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Without wading into the debate too much, we report on some commentary from the web on yesterday’s announcement that Thomas Sargent and Christopher Sims had won the Nobel Memorial Prize in Economics: “Free-market” supporters differed greatly in their assessments. One “New Monetarist” argues that the choice of Sargent and Sims represents a nod to the anti-Keynesian “New Classical” school of macroeconomic theory, which introduced rational expectations into macro in the 1970s. On the other hand, while Edward Glaeser also seems to view the award as partly an anti-Keynesian decision, his comments on Sims and the New Classical School of macroeconomics emphasize Sims’s efforts to minimize the use of macroeconomic theory of any kind in his econometric work: “Sims — like Sargent, Lucas and Edward Prescott (another great theorist of the post-Keynesian world) — saw that the Keynesian macroeconometric models were a thing of the past, but he understood the ongoing need for economic prediction. Perhaps one day, economic theory will make complete sense of the business cycle, but until that time, policy makers and ordinary investors will still want to have some idea of what lies ahead. Sims’s work addressed that need, free from the confining assumptions of Keynesianism.” Similarly, at this link, Keynesian-leaning Mark Thoma endorses the argument that Sims’s vector autoregression (VAR) techniques help economists avoid making an… Read More

Over the past several decades, many people adopted the view that monetary policy, almost alone, could effectively control the economy. Economists, politicians and scholars came to believe that the Federal Reserve was full of neutral technocrats who dutifully fine-tuned the economy. Through their careful orchestration of interest rates, the money supply and inflation, we assumed that they could guarantee a smoothly functioning economy. Fed officials seemed to do so well at their jobs that they were never doubted. But by depending on monetary policy and discounting fiscal policy as an effective way to secure economic stability, we have created a system that is now dysfunctional. Randall Wray and Micah Hauptman have a piece in The Hill on the problems with our over-reliance on the Federal Reserve.  Due to the fact that fiscal policy is mired in political deadlock (more particularly, expansionary fiscal policy) we may be stuck relying on (inadequate) support from the Fed. Wray recently wrote a policy brief with Scott Fullwiler (“It’s Time to Rein in the Fed”) that is relevant to this issue.  From their one-pager (referring here to QE2):  “…it’s truly remarkable that, three years into the crisis, the Fed still has not learned that monetary policy is about price, not quantity. The Fed is buying $600 billion in long-term Treasuries in the hope of bringing… Read More

This morning, it was announced that Thomas Sargent and Christopher Sims are the winners of the 2011 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (link to New York Times article here; link to official Nobel economics site here). Sargent and Sims’s approach is often thought to imply, among other things, that monetary or fiscal stimulus is unlikely to be of very much benefit to an economy, even one in deep recession.  Of course, the Levy Institute, as a proponent of the Keynesian approach, almost always disagrees strongly with this view on macroeconomic policy, though extreme pessimism about Keynesian stabilization policies is only one possible implication of Sargent and Sims’s extensive oeuvres. Moreover, the technical aspects of Sargent and Sims’s work are also crucial to neoclassical macroeconomics, and their influence is felt in many ways. Of special interest to me as a researcher is their work on vector autoregressions (VARs), which has led to literally thousands of studies in academic journals, even some authored by heterodox economists. (Sims’s seminal contributions to the VAR literature are the main Sims accomplishment cited in the Nobel committee’s “scientific background” paper for today’s announcement.) Nonetheless, as with any research in the social sciences, the VAR approach to empirical work in macroeconomics has been subjected to many critiques and revisions since… Read More

Since it’s Friday… This one is for every graduate student who’s been on the receiving end of a glazed/skeptical/bemused expression after trying to respond to a “so what’s your dissertation about?” query.  Your elevator pitch would go over much better if it were more kinetic.  Via GonzoLabs, Science magazine and TEDxBrussels are sponsoring a competition for PhD students in science-related fields for the best dissertation interpreted through dance.  There don’t seem to be many entries from economists (dismal, dismal), but these physics students look like contenders (incidentally, there’s still time for some last-minute, ill-considered choreographing.  The deadline is Oct. 10.): “For years I have been trying to explain to my mother what it is I do. This video was aimed at her. She now finally understands what the point of my research is. If I had known that all it would take was a little dancing, I would have done this a long time ago.”

According to Floyd Norris at Economix.  Norris includes this chart, comparing our ongoing shedding of state and local government jobs to the one in the early ’80s: I haven’t been looking at any employment reports lately, but I can only assume that this has sparked a massive boom in private payrolls.

The prevailing anxieties of elite opinion are focused relentlessly on the deficit and debt, with sporadic bouts of indigestion reserved for the slump in jobs.  This is a complete reversal of what ought to be the case.  But let’s say you really can’t get over the idea that there’s no major short-term economic problem currently being caused by high deficits.  Well then, if you are such a person, you ought to be deeply concerned that the economy is operating below potential. Rep. Chris Van Hollen recently requested an estimate from the CBO (hat tip TPM) regarding what portion of the federal deficit can be attributed to cyclical factors—e.g. the non-recovery in the job market.  The answer:  roughly a third.  There’s nothing new here, but it is an excuse for futile repetition of the following upshot:  attempts to cut the deficit right now are self-defeating, to the extent that they drag down growth and employment. Gennaro Zezza has been all over this.

Let’s look at the reasons to doubt that the big six are solvent. 1.The economy is tanking. Real estate prices are not recovering, indeed, they continue to fall on trend. No jobs are being created. Defaults and delinquencies are not improving. GDP growth is falling. Isn’t it strange that Wall Street has managed to remain largely unaffected? Finance is an intermediate good. It is like the tire that goes on a new Ford automobile. Auto sales are collapsing but somehow tire sales to auto manufacturers are doing just fine? Does that make sense? Banks are making no loans, yet, they remain profitable? 2.Not only are the financial institutions NOT doing any of the traditional commercial banking business—lending—they aren’t doing much of the investment banking business either (remember that the last two remaining investment banks were handed bank charters so that they could scoop up insured deposits as a cheap way to finance their business). How many IPOs have been floated? Corporate debt? Trading? Well, one of the two investment banks that survived, Morgan Stanley (the sixth largest bank—barely squeaking into my “dirty half dozen” biggest banks), just released a pretty poor trading outlook—blamed on “high costs, historically low interest rates and market volatility that has pushed clients to the sidelines”. (Reuters Global Wealth Management Summit News). 3.Europe is toast. US… Read More

By Gal Noir* In his Congressional testimony on October 4th, Federal Reserve Chairman Bernanke uncharacteristically praised the benefits of fiscal policy, calling it “of critical importance” and conveying concerns with the looming deficit reductions. He cautioned: “an important objective is to avoid fiscal actions that could impede the ongoing economic recovery.” Many economists expressed worry that such advocacy of fiscal policy will erode America’s (already) wavering confidence in the Fed and will further weaken their support for austerity measures. More troubling still, the economists said, was the possibility that the public may follow suit and start demanding from Congress bolder government action on the jobs front. A few dissenting scholars thought that it was high time for Bernanke to put his money where his mouth was, so to speak. Among them was Dr. Tcherneva, who had studied Bernanke’s academic proposals for government action during crises and his actual policy moves as Fed Chairman during the Great Recession (2011).**   “I am not at all surprised that Chairman Bernanke is making the case for fiscal policy” Tcherneva said. “I am only astonished that it took him so long. After studying his policy prescriptions for the case of Japan, I am left with the nagging conclusion that Bernanke actually favors fiscal policy over monetary policy. And while the reasons for this position… Read More

James Galbraith talks about the mechanisms by which obstacles are placed in the way of dissenting and original voices in economics, as well as the failure of most in the forefront of the profession to see the global financial crisis coming (via INET): Galbraith has written about this before; surveying the work of those who got it right, as well as the narrow parameters of prevailing doctrine:  “This is the extraordinary thing. Economics was not riven by a feud between Pangloss and Cassandra. It was all a chummy conversation between Tweedledum and Tweedledee. And if you didn’t think either Tweedle was worth much—well then, you weren’t really an economist, were you?” (read it here).

(continued at EconoMonitor)

“We’ve put this off for too long.  We need debt relief and jobs and until we get these two things, I think recovery is impossible”—Randall Wray, quoted in a Reuters article examining the possibility of negotiating massive consumer debt relief. Although household borrowing has been declining, debt burdens remain sky high: (from the latest Levy Institute Strategic Analysis)

Martin Wolf, in the Financial Times last week, “thinks the unthinkable” and inches toward what sounds distinctly like a Modern Money Theory approach:  “Alternatively, the government could fund itself from the central bank, directly. Better still, the government could increase its deficits, perhaps by slashing taxes, and taking needed funds from the central bank. Under any of these alternatives, the central bank would be behaving like any other bank, creating money in the act of lending.” Wolf goes on to argue that such a policy needn’t be inflationary, insisting on the absence of a necessary and immediate linkage between central bank money and the overall money supply:  “…the policy would be inflationary only if it led to chronic excess demand. So long as the central bank retains the right to call a halt, that need be no serious danger.” To learn more about MMT and its policy implications, this short working paper by Randall Wray is a good place to start.  Wray is also putting together an MMT primer over at New Economic Perspectives. Beyond the particulars of Modern Money Theory, would it be too naive to expect that the latest crises, convulsions, and lingering stagnation would prompt more economists and economic thinkers to move beyond “normal science” and begin, in a more general sense, thinking the unthinkable?