American Macroeconomics, 1960-2012

1. The Major Viewpoints (see my previous post)
2. Targets, Instruments, Indicators, Patterns, and Stories (introduces key macroeconomic data and standard interpretations for 1960-2007; Benjamin Friedman meets Edward Leamer)
3. The Hicks-Friedman 70’s textbook synthesis. IS-LM and AS-AD in all their glory (but I hope to do this without diagrams).
4. Why macroeconomists would be better off as historians than as physicists. Causal density makes it unwise to try to draw firm conclusions. At a theoretical level, The textbook diagrams make it appear as if macroeconomic variables are stable and path-independent. Yet the Great Stagflation and the Financial Crisis Aftermath seem to represent “phase changes” or “regime shifts,” at least compared to prior experience and expectations, and macroeconomic variables exhibit obvious path-dependency. Turning from theory to empirics, we do not have controlled experiments available to us. Statistically, we cannot view macroeconomic data as consisting of repetitive trials coming from a common environment.
5. How I experienced the 1970s convulsion. Follow me as I enter Swarthmore college in 1971, learn 1960s Keynesian macro, and proceed to see what I have learned fall apart in just a few years.
6. The Many Descendants of Robert E. Lucas, Jr. and Stanley Fischer. How the macroeconomics profession became narrow, inbred, and retarded.
7. The Dirty Laundry Hidden in the 1970s Textbook Model. Problems include: the unspecified connection between short-term nominal interest rates and long-term real rates; the hypothesis of sticky nominal wages is asked to carry a very heavy load; money has close substitutes both as an asset and as a transaction medium; the paradoxical relationship between money demand, the price level, and inflation
8. The Financial Crisis and its Aftermath. Are any of the pre-2000 viewpoints adequate? What about the post-2000 viewpoints?

Here is a table to organize the various viewpoints (K means Keynesian, C means Classical, S means a synthesis):

Notes: I date classical to the publication of The General Theory, because Keynes defined classical as a contrast to his views. I date 1960’s Keynesian to the Samuelson-Solow paper on the Phillips Curve. I date the 1970s textbook synthesis, which might be called the Friedman-Hicks synthesis, to the publication of Milton Friedman’s address to the American Economic Association (delivered in 1967, published in 1968). I date the general disequilibrium model to the publication of the Barro-Grossman book. I date the New Classical to Lucas’ JET paper. I date New Keynesian to the John Taylor and Stan Fischer papers. I date populist supply-side to the 1980 election campaign. I date academic supply-side (RBC) to the Kydland and Prescott 1982 paper. I date the liquidity trap to Krugman’s 1998 Brookings paper (yes, I know that Keynes was there first). I date the Minsky Moment to the 2011 edition of Kindleberger’s book (that’s also open to challenge). I date PSST to my paper in Capitalism and Society. I date Market Monetarism to Marcus Nunes’ book.

Note that the general disequilibrium, populist supply-side, and academic supply-side never really had much effect on the consensus.

One way to think of the history is that classical economics could not account for the Great Depression, and so we ended up with 1960s Keynesian as the consensus. But 1960s Keynesian could not account for the 1970s Great Stagflation, and so we ended up with the textbook synthesis as the consensus at the undergraduate level and the New Keynesian as the consensus at the graduate level. Policy thinking in Washington remained somewhere in between 1960s Keynesian and textbook synthesis, with some populist supply-side thrown in.

None of the macroeconomic viewpoints of the 1970s or 1980s could account for the aftermath of the Financial Crisis of 2008, so we had the last four emerge as contenders (I know it’s brave to put PSST in there, but it is going to be my book, after all).

I got 20,000 words written, but now I want to start over. Current thoughts:

1. A concise, selective history of macroeconomic thought from 1960-2012. Not a survey or scholarly reference work. By history of thought, I mean to capture the path-dependence of the ideas. Starting in 1960 lets me skip over a whole lot of the discussion that preceded 1960. “What did Keynes mean?” is a well-squeezed orange that I do not want to touch.

2. Organized in two dimensions (three if you count time). One dimension is by school of thought, covering: classical, 60’s Keynesian, Friedmanite, 70’s textbook, general disequilibrium (Clower, Barro-Grossman) New Classical (rational expectations, real business cycle), New Keynesian (rational expectations with sticky wages/prices), Minsky, PSST.

3. The other dimension is by major issue.

Unused Resources–are they a temporary aberration that markets will quickly eliminate? a manifestation of effective demand failure? other?

Wage stickiness–are wages sticky in real terms? in nominal terms? How central is this to explaining macroeconomic phenomena?

Macroeconomic data–is it well behaved? If not, what are the important issues: path dependence? phase changes/regime shifts? structural change? singular events (policy shocks, exogenous shocks)? Can we cut through the causal density in order to test theories?

Fiscal policy–is it an important tool for macroeconomic stabilization?

interest rates–one interest rate or multiple interest rate?, real vs. nominal, ex ante vs. ex post

Money–how unique is it? how do substitution possibilities in terms of assets and transaction media affect the link between central bank actions and the economy?

Credit–do we need to understand credit markets, including credit rationing and changes in risk tolerance, in order to understand macroeconomic behavior?