Why Oh Why Can't We Have Better Nobel Laureates in Economics (Robert Lucas Suddenly BFF with Ben Bernanke Edition)
8/19/09 12:53 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 06, 2009
Why Oh Why Can't We Have Better Nobel Laureates in Economics (Robert Lucas Suddenly BFF with Ben Bernanke Edition) Robert Lucas provides an annoying defense of his brand of economics here in the Economist: Economics focus: In defence of the dismal science | The Economist: THERE is widespread disappointment with economists now because we did not forecast or prevent the financial crisis of 2008... Lucas's defense is annoying for two big reasons: First, some economists did indeed forecast the financial crisis of 2008--or, rather, forecast that Alan Greenspan's low interest rate policies of 2002-2004 (policies I approved of and endorsed, by the way) ran an unacceptable risk of getting the economy wedged into a position like the one it now is. All praise and honor to Dean Baker, Richard Thaler, Robert Shiller, Michael Mussa, and their posse. Here's Michael Mussa, writing in 2004: Michael Mussa (2004), "Global Economic Prospects: Bright for 2004 but with Questions Thereafter" (Washington: Institute for International Economics: April 1): Policy interest rates are exceptionally low in most industrial countries: zero in Japan and Switzerland, 1 percent in the United States, 2 percent in the euro area, and at or near historic lows in the United Kingdom and Canada.... The very low level of policy interest rates is an imbalance (relative to normal conditions) that reflects exceptionally easy monetary policies to combat economic weakness. This policy imbalance poses an important challenge for the future conduct of monetary policy. Situations of low policy interest rates and low inflation tend to be associated with unusual inertia in the processes of http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett‌economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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Why Oh Why Can't We Have Better Nobel Laureates in Economics (Robert Lucas Suddenly BFF with Ben Bernanke Edition)
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low inflation tend to be associated with unusual inertia in the processes of general price inflation, which makes traditional indicators of rising inflationary pressures less reliable as measures of the need to begin to tighten monetary conditions. Also, these situations tend to be associated with high valuations of equities, real estate, and long-term bonds, which can become fertile ground for large, unsustainable increases in asset prices. In this situation, if monetary policy is tightened too much too soon (perhaps because of worries about unsustainable increases in asset prices), the result can be an unnecessary asset market crunch and economic slowdown, and monetary policy may have relatively little room to ease in order to counteract this outcome. On the other hand, if monetary policy remains too easy for too long (perhaps because subdued general price inflation gives no clear signal of the need for monetary tightening), then large asset price anomalies may develop before corrective action is taken. The monetary authority would then confront the grim choice of trying to keep an unsustainable asset price bubble alive or trying to combat the collapse of such a bubble without a great deal of room for monetary easing... Bingo. Here we are right now. Wedged. The disappointment with economists is not because there were none of us who forecast the possibility of the crisis we are in, but rather that economists like Robert Lucas and myself did not listen with sufficient care and attention to hte Michael Mussa posse. (Indeed, I have a half-finished paper that will now never, ever be finished on how Mussa was wrong.) So when Lucas writes things like: Economics focus: In defence of the dismal science: One thing we are not going to have, now or ever, is a set of models that forecasts sudden falls in the value of financial assets, like the declines that followed the failure of Lehman Brothers in September. This is nothing new. It has been known for more than 40 years and is one of the main implications of Eugene Fama’s “efficient-market hypothesis” (EMH), which states that the price of a financial asset reflects all relevant, generally available information... he darkeneth counsel without wisdom. It is true that no model is going to successfully forecast the time and date of a "sudden fall in the value of financial assets." But that misses the point. What Mussa and his posse correctly did was forecast the growing size of the left-side tail of the distribution of possible future financial asset changes. Second, Lucas defends economics by suddenly becoming BFF with Federal Reserve Chair Ben Bernanke: Mr Bernanke... [is] in the mainstream of what one critic [Paul Krugman] cited in The Economist’s briefing calls a “Dark Age of macroeconomics”. They are exponents and creative builders of dynamic models and have taught these “spectacularly useless” tools, directly and through textbooks that have become industry standards, to generations of students. Over the past two years they http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett…economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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industry standards, to generations of students. Over the past two years they (and many other accomplished macroeconomists) have been centrally involved in responding to the most difficult American economic crisis since the 1930s. They have forecasted what can be forecast and formulated contingency plans ready for use when unforeseeable shocks occurred. They and their colleagues have drawn on recently developed theoretical models when they judged them to have something to contribute.... I simply see no connection between the reality of the macroeconomics that these people represent and the caricature provided by the critics whose views dominated The Economist’s briefing... But when Robert Lucas stood up to talk at the Council on Foreign Relations only four months ago, he had a very different view of the competence of Ben Bernanke. Then he said that economists--like Ben Bernanke--who believed that expansionary fiscal policies like the Obama stimulus might well be effective were either incompetent ("schlock economics" was the phrase) or corrupt. And Lucas went on to say that he "didn't get" the rationale for the banking-sector support policies Bernanke had put into place--which meant that Lucas had never bothered to understand any of the many, many papers Bernanke had written about the "credit channel" and economic activity. If you are going to be a shrill and unbalanced somebody in the spring and then claim that you are their BFF in the summer, you owe your readers an explanation for why you have changed your mind. Lucas does not provide one. So I have one of what I expect to be a number of responses to Lucas coming in the Economist this afternoon. Here it is: Robert Lucas’s Mysterious Change of Mind J. Bradford DeLong University of California at Berkeley and NBER delong@econ.berkeley.edu August 5, 2009 Today in the Economist Robert Lucas is an enthusiastic supporter of the economics of Ben Bernanke. He sets the stage as the world economy stood late last September: After Lehman failed and the potential for crisis had became a reality, the situation was completely altered. The interest on Treasury bills was close to zero, and those who viewed interest-rate reductions as the only stimulus available to the Fed thought that monetary policy was now exhausted... And then Bernanke swung into action: Bernanke immediately switched gears, began pumping cash into the banking system, and convinced the Treasury to do the same. Commercial-bank reserves grew from $50 billion at the time of the Lehman failure to something like $800 billion by the end of the year. The injection of Troubled Asset Relief Programme (TARP) funds added more money to the financial system.... The recession is now under control and no responsible forecasters see anything remotely like the 1929-1933 contraction in America on the horizon. This outcome did not have to http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett‌economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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1929-1933 contraction in America on the horizon. This outcome did not have to happen, but it did... There follows Lucas’s praise of Bernanke (and his Federal Reserve colleague Ric Mishkin) and his excoriation of the critics of economics: Mr Bernanke and Mr Mishkin are in the mainstream of what critics cited in The Economist’s briefing call a “Dark Age of Macroeconomics.” They are exponents and creative builders of dynamic models and have taught these “spectacularly useless” tools, directly and through textbooks that have become industry standards, to generations of students. Over the past two years they (and many other accomplished macroeconomists) have been centrally involved in responding to the most difficult American economic crisis since the 1930s.... They have drawn on the ideas and research of Keynes from the 1930s, of Friedman and Schwartz in the 1960s, and of many others. I simply see no connection between the reality of the macroeconomics that these people represent and the caricature provided by the critics whose views dominated The Economist’s briefing... I approve of Robert Lucas’s praise of Ben Bernanke. I agree with it. I am and have long been an enthusiastic fan of and supporter of Bernanke (and Mishkin too). I think he is one of the very best we have, and I do not see any better candidates (I do see some as-good candidates however) for the seat he occupies. If Lucas now says that Ben Bernanke and company know what they are doing—as I think that they do—and that their judgments are to be respected (which include judgments that banking-sector recapitalizations, loan guarantees, and other creditchannel policies on the one hand and expansionary short-run fiscal policy on the other have their proper place in dealing with the recession), then we can all agree and go home. But I would like everybody to note that Robert Lucas thought very differently, or at least appeared to think very differently, only four months ago. Ben Bernanke’s principal theoretical contribution to economics has been his investigation of the “credit channel”–how, independent of the supply of money, the health of the banking system and the configuration of interest rates affect the level of spending. Ben Bernanke’s principal empirical contribution to economics has been documenting that the “credit channel” has in fact mattered. And Bernanke’s chief policy innovation has been to expand the Federal Reserve’s role from standard expansionary monetary policy open-market operations into a host of innovative financial policies aimed at this “credit channel.” Last March at the Council on Foreign Relations Lucas commented on Bernanke’s “credit channel” policies—bank bailouts, etc. Lucas said he “didn’t really get it”: I avoided this bank bailout issue in my 15 minutes and there's a reason for it. I don't really get it. Some of the problems you're talking about about deciding who gets paid and who doesn't, that's the whole function of bankruptcy law is to http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett…economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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who gets paid and who doesn't, that's the whole function of bankruptcy law is to deal with that in an effective way. Now, it may be that the kind of neighborhood effects of the bankrupt banks are sufficiently different from the neighborhood effects of a bankrupt auto company—that they need some kind of special treatment. But then it seems like the right public policy is something that— maybe some kind of accelerated bankruptcy proceedings. Just to say make them well on all the money they've lost over this thing, I just—I do not get it... And last March Lucas had nothing but contempt for judgments like Bernanke's that a fiscal stimulus program—temporary increases in government spending and a temporary tax cut—would boost spending. Bernanke endorses the Congressional Budget Office and its: estimates of the effects of the stimulus package on real GDP and employment that appropriately reflect... uncertainties.... [B]y the end of 2010, the stimulus package could boost the level of real GDP between about 1 percent and a little more than 3 percent and the level of employment by between roughly 1 million and 3-1/2 million jobs... But Lucas says--or rather said last March: [W]ould a fiscal stimulus somehow get us out of this bind, or add another weapon that would help in this problem?... I just don't see this at all.... [T]he only part of the stimulus package that's stimulating is the monetary part.... But, if we do build the bridge by taking tax money away from somebody else, and using that to pay the bridge builder... then it's just a wash... there's nothing to apply a multiplier to. (Laughs.)... And then [running a budget deficit now and] taxing them later isn't going to help, we know that... Lucas went on to explain why he thought Bernanke and ihs colleagues like Christina Romer were testifying before Congress that he believed the stimulus would be effective: Christina Romer... here's what I think happened. It's her first day on the job and somebody says, you've got to come up with a solution to this— in defense of this fiscal stimulus, which no one told her what it was going to be, and have it by Monday morning. So she scrambled and came up with these multipliers and now they're kind of—I don't know. So I don't think anyone really believes. These models have never been discussed or debated in a way.... These are kind of schlock economics. Maybe there is some multiplier out there that we could measure well but that's not what that paper does. I think it's a very naked rationalization for policies that were already, you know, decided on for other reasons... When Paul Krugman calls today a “Dark Age of Macroeconomics” he is not referring to Ben Bernanke and Ric Mishkin, with their keen awareness of the potential and the limits of both fiscal policies and credit-channel policies to affect the level of spending alongside monetary policy. He is referring to people like Robert Lucas as he was last March—when the only reason Lucas could think of for why Romer and Bernanke were saying that the stimulus was likely to be effective was that they were http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett…economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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Bernanke were saying that the stimulus was likely to be effective was that they were corrupt, and when Lucas just “really didn’t get” any piece of Bernanke’s major contribution to economics. Krugman does call this a “Dark Age,” and I think Krugman is right: until this year I taught that the empirical and theoretical issues about whether credit channel and fiscal policies could affect the economy were settled for economists in the 1930s with, in each case, a “yes.” Don’t get me wrong: it is, I think, a very good thing that Robert Lucas has much more respect for Ben Bernanke and for Bernanke’s judgments on the importance and efficacy of credit and fiscal policies now than Lucas did last March. But I am curious: Why? Why does Lucas think Bernanke's work on the credit channel shows that he is an "exponent and creative builder of dynamic models" now when Lucas "didn't really get it" last March? Why are the models in which fiscal policy matters that Bernanke presents in his textbooks "[economic] industry standards" right now when they were "schlock economics" last March?
Open publication - Free publishing - More lucas http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett…economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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Markus Brunnermeier on Which Macroeconomics for the Future?(this site) Why Oh Why Can't We Have a Better Press Crops? (Have I Dropped into an Alternative Universe? Blogging)(this site) 2 more recommended posts Âť Brad DeLong on August 06, 2009 at 08:42 AM in Economics, Economics: Economists, Economics: Federal Reserve, Economics: Finance, Economics: Fiscal Policy, Economics: History, Economics: Macro, Utter Stupidity | Permalink TrackBack TrackBack URL for this entry: http://www.typepad.com/services/trackback/6a00e551f0800388340120a4cd5717970b Listed below are links to weblogs that reference Why Oh Why Can't We Have Better Nobel Laureates in Economics (Robert Lucas Suddenly BFF with Ben Bernanke Edition):
Comments You can follow this conversation by subscribing to the comment feed for this post. The stimulus has a problem. State and federal spending, in total, went up by 12%. Private sector spending down by 1%. So, if the stimulus theory of Keynes works, then this must be closer to equilibrium for the economy than prior to the stimulus. I cannot think of a better definition than moving the equilibrium to a more stable point. Have we really done that? Posted by: Mattyoung | August 06, 2009 at 08:59 AM I have to say Professor, to admit an error such as you have here, even if it is in the context of showing how someone else is unable to admit that error is most laudable. I hope to one day see you get back to the NAFTA and globalization issue you were circling in on before the last election cycle pulled you off. But as to this one, my hat is most definitely off to you. Posted by: Kelly | August 06, 2009 at 09:19 AM Why no mention of Dr. Doom (Roubini) or Steven Roach? These two were pretty far ahead of the curve too if you look back. Posted by: Michael Carroll | August 06, 2009 at 09:28 AM Do I smell an inner Austrian? Posted by: Joe | August 06, 2009 at 09:35 AM Maybe Prof. Lucas revisited the analysis he earlier didn't get, and now has gotten it. If so, his saying so would highlight Mr. Bernanke's policies and what the heck the Fed is doing (as this post's summary of Mr. Bernanke's Credit Channel analysis has done for at least me on among the readers here), and would be a refreshing 'I was wrong about this public policy issue' grace note, which we generally have search at least one step further than current officeholders to find these days...or was it ever thus? Posted by: MaryCh | August 06, 2009 at 10:09 AM Brad: I have a non-economic question. Are you alluding to Job when you write that: "he darkeneth http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett‌economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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I have a non-economic question. Are you alluding to Job when you write that: "he darkeneth counsel without wisdom?" Or are you alluding to someone who riffed upon Job? I am not trying to be cute, but I am aware of a slightly different version of the line in Job. Therefore, I am curious if this is because I am not familiar with the King James Version of the Bible, or if this is a famous quote apart from Job. Posted by: Bill | August 06, 2009 at 10:50 AM If a trend is NOT sustainable, it WILL NOT continue. Unsustainable trend- energy usage in the late 1970s until the Carter energy programs put us on a more sustainable path. Unsustainable trend- 2000 Oil usage returned to late 1970s levels, return of gas spikes and oil inflation. Bush response- let oil companies make record profits. Economic response- collapse of auto industry, reduction of car and truck sales, reduction in miles driven and economic downturn that uses less oil. Unsustainable trend 2001- Tech downturn creates unemployment. Bush response- Jobs and wages replaced with unsustainable levels of easy credit. Economic response- Financial crisis once un-collateralized debt and foreclosures collapse lending. Monetary policy can give an economy some breathing room by supporting policies in the short term that are unsustainable in the long run. However, if the unsustainable problems are not or cannot be addressed, then the economy is headed for its WileECoyote Minsky Moment. We still have not addressed the unsustainable trends (energy efficiency/carbon emissions) or a combination of benefits and wages that will sustain consumption. We do not have a policy yet to expand jobs. Monetary policy can provide the government with some breathing room to get it done. However, Monetary policy cannot compensate for bad or unsustainable fiscal and employment policy. Greenspan may have been a Maestro under Clinton, but Greenspan was merely an enabler under Bush. Posted by: bakho | August 06, 2009 at 10:54 AM OK, lots of good material and pushback against Bushy-sounding "who could have predicted ...", and laudable mea culpa. But one of the top economists, Joe Stieglitz, did predict this crash and isn't in OP's list of seers (maybe implicit in "their posse" but worth direct mention IMHO.) Newsweek had this article "The Most Misunderstood Man in America" "Joseph Stiglitz predicted the global financial meltdown. So why can't he get any respect here at home?" By Michael Hirsh | NEWSWEEK Published Jul 18, 2009 From the magazine issue dated Jul 27, 2009 http://www.newsweek.com/id/207390 There's also a list of villains, including the overrated hack Greenspan (who may well have diddled the economy in 2004 to help get Bush elected.) BTW, another thing that ran up the bubble IMHO was the execrable reduced tax rate on capital gains (but I agree that indexing is fair.) That typical Republican policy enticed people to trade stocks instead of putting in money for long-term capital investment. Hence it led to both a bursting bubble, and the increased debt meanwhile during Bush's watch. Once debt is already run up by deficit spending/tax favors, it's harder to borrow for stimulus. http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett‌economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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run up by deficit spending/tax favors, it's harder to borrow for stimulus. "tyrannogenius"
Posted by: Neil B ♪ | August 06, 2009 at 02:53 PM Brad, don't forget that you don't have a Nobel. And unless the Swedish Academy decides to institute a new Nobel Prize for obesity, you're not getting one anytime soon. So watch your mouth, and your waistline. Posted by: calles | August 06, 2009 at 04:00 PM Surely one can be in favor of Bernanke, and also be against the fiscal stimulus. BTW, where is Raghu Rajan on your list? You've praised him earlier, and in fact he nailed down precisely where the weak links were in the financial intermediaries, while others on your list have simply been doomesdaying for years on end. Posted by: Thorfinn | August 06, 2009 at 04:38 PM BTW, Joseph Stiglitz did get the Nobel in Economics (Memorial add-on)! Also, IIRC Krugman had some misgivings about where things were going - and my economist brother-in-law K. Rock may not have published such misgivings, but felt them enough to avoid getting ruined by the crash (good break for him and Sis.) Posted by: Neil B ♪ | August 06, 2009 at 04:43 PM "The disappointment with economists is not because there were none of us who forecast the possibility of the crisis we are in, but rather that economists like Robert Lucas and myself did not listen with sufficient care and attention to hte Michael Mussa posse." You inadvertently are the best defense of Robert Lucas, his article and the efficient market hypothesis. If a respected economist at a top ten economics school, such as yourself, did not find the analysis and predictions of Dean Baker, Richard Thaler, Robert Shiller, and Michael Mussa compelling so that you would take action, make investment decisions based on their advice, and argue for policy changes, what can be expected of other economists, policy makers, and home buyers? Additionally, you admit you were in the midst of writing a paper, presumably with economically cogent, logical and correct arguments against the conclusions of the economic doomsayers. It is not that Shiller saw the heightened potential of the decline in home prices that is important. What is important is that there was no reason to believe that his predictions and analysis were any more or less accurate than any other prediction in the noisy environment of future home price predictions. Economic research on bubbles shows that they can also last a long time and revert to fundamental levels gradually as opposed to crashing. Is timeliness an important factor for your respect of the predictions that home price levels were unsustainable or can a bubble crash prediction be made a few years too early and still be respected? Is predicting the extent of the downturn important? Was Shiller's prediction any more than what goes up must come down? I assume that the economists you mentioned have made other predictions over the years. How accurate are their other predictions as to results, timing, duration and severity? Were these four and others who made the same predictions just lucky this time? Your behavior is a defense of the efficient market hypothesis. Given the information that you knew and that was available to you, you could not credibly see the coming decline in home http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett‌economics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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knew and that was available to you, you could not credibly see the coming decline in home prices and you did not act or invest as if a decline was coming. That is all the efficient market hypothesis says. Available information is not actionable to the extent that it will allow someone to make profits beyond that expected by chance and risk. Thank you for showing through action that Robert Lucas, Eugene Fama and many other EMH proponents are right. Posted by: Milton Recht | August 06, 2009 at 06:35 PM Milton Recht, nice sleight of hand, but the issue is not whether one foresaw that housing prices were on an unsustainable trajectory - hell, i knew that - the issue is whether you realized that the break in that trajectory, thanks to the increased level of risk within the system, would create a systemic crisis. Posted by: howard | August 06, 2009 at 08:25 PM You might like to read the Financial Times from Aug 5, 2009 (Wednesday). Richard Thaler demolishes the Efficient Market Hypothesis -- largely through demolishing the "the price is right" half of it, conclusively. Smart, smart man and I'd listen to his economic analysis every day. Posted by: Nathanael | August 07, 2009 at 02:05 AM "It is not that Shiller saw the heightened potential of the decline in home prices that is important. What is important is that there was no reason to believe that his predictions and analysis were any more or less accurate than any other prediction in the noisy environment of future home price predictions." Shorter MR: Predictions that turn out correct are invalid because they occur in a noisy environment full of incorrect predictions. Ergo, the EMH prevails. Posted by: ogmb | August 07, 2009 at 02:41 AM @ Neil B ♪ | August 06, 2009 at 02:53 PM "BTW, another thing that ran up the bubble IMHO was the execrable reduced tax rate on capital gains (but I agree that indexing is fair.)" Indeed. Indeed. Look at the tax changes for "flipping houses". Taxes on home sales more or less disappeared allowing speculators a source of almost tax free income. The tax code hugely encouraged house flipping over other investments. Also note that house flipping was one way for lobbyists to funnel money to Congressmen by buying their houses for more than the market price. From the Duke Cunningham scandal: " The seven-term Republican, who represents the 50th Congressional District, drew the attention of investigators regarding the November 2003 sale of his Del Mar home to Mitchell Wade, head of the contracting firm MZM Inc., the sources said. Cunningham sold the home to Wade for $1,675,000 and used the proceeds of the sale to purchase a $2.55 million house in Rancho Santa Fe. Wade put the Del Mar house back on the market almost immediately for roughly the same price, where it remained unsold and vacant for more than eight months. It eventually sold for $700,000 less than what Wade paid Cunningham. The housing market turned into the wild west. Posted by: bakho | August 07, 2009 at 06:54 AM "They are exponents and creative builders of dynamic models and have taught these “spectacularly useless” tools, directly and through textbooks that have become industry standards, to generations of students. "
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Where I come from, a generation is 30 years (give or take.) Unless Lucas has special views on the age of consent, I think we agree that these tools have only been taught to one generation. Posted by: Simon van Norden | August 07, 2009 at 08:02 AM Simon, the spectacularly useless tools were firmly established by that enormous source of wasted time, Kydland and Prescott's 1982 time-to-build paper. A grad student in 1982 could easily have a 27-year-old child who is now inflicting these "methods" on a new generation of innocents. Posted by: Frank Dean | August 07, 2009 at 10:23 AM I think you are far too hard on yourself and easy on the critics of the Fed's pursuit of its traditional objectives of full employment and price stability. To blame the financial crisis on the low interest rates that were required to avoid unnecessary unemployment is facile -- and for reasons you correctly highlighted at the time. The financial crisis was due much more to the lax regulatory backdrop and to bad luck than to monetary policy itself. Those who argued for higher rates at the time may look now -deceptively -- to have been right. But they never explained how much unemployment they would have been willing to tolerate in the interest of avoiding the housing bubble. You pointed this out in real time, correctly. Moreover, some of the folks on your list were much more critics of the regulatory environment than of monetary policy, as I believe you were yourself. I know you want to seem gracious, but you are spreading a falsehood. It is actually NOT that impressive and I do NOT tip my hat. It is important to learn the RIGHT lessons from this recent episode. Posted by: Gerard | August 07, 2009 at 01:06 PM Brad, I just read Lucas' speech (http://www.cfr.org/publication/18996/why_a_second_look_matters.html) and many of your quotes of Lucas are selective and misleading. [Be careful here. Lucas says that he thinks Bernanke's *monetary* expansionary monetary policies are the right thing to do. He says that he thinks that Bernanke's *banking* and *credit-channel* policies are not; he says that he thinks that the fiscal expansions that Bernanke has lobbied for and endorsed are indefensiblr.] Lucas says on Bernanke's policies: "So I want to tell you why I think this is the right thing to do and what's the case for it" and continues to do it. For other quotes, in context Lucas is acutally saying he does not understand a part of the policy, not mocking it or saying it doesn't or won't work. The term "schlock economics" refers to the Moody's model, which really is on par with Moody's rating of MBS -- informative given past correlations, not structurally useful as academic models seek to be (in no small part due to the leadership of Lucas). Unless you think it is your comparative advantage, leave the personal stuff to the tabloids and stick to economics -- talk about models and theories and data not people. Posted by: Jonathan Parker | August 07, 2009 at 02:22 PM Lucas' turnabout is remarkable and casts doubt on his credibility as an observer and interpreter of economic reality. Not on his ability to develop the art of applied mathematics associated with economic phenomena. It is a pity that the non-academic public is in some way, inclined to believe that that type mathematical and statistical virtuosity make someone an intrinsically better judge of the very complex phenomena (problems?) that governments are supposed to deal with, without these phenomena even being always sufficiently identifiable. People would not expect that a medical researcher with a strong specialization in applied mathematics and statistics (as Dr Lucas) would be the right person to advise a relative on the http://delong.typepad.com/sdj/2009/08/why-oh-why-cant-we-have-bett‌conomics-robert-lucas-suddenly-bff-with-ben-bernanke-edition.html
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Why Oh Why Can't We Have Better Nobel Laureates in Economics (Robert Lucas Suddenly BFF with Ben Bernanke Edition)
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mathematics and statistics (as Dr Lucas) would be the right person to advise a relative on the type of treatment for a personality disorder, unless that would be a private hobby of the researcher. Mr Lucas has invented several interesting theories, and had a very strong influence on the education of the current generation of policy designers in the US. Probably, if the US had no external sector, reality would have behaved more in line with his (mathematically expressed) beliefs. Not only because of fewer moving parts and friction, but also as a result of different budget constraints for consumers (no China supplying goods on indefinite credit terms for instance, or Arabs supplying oil in a similar fashion). If the incremental volume of consumption (and throw in part of housing expenditure as well) in the US since 2002 could only have been sourced from within NAFTA, it would not have occurred and have led to early inflationary effect that, would have triggered monetary policy measures. We have mistaken overseas-slack-on-credit for ordinary slack in setting monetary policy. But let's face it, would the politicians of the day have been happy with stagnation? Posted by: Rien Huizer | August 08, 2009 at 11:07 PM My I suggest that completing the "how Mussa got it wrong" paper is more valuable now that he has been proven right than it would otherwise have been. If he had been wrong, lots of people would have explained why - some without even know that they were addressing Mussa. There is now an opportunity to examine how it is possible to craft an argument about Mussa's error, when in fact he didn't make one. What was in your head, and would have been put on paper, that persuaded you Mussa was wrong? Understand how error is made, and how it persists, and you will understand a lot. Write it down and show it to the world and you will help others understand. That's the business you're in, yes? Posted by: kharris | August 14, 2009 at 12:34 PM
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Why Oh Why Can't We Have Better Nobel Laureates in Economics (Robert Lucas Suddenly BFF with Ben Bernanke Edition)
Paul Krugman Mark Thoma Cowen and Tabarrok Chinn and Hamilton Brad Setser
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