The great mystery is why they are so clueless

If you are wondering why you should never go to a mainstream economist to solve our economic problems, you should read through this: A Rare Prize for an Economist Looking at the Big Picture. That is, he has won the John Bates Prize awarded to economists under 40. “New” Keynesian Economics is not actually new; more like the far-left wing of modern macro.

Nakamura is one of the leaders in the field of New Keynesian economics. This school of thought, which has become the dominant paradigm at central banks around the world, holds that recessions happen because companies are unable to adjust their prices in response to events like a financial crisis or a big rise in interest rates. Without the ability to adjust prices, the theory goes, companies cut their output and lay off workers instead. In a 2008 paper with frequent co-author and husband Jon Steinsson, Nakamura showed that even very small amounts of this so-called price stickiness can generate large recessions, and make the economy very sensitive to changes in monetary policy.

“Not able to adjust their prices”? Surely they can put their prices down. Who would stop them? Surely they could raise their prices as well if they saw fit. But the problem is that at the prevailing prices and other prices as well, these firms cannot make a profit. As noted in the article:

Exactly why companies can’t adjust prices, however, remains something of a mystery. Nakamura’s research has helped to shed light on this question. Another 2008 paper with Steinsson helped to establish that price stickiness probably results from multiple factors.

The other word for it being a “mystery” is that they are “clueless”. I wonder if there are any lessons to be learned from the United States.


And speaking about clueless, think about the other 50% of Americans who do not approve of Donald Trump.

[My thanks to Nathan for sending me the news of the JB Clark medal.]

The vast majority of economists are Keynesian

I will preface this with my own invention, the National Accounting Stimulus Trap, which is built around Y=C+I+G. An increase in public spending will, inevitably, show up as an increase in Y because that is how the accounts are designed. A fall in public spending will inevitably show up as a fall in Y, for exactly the same reason. If you think that the real effects of a change in policy can ever be detected in less than a year, you have to be blind to the basics.

Which brings me to a blog post by Simon Wren-Lewis, University of Oxford, with the title, The academic consensus on the impact of austerity. The consensus is negative; most economists are either Old or New Keynesians:

Unfortunately we do not have a great deal of information on what academic economists as a whole think about austerity, but we do have two important survey results which are pretty conclusive. In the US, there is the IFM Forum, which regularly asks a group of distinguished economists – including many macroeconomists – their views on key policy issues. The last poll I have seen suggests that 82% of that panel thought the 2009 Obama stimulus had reduced unemployment, while only 2% disagreed. In the UK, the CFM survey asked a similar question to a smaller group of academic economists, most of whom are macroeconomists. Only 15% agreed that the austerity policies of the coalition government have had a positive effect on aggregate economic activity, while 66% disagreed. That consensus is not universal – it would not apply in Germany for example – but I doubt if anyone would disagree when I say that US economists call the shots as far as academic macroeconomics is concerned.

This is why economists the world over continue to teach Keynesian macro to undergraduates, and normally not as one ‘school of thought’ but rather as an initial approximation of how the economy actually works. As Amartya Sen so forcefully reminds us, the experience of the last hundred years has earned Keynesian theory this central role.

There’s more of the same:

We have another, more indirect, source of evidence. If you asked whether there was a standard model for analysing the business cycle among economists in academia and in policy making institutions, the answer would have to be the New Keynesian model. I want to include economists in central banks in particular because they have to put theories of the business cycle into practice on a regular basis. The key macromodels that central banks use to forecast and to analyse policy are Keynesian, and many are New Keynesian. [his italics]

And I have to give you this, which is a jargon-filled sentence of such raw stupidity that it amazes me that anyone can write such a nauseating sentence with such smug certitude given how anaemic the American “recovery” has been:

This is why, among economists with expertise, there is a clear majority view that fiscal austerity is significantly contractionary in a liquidity trap.

No economy that has had a stimulus applied has recovered in any interesting sense. The business cycle is cyclical. Every downturn turns up. Nothing falls forever. But if you are going to call the present pathetic example of a recovery a serious upturn, I will merely point out that you have not got a clue.

For more of the same, go here.