn't they deliver forecasts conditional on a crisis occurring? Why didn't they ask this question of the model?... And... why was the main factor that allowed the crisis to spread, the interconnectedness of financial markets, missed? It was because policymakers couldn't and didn't take seriously the possibility that a crisis and meltdown could occur. And even if they had seriously considered the possibility of a meltdown, the models most people were using were not built to be informative on this question. It simply wasn't a question that was taken seriously by the mainstream. Why did we, for the most part, fail to ask the right questions? Was it lack of imagination, was it the sociology within the profession...? It wasn't the tools, and it wasn't lack of imagination.... [T]he voices were there... Michael Mussa for one.... Nobody listened even though some people.... And here I think that thought leaders such as Robert Lucas and others... have questions they should ask themselves (e.g. Mr Lucas saying: "At research seminars, people don’t take Keynesian theorizing seriously anymore; the audience starts to whisper and giggle to one another"...).... [That] influences whole generations of economists away from asking certain types of questions... I think that sociology takes us only so far. Looking back, the Federal Reserve and the Treasury had done a relatively good job in keeping money and finance a fluttering veil for a generation. The stock market crash of 1987--no macroeconomic impact on production and employment. The savings-and-loan crisis of 1990 and the associated http://delong.typepad.com/sdj/2009/08/sociology-vs-complacency-in-the-failures-of-macroeconomics.html
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Sociology vs. Complacency in the Failures of Macroeconomics
8/19/09 12:44 PM
production and employment. The savings-and-loan crisis of 1990 and the associated credit crunch--minimal macroeconomic impact. The 1998 collapse of LTCM--no macroeconomic impact. The 2000 crash of the dot-com bubble--minimal macroeconomic impact. The Greenspan Fed batted four-for-four in crises, and many of us--especially me-thought that the Bernanke Fed would do at least as well. Matthew Yglesias muses on this issue: Matthew Yglesias: Out of the Frying Pan: One of the more interesting questions about the Housing Bubble Era of 2001-2008 actually has to do with what happened in the years before its rise. Why didn’t the LTCM failure, the “Asian” Financial Crisis (which certainly seemed like a big crisis in Russia at the time), the collapse of the NASDAQ bubble, and the revelation of massive accounting fraud all during the 1997-2000 period prompt some kind of more meaningful action. At the time, I can recall that there was a lot of talk in the air of the need for reform. John Quiggin recalls: Neither of these things happened. Advocates of the efficient markets hypothesis, in general, simply ignored the dotcom fiasco, and went on as if nothing had happened. The accounting scandals at Enron and other companies produced the Sarbanes-Oxley Act, which sought to reform corporate governance. But the Act was limited and largely ineffectual. Within a year or two, the conventional wisdom of the financial markets was that Sarbanes-Oxley was an over-reaction to isolated cases of fraud, and that a new push for deregulation was needed. Financial institutions could disregard the failures of the dotcom bubble because of the (seemingly successful) operation of the Greenspan put. Rather than let the financial sector suffer the consequences of the bursting bubble, Greenspan relaxed monetary policy and inflated a whole new bubble, this time in housing. This is a somewhat strange problem. Whatever you think of Greenspan’s overall legacy—and I think it’s appropriate to take a very dyspeptic view of his fiscal policy interventions in 1999-2001 and of his interest rate policy in 2004—I think it’s a bit hard to regret that he acted swiftly and decisively to keep the world out of a major recession at the turn of the millennium. The millennial recession was not a fun time for the aversely affected, but relatively few people were aversely affected because it was relatively short and shallow. Letting things fall apart would have led to millions of additional unemployed people, state budget crises, cutbacks in critical social services, etc., etc., etc. But it really does seem that the success of these operations was taken as a reason to avoid any serious systematic reform. And you can feel the same kind of thing happening today. It’s disturbing.
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Sociology vs. Complacency in the Failures of Macroeconomics
8/19/09 12:44 PM
Brad DeLong on August 09, 2009 at 01:44 PM in Economics, Economics: Federal Reserve | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340120a5337ad6970c Listed below are links to weblogs that reference Sociology vs. Complacency in the Failures of Macroeconomics:
Comments You can follow this conversation by subscribing to the comment feed for this post. The question that really needs an answer is, "Why has the US economy created ZERO net jobs in the last decade?" http://www.ritholtz.com/blog/wp-content/uploads/2009/08/0808-biz-webcharts.gif "People choose not to work" is NOT an acceptable answer. IMHO, the Clinton Administration enacted policies and governed with job creation as a high priority. Bush policies never targeted jobs specifically and obvious policies that would have created jobs were not pursued. Posted by: bakho | August 09, 2009 at 02:44 PM While it's easy to agree with the wisdom of fighting the recession back in 2002, I'm more miffed about the half decade between the end of that recession and the collapse. Posted by: John Whitesell | August 09, 2009 at 03:01 PM To me, the series of crashes/crises look like a series of harvests, like taking one after another crops of alfalfa off a field. They need not be planned as such, to have the same effect. This sort of thing can be done continuously over decades, provided sufficient roots and water and fertilizer remain to allow the next crop to grow. But the system breaks down if the greedy don't fertilize, don't allow the rain to fall on the field, and rip up the plants, roots and all, when harvesting. From the late 70s on this was the pattern. Then the Naughts arrive and the greed goes to the roots. Regrowing the field will take more than platitudes. Noni Posted by: Noni Mausa | August 09, 2009 at 04:57 PM The Greenspan Fed batted 4-4 in crises only because it kept using low interest rates to roll the problem over into the future. Lowering interest rates to fight a recession doesn't actually fix anything in the economy or encourage productive behavior, it is only a superficial strategy. If you keep doing this for long enough, sooner or later you will get to a crisis which can't be rolled over again- obviously this is the stage we are at now, which is why dropping interest rates to the zero bound has been largely ineffective. The obsession with getting below that bound and easing even more fiercely is counterproductive. Posted by: Christopher | August 09, 2009 at 05:31 PM You really think the early 90s recession had nothing to do with the S&L crisis? Posted by: Noah | August 09, 2009 at 05:57 PM Real Business Cycle Theory is the mechanism by which Deep Regulatory Capture occurs.
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Sociology vs. Complacency in the Failures of Macroeconomics
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There are billion dollar interests in making sure that academic economics has a theory which concludes that business(at least collectively) can do no wrong. Posted by: Patrick | August 09, 2009 at 09:51 PM Huh. I am having a really hard time figuring out what is difficult about this problem. Four times out of four, the Fed stepped in and made good on a massive misallocation of resources that had been producing huge profits on Wall Street. Each time, people decided to engage in larger misallocations of resources afterward. Is there any discipline in the social sciences OTHER THAN ECONOMICS that would have difficulty explaining this? Are you really going to continue to insist on measuring progress by GDP, essentially insisting that everything people do with money is an equal contribution to social welfare by definition? If so, how is this distinguishable from the strong version of the efficient markets hypothesis? Posted by: albrt | August 09, 2009 at 10:29 PM Although I only have a twenty year old BA in economics, might I suggest that the problem in Macroeconomics is microeconomics and the synthesis of the two. As far as I can Micro was developed as tool to support certain ideological and policy goals, starting with British industrialists trying to get their preferred policies past the Tory landed elite. Then, Marshall and his generation of relatively wealthy academics developed preferences to undermine marx theoretically and support their class’s antipathy to unions. For generations now, the standard intro to micro is propaganda for free markets and against anything resembling socialism. Like Jesuits indoctrinating schoolchildren, generations of undergrads have been taught that the ridiculous model is the real world. Then they go through life voting and acting that bias. Incorporating micro framework into macro just provides tools for the ideologists to preach. Predictive results are immaterial to the proponents of rational expectations and their ilk, because the theory exists to support a preferred policy, not a guide to selecting the best policy. Get a better micro, or toss out the neoclassical synthesis. Elegance is not an acceptable basis for modeling, if the predictions are wrong. Posted by: PSP | August 10, 2009 at 07:27 AM "Four times out of four, the Fed stepped in and made good on a massive misallocation of resources that had been producing huge profits on Wall Street. Each time, people decided to engage in larger misallocations of resources afterward. Is there any discipline in the social sciences OTHER THAN ECONOMICS that would have difficulty explaining this? Are you really going to continue to insist on measuring progress by GDP, essentially insisting that everything people do with money is an equal contribution to social welfare by definition? If so, how is this distinguishable from the strong version of the efficient markets hypothesis?" albrt is on to something! Posted by: david | August 10, 2009 at 07:57 AM They should not make fun of Keynes. He was very close to the truth on how you should run economies. He just did not have the benefit of divine interventions. Posted by: Nancy Kirsch | August 14, 2009 at 08:25 AM
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Sociology vs. Complacency in the Failures of Macroeconomics
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