Wanted: A New Handbook of Macroeconomics

The first volume of the Handbook of Macroeconomics, edited by Michael Woodford and me, was published in 1999 in the midst of the Great Moderation.  It still ranks first in total downloads of all economics books according to Research Papers in Economics (RePEc). This is perhaps not so surprising given all distinguished contributors to the volume like Hansen, Solow, Shiller, Bernanke, Mankiw, Hall, Browning, Gertler, Christiano, Eichenbaum, Evans, Stock, Watson, Bordo, Schwartz, Durlauf, Quah, Benhabib, Farmer,  Evans, Honkapohja, Heckman, McGrattan, Caballero, King, Rebelo, Ramey, West, Mortensen, Pissarides, Persson, Tabellini, Chari, Kehoe, Calvo, Vegh, Elmendorf, Schmitz, McCallum, Gilchrist, Campbell, and Attanasio

But much has changed in macroeconomics in the past 15 years—including the sad end of the Great Moderation, the financial crisis, the Great Recession, the Not-So-Great Recovery, and a substantial rethinking of macro models and macro policy.  So a new Handbook is sorely needed, and Harald Uhlig and I have agreed to put one together with Elsevier as the publisher again.

A key part of the creation of such a Handbook is a conference where contributors can present and discuss their ideas. Because there will be many contributors, Harald and I have arranged for two conferences, one hosted by the Hoover Institution at Stanford University on April 9-11, 2015, and the other hosted by the Becker-Friedman Institute at the University of Chicago on April 23-25, 2015. These conferences promise to be fascinating.  They will bring together a wide range of distinguished macroeconomic researchers to exchange views about the current state of macro. The Handbook will then follow.

The following Table of Contents for the Handbook shows the economists who will contribute and will appear either at the Hoover conference or the Becker-Friedman conference. The volume is divided into parts which distinguish between empirical, theoretical, methodological, and policy issues.  I am really looking forward to these back-to-back conferences next spring.

Handbook of Macroeconomics Volume 2  John B. Taylor,  Harald Uhlig (Editors)

The Facts of Economic Growth and Economic Fluctuations

  1. Business Cycles                                                                        Ed Prescott
  2. The Facts of Economic Growth                                                Chad Jones
  3. Macroeconomic Shocks and Their Propagation                   Valerie Ramey
  4. Macroeconomic Regimes and Regime Shifts                       Jim Hamilton
  5. The Macroeconomics of Time Allocation                            Mark Aguiar and Erik Hurst
  6. Household and Firm Credit Flows                                      Amir Sufi and Atif Mian
  7. Prices and Wages                                                                      Susanto Basu, Chris House
  8. Financial and Fiscal Crises                                                    Mike Bordo and Chris Meissner

The Methodology of Macroeconomics

  1. Factor Models for Macroeconomics                                     James Stock and Mark Watson
  2. Solution and Estimation Methods for DSGE Models        Jesus Fernandez Villaverde, Juan Rubio-Ramirez, and Frank Schorfheide
  3. Recursive Contracts and Endogenously Incomplete Markets        Mikhail Golosov and     Aleh Tsyvinski
  4. Macroeconomics and Heterogeneity (including inequality)       Dirk Krueger and             Fabrizio Perri
  5. Natural Experiments in Macroeconomics                        Nicola Fuchs-Schündeln and Tarek Hassan
  6. Self-confirming Equilibria, Robustness and Applications             Tom Sargent
  7. Accounting for Business Cycles with Wedges                         V.V. Chari
  8. Incomplete Information in Macroeconomics                     Marios Angeletos

Financial-Real Connections

  1. Credit and Financial Frictions                                     Mark Gertler and Nobu Kiyotaki
  2. Macroeconomics and Financial Markets             Harald Uhlig and Veronica Guerrieri
  3. Macro,Money and Finance:A Continuous Time Framework    Markus Brunnermeier and Yuliy Sannikov
  4. Housing and Macroeconomics                          Monika Piazzesi and Martin Schneider
  5. Term Structure of Uncertainty in the Macroeconomy      Jaroslav Borovicka and Lars Hansen
  6. International Debt Crises   Hal Cole, Satyajit Chatterjee, Mark Aguiar, Zach Stangebye

Models of Economic Growth and Fluctuations

  1. Long-run Growth                                                          Oded Galor
  2. Family Macroeconomics          Matthias Doepke and Michele Tertilt
  3. Environmental Macroeconomics     John Hassler, Per Krusell, and Tony Smith
  4. Models with Price and Wage Rigidities                         John Taylor
  5. Neoclassical Theories                                                     Lee Ohanian and Gary Hansen
  6. Labor Markets and Unemployment                         Robert Shimer
  7. Uncertainty and Macro                                              Nick Bloom and Steven Davis
  8. Macroeconomics of Persistent Slumps                       Bob Hall
  9. Macroeconomics and the Labor Market                  Larry Christiano, Marty Eichenbaum, and Mathias Trabandt                                

Macroeconomic Policy

  1. Macro Models Used at Central Banks and New Challenges                  Jesper Linde, Frank Smets. and Raf Wouters
  2. Macroprudential Financial Regulation                       Anil Kashyap
  3. Fiscal Inflation                                                                  Eric Leeper, Campbell Leith
  4. New Dynamic Public Finance                                                   Iván Werning
  5. Deficits, Debt, Fiscal Crises and Fiscal Consolidation                     Enrique Mendoza, Pablo D’Erasmo, Jing Zang
  6. Political Economy and Macroeconomics                                                Alberto Alesina
Posted in Teaching Economics

Across the Great Divide: New Perspectives on the Financial Crisis

A year ago today, the Hoover Institution and the Brookings Institution held an unusual joint conference on the financial crisis, where twenty-four economists and legal scholars reexamined the crisis, its effect on the US economy, and possible policy reforms. The participants were spread between two venues: Hoover at Stanford and Brookings in Washington.  The conference was simulcast so that people at each location could see and hear people at the other location.

This month a book titled Across the Great Divide, containing all the conference papers and edited by Martin Baily and me will be released.

Cover - Across Great Divide

We chose that title because it is symbolic of the wide range of different opinions represented at the conference.  As we wrote in the introduction, “while both Brookings and Hoover are proud of the range of scholars within each institution that embrace different politics and economic philosophies, Brookings is often seen as center left while Hoover is center right, so it was an important step to undertake this joint conference as a way of expanding the dialog…”

Indeed there were differences of opinion. The conference included the first presentation by Larry Summers of his secular stagnation idea which has since become a widely cited reference as a possible explanation for the slow growing economy of recent years. But it also included alternative views, such as mine, that the slow growth has been due to poor economic policy and can be ended with a change in policy.  The conference included both those critical of the Fed and those who praised the Fed in recent years.

Despite these differences, there was, as George Shultz emphasized in his concluding remarks, “more agreement here than people may have expected,” suggesting therefore that perhaps the conference helped to narrow “Great Divide.”  He noted, for example,  that people at the conference “all instinctively do realize” that bailouts change people’s behavior in an undesirable way and that we need to look for ways that encourage people in leadership positions to resist bailouts. As he put it: “for all of the fascinating and important issues…in this conference to work, there have to be some people at the top with guts who are willing to look at these things and see them through. It isn’t easy.”

Here is the table of contents for the book:

Introduction Martin Neil Baily and John B. Taylor

Chapter 1 How Efforts to Avoid Past Mistakes Created New Ones: Some Lessons from the Causes and Consequences of the Recent Financial Crisis Sheila C. Bair and Ricardo R. Delfin

Chapter 2 Low Equilibrium, Real Rates, Financial Crisis, and Secular Stagnation Lawrence H. Summers

Chapter 3 Causes of the Financial Crisis and the Slow Recovery: A Ten-Year Perspective John B. Taylor

Chapter 4 Rethinking Macro: Reassessing Micro-foundations Kevin M. Warsh

Chapter 5 The Federal Reserve Policy, Before, During, and After the Fall Alan S. Blinder

Chapter 6 The Federal Reserve’s Role: Actions Before, During, and After the 2008 Panic in the Historical Context of the Great Contraction Michael D. Bordo

Chapter 7 Mistakes Made and Lesson (Being) Learned: Implications for the Fed’s Mandate Peter R. Fisher

Chapter 8 A Slow Recovery with Low Inflation Allan H. Meltzer

Chapter 9 How Is the System Safer? What More Is Needed? Martin Neil Baily and Douglas J. Elliott

Chapter 10 Toward a Run-free Financial System John H. Cochrane

Chapter 11 Financial Market Infrastructure: Too Important to Fail Darrell Duffie

Chapter 12 “Too Big to Fail” from an Economic Perspective Steve Strongin

Chapter 13 Framing the TBTF Problem: The Path to a Solution Randall D. Guynn

Chapter 14 Designing a Better Bankruptcy Resolution Kenneth E. Scott

Chapter 15 Single Point of Entry and the Bankruptcy Alternative David A. Skeel Jr.

Chapter 16 We Need Chapter 14—And We Need Title II Michael S. Helfer

Remarks on Key Issues Facing Financial Institutions Paul Saltzman

Concluding Remarks George P. Shultz

Summary of the Commentary Simon Hilpert

Posted in Financial Crisis, Slow Recovery

Inequality Conference in Memory of Gary Becker at Stanford’s Hoover Institution

Last Thursday and Friday the Hoover Institution at Stanford hosted a wonderful Conference on Inequality in Memory of Gary Becker. John Raisian and I opened the conference commenting on the appropriateness of both the venue and the topic: Gary spent a great deal of time doing research at Hoover over the years, and he began diagnosing and recommending policy solutions to inequality problems decades ago, long before the current explosion of popular interest.

I recalled his policy advice on the issue two decades ago in a presidential campaign memo: “we have seen income distribution widen in the United States and other countries” and that reflects, he said, “a particular problem with the education and training of those at the lower end of the income distribution.” He advised that “the aim of policy reforms in this field should be to help stimulate economic growth by encouraging better quality and more effective schooling and training, especially for those at the bottom and middle of the human capital distribution.” This “will both raise economic growth and also reduce inequality in earnings.”

Gary took economics very seriously, including when he applied it to policy. For Gary, economics and economic policy were inseparable, and a goal of the conference was to bring out that inseparability. Here is a quick summary. A book on the conference will appear soon, and more information can be obtained from the individual speakers.

The conference began with an overview of the facts placed in context by Jim Pierson who made use of his provocative new book The Inequality Hoax and an informative chart book prepared for the conference by Tom Church.  Jim reviewed the data collected by Piketty and Saez and put these in the context of the recent policy debate in the US.

We then shifted to Casey Mulligan whose presentation, “The Effects of Redistribution Policies on Growth and Employment,” showed that attempts to reduce inequality through a host of new government re-distribution policies had the unintended consequence, at least during recent years, of lowering economic and job growth. At the end of his presentation Casey conjectured (in jest?) that the reason a survey of economists at the Chicago Booth School found that these “stimulus policies worked” was that no one on the survey took Gary’s price theory course either at Chicago or Columbia.

Josh Rauh’s session was called, “The Broad-Based Rise in the Return to Top Talent.”  Josh compared two opposing views of the recent increase in income inequality: the economic growth incentive view, in which lower marginal tax rates increase incentives and economic growth, versus the rent-seeking view, in which lower tax rates, for example, reduce the resistance of corporate boards to very high executive pay.  He presented reams of data and examples more consistent with the first view, which of course has bearing on the question of what to do.

Chad Jones, in the session “The Economic Determinants of Top Income Inequality,” presented a nice workable model—thus in the Becker tradition—that enabled him to determine the factors that affect the income distribution over time and across countries. A special feature of his model was a two parameter combination determining the pace of technical change and the dampening of  creative destruction.  He used the models to explain why income distribution did not widen as much in France as in the United States in recent years.

At the end of the first day of the conference, Eddie Lazear and George Shultz reminisced eloquently about their long association with Gary over the years both at Chicago and at Stanford. There is no way that I can do justice to their touching tributes, so you will have to wait for the conference volume.

The second day of the conference began with the session “Inter-generational Mobility and Income Inequality: Facts, Explanations, and Policy Implications.”  One of Gary’s former students, Jörg Spenkuch, presented a paper that he was working on with Gary when Gary died.  It was one of Gary’s last presentations at the Hoover Working Group on Economic Policy, and I remember that well.  It traced out the connection between the income distribution and inter-generational mobility.  A key issue in the model was the connection between parents’ human capital and the ability or effort with which parents are able to pass on that human capital to children.

The next session was a fascinating “debate” on “Income and Wealth Inequality in America and Policies to Address It” with Kevin Murphy and Emmanuel Saez. While they covered many issues, the main take-away was that Kevin Murphy focused on poor education (insufficient supply response) as the source of the inequality problem and recommended improvements in education, while Emmanuel Saez focused more on higher tax rates as the way to reduce inequality.

In keeping with the policy theme, the conference concluded with a Panel on Solutions, with John Cochrane, Lee Ohanian, and George Shultz focusing mainly on what policies would most help those below the 1%. John focused on the fundamental question of why so many in academia, the media, and policy circles seem to care so much about the 1%.  (A survey reported by Dan Kessler at the conference found that most other people do not care so much). John argued that such an emphasis gets in the way of implementing policies which actually help those with lower incomes. Lee Ohanian focused on education (with many graphic stories and statistics—including examples of what is actually on those achievement tests) and immigration reform. Shultz proposed a more hard-nosed, roll-up-your-sleeves approach with practical solutions including health and micro-finance programs like those promoted by Muhammad Yunnis. No one on this panel called for higher tax rates as a solution.

A stated purpose of the conference—starting from the early planning stages—was to address “the key policy question of what to do, with particular attention to those at the bottom of the income distribution and the overall effects on economic growth.” As evidenced by this last panel and indeed most of the other presentations and discussions at the conference, this was exactly how the conference turned out.

 

Posted in Teaching Economics

NICE-Squared (Or TWICE NICE)

Due to previous commitments in Hong Kong I could not attend today’s Bretton Woods: The Founders and the Future conference in New Hampshire, but I was invited to speak via video. Here is the text of my remarks.

I want to thank Larry Goodman for hosting this timely conference in Bretton Woods, and for giving me a chance to give some remarks.  In my view the time is ripe for a new international understanding, and perhaps even agreement.  It is good, for example, that IMF is revising its exceptional access framework in light of the unpleasant experiences of the recent European sovereign debt crisis.

But I want to focus today on the international aspects of monetary policy.  Soon after the end of the Bretton Woods system in the 1970s, monetary economists—myself included—started to use their brand new Keynesian models with rational expectations and price rigidities to examine how monetary policy should be conducted in a world of flexible exchange rates. They found two surprising things.

First, they found that simple steady-as-you-go, rule-like monetary policies would lead to a NICE outcome—that is a non-inflationary consistently expansionary, N-I-C-E, or NICE  outcome to use the term coined by Mervyn King.

Second, on the international side and even more surprising, they found that those same steady-as-you-go, rule-like monetary policies would also achieve most of the potential gains from international cooperation of monetary policy. And this would occur even if each central bank focused on its own country’s economic performance.  In other words the international monetary system would be NICE: near an internationally cooperative equilibrium, N-I-C-E, or NICE. One could say that the NICE system would help the world economy stay together during the NICE period.  Let’s just call it NICE-squared.

What is even more surprising is that the actual outcome in the years that followed—the  1980s, 1990s and until recently—seemed to bear out these NICE-squared predictions. As central banks moved toward more transparent, rules-based monetary policies—including through inflation-targeting—economic performance improved dramatically, especially compared with the 1970s, and an important step was when the Fed began to announce its federal funds target.

By choosing policies which worked well domestically, central banks contributed—in “invisible hand” like fashion—to better global economic conditions during this NICE-squared period. And toward the later part of this period, central banks in many emerging market countries began to move toward more rule-like policies.  As they did so, they began contributing positively to overall global monetary stability.

But during the past decade—especially since the end of NICE-squared—international spillover effects have again become a major policy issue.  Policy makers in emerging market countries from Brazil to India complain about adverse spillover of monetary policy in the US.   Policy makers in developed countries including Japan and Europe have pointed to the adverse exchange rate effects of monetary policies in the US and some have raised concerns about currency wars and competitive devaluations.  Many central banks—from Singapore to Switzerland—have been forced into near-zero or too-low-for-too-long policy rates have had to take actions, euphemistically called macro-prudential to prevent the booms and busts in housing or consumer durables markets.

What caused the end of the Nice-squared? Some say it was the financial crisis itself. Others say that international capital flows have exogenously become more volatile.

But the more obvious explanation is that monetary policy deviated from steady-as-you-go, rule-like policies of the NICE-squared period. Empirical research shows that such deviations in the United States and some other countries started about a decade ago when interest rates were held very low.  Researchers at the OECD and the BIS have detected a similar Global Great Deviation which is continuing to the present—especially when the large-scale unconventional central bank interventions are included.

So the implication is that we should try to go back to the steady-as-you-go, rule-like policies that worked in the NICE-squared period.  An international understanding and agreement will help. Such an agreement could instruct the IMF or the BIS, or even ask private non-profit groups, to monitor the extent to which central bank policies are steady and rule-like.

But will it be enough?  I think so.  The large destabilizing monetary-policy-induced capital flows motivated by search for yields would diminish. Fear of free falling exchange rates would be calmed as reliable central bank actions come to be expected.

A NICE-squared world would reappear. At least that is the hope and purpose of a conference like this. Thank you very much.

Notes: The first reference to “NICE” is from Mervyn King, Stamp Memorial Lecture, London School of Economics, October 2012; the term “Global Great Deviation” is from Boris Hofmann and Bilyana Bogdanova, “Taylor Rules and Monetary Policy: A Global Great Deviation?” BIS Quarterly Review, September 2012;  the term “fear of free falling” is from Carlos Vegh and Guillermo Vuletin, “Overcoming the fear of free falling: Monetary policy graduation in emerging markets,” NBER Working Paper No. 18175, June 2012.

Posted in International Economics

Family Economics and Macro Behavior at a Gary Becker Memorial

Kevin Murphy and I were invited to speak at a memorial session for Gary Becker at the Mont Pelerin Society meetings in Hong Kong yesterday.  My remarks focused on the time Gary spent each year at the Hoover Institution and on his foray into presidential politics, much like I wrote in this post, but I also was asked to delve into macro which is quite interesting

Gary wrote several good papers on macro back in the 1950s. In a 1952 paper with William Baumol, coming out of his undergraduate days at Princeton, Gary defended the classical economists showing that they were not nearly as naïve as Lange and Keynes claimed.  Then in a 1957 paper with Milton Friedman, he criticized empirical tests of the Keynesian consumption function, and followed up a year later with a reply to Lawrence Klein who reacted angrily to the criticism.

Most interesting was his 1956 “A Proposal For Free Banking,” a short paper which remained unpublished for 37 years, though Friedman referred to it in his famous 1960 Program for Monetary Stability.  Gary was reacting to the 100% reserve requirement proposal then popular at the University of Chicago, arguing that the banks were already too regulated.  He did recommend that the government maintain a monopoly on printing notes, because he was worried about an indeterminate price level.  While banks could issue checking deposits, holding reserves as needed to deal with currency demand, he argued that the need to convert to cash would lead to a finite amount of deposits and a determinate price level and that shifts in the currency deposit ratio would not be that great and could be stabilized.

No discussion of Gary’s contributions to macro would be complete without considering his Presidential address to the American Economic Association in Chicago in 1987.  I was at the talk and recall being surprised that he decided to concentrate on macroeconomics. He titled the talk “Family Economics and Macro Behavior.”  And he covered the gamut of the subject.

He was positive about the neoclassical growth model’s advances over the Malthus, but he criticized it for leaving out sustained growth in income per capita. As Becker put it, “The persistent growth in per capita incomes during the past two centuries is no easier to explain within the neoclassical framework than within the Malthusian” and the need to rely on “exogenous progress is a confession of failure to explain growth within the model.”  The neoclassical modelers were right to stress endogenous capital accumulation and the Malthusians were right for stressing fertility responses, he argued, but then went on to discuss the importance of adding the family to economic growth and traced out a model “combining the best features of the neoclassical and Malthusian models” in which parents choose both the number of children and the human capital bequeathed to each child, motivated by parental altruism or love toward children. “Altruism means that the utility of parents depends on the utility of each child,” an idea, once conceived, that was easy to work into the algebra.  So he added family economics to the Solow growth model simply by letting the parent’s utility function depend on the utility of the children.  This changed the results in important ways. In the event of a deep recession, a temporary decline in productivity could permanently lower aggregate income because of the decline in birth rates.

And it had other implications. He pointed out, referring to Robert Barro, that a “dose of family economics radially alters traditional conclusions about the effects of budget deficits on private saving” because “Parents offset any increase in future taxes with a greater bequest, and thus there is no effect on consumption. “ He then showed that this Ricardian equivalence result could be reversed if Social Security reduces the demand for children.

Becker also criticized the overlapping generation models because they did not include familial connections.  In his view the lack of connections between children and parents, husbands and wives and other members of the family led these models to focus on minor problems. He particular criticized the models as ways to justify the demand for money, as Sargent and Wallace had done. He argued that in both modern and ancient times, “children have been an important resource and money balances an unimportant resource of the elderly in practically all societies, whether simple or complex.”

Regarding shorter run cycles, Gary had to admit that none of the modern macroeconomic theories relied much on family behavior to cause business cycles, but he did mention that Hansen’s secular stagnation concept related to declining population growth, which could have been an endogenous response to the great depression.

Many of these family economics ideas are now an integral part of the macro mainstream. In fact in the latest edition of the Handbook of Macroeconomics Harald Uhlig and I are including a chapter on “Family Macroeconomics” by Matthias Doepke and Michele Tertilt and another paper on “The Macroeconomics of Time Allocation” by Mark Aguiar and Erik Hurst.

 

Baumol, William J. and Gary S. Becker (1952), “The Classical Monetary Theory: The Outcome of the Discussion,” Economica, New Series, Vol. 19, No. 76. Nov, pp. 355-376.

Becker, Gary S. (1956), “A Proposal for Free Banking,” published later with a new introduction in L. H. White (Ed.) (1993) Free Banking, Aldershot, U.K.: Elgar, 1993, pp. 20-25

Becker, Gary S. and Milton Friedman (1957), “A Statistical Illusion in Judging Keynesian Models,” Journal of Political Economy, Vol. 65, No. 1, Feb. pp. 64-75

Becker, Gary S. and Milton Friedman (1958), “The Friedman-Becker Illusion: Reply” The Journal of Political Economy, Vol. 66, No. 6, Dec. pp. 545-547

Becker, Gary S. (1988), “Family Economics and Macro Behavior,” The American Economic Review, Vol. 78, No. 1, Mar., pp. 1-13.

Posted in Teaching Economics

Terminal Policy Rates: Hot, Cold and About Right

Last week I flew overnight from Cartagena, Colombia (90o F, very humid) to Jackson Hole, USA (37o F, plus wind chill). In both places I was asked a lot about monetary policy—by bankers at the conference in Colombia and by central bankers at the conference in the US. The most common question was “What is the real equilibrium policy interest rate?”  Is it 2% as in the original Taylor rule, or is it 0%, (Taylor rule minus 2) as the people at PIMCO (Paul McCulley and Bill Gross) have been arguing, or is it even negative as the new secular stagnationists such as Larry Summers would have it.

FOMC members have expressed their views on this for a while, with a median of around 4% nominal, which translates into 2% real if you use their 2% target inflation rate.  Recently their median is slightly lower, 3-3/4 %, and that is also what former governor Larry Meyer at Macroeconomic Advisers is saying, though this is still not much different from 4%.

Paul McCulley admits befuddlement by all this and is making the case for a change.  In a recent PIMCO newsletter he says “…for me, it is so befuddling that the Fed, and thus the markets, still clings – even if reluctantly – to one man’s estimate of an “equilibrium” real fed funds rate, made in 1993: John Taylor, who assumed it to be 2%….I’ve got to hand it to John, whom I’ve known and liked for a very long time: Twenty-one years on, and you are still hardwired into the catechism of Fed policy!”

Well there are other plenty of other catechism type “questions-and-answers” that are not hardwired, though I wish they were, such as “Q: Should the Fed adopt and state a rule or strategy for the instruments of monetary policy? A:Yes”

I have not seen convincing evidence of a new neutral for the terminal federal funds rate in a policy rule.  The 2 percent real rate was chosen back when the potential economic growth rate was estimated to be quite low (2.2% in my 1993 paper).   Most important in my view is that the poor economic performance in the developed countries in the past few years is due to economic policy in general (which can change) not to some exogenously imposed “new neutral.” Also, when you ask monetary policy analysts in emerging market central banks around the world, they do not see evidence for such low equilibrium rates. For example, I learned in Colombia the real policy rate has averaged about 2 percent since inflation targeting began. My informal poll of emerging market central bankers at Jackson Hole revealed the same: two to three percent.

Of course, this debate centers on the real policy rate in the long run.  There is more room for disagreement about the short run or the medium run, but for now the terminal rate of 4% still seems about right to me.

Posted in Monetary Policy

The American Economy: Turtle or Caged Eagle?

Last week I was on a panel with Stanford President John Hennessy and Congressman Paul Ryan at the new Hoover Institution Offices in Washington. Al Hunt moderated the discussion which focused on policies to raise economic growth. The video is here.

The discussion revealed both a sense of urgency and of optimism.  I am convinced that we sorely need a major change in US economic policy to address the problem of low economic growth, only 2 percent since the end of the recession 5 years ago compared to years of 4 or 5 percent growth following earlier deep recessions in the US. That’s huge. It means that we have far fewer resources available for both private and public use.

I argued, as I have been arguing for a long time, that the cause of weak growth is poor economic policy. But Al Hunt asked me if it was all over for a strong growth in America. After all, more and more people are talking of secular stagnation and telling stories that we have picked all the low hanging fruit. I just don’t see that, maybe because I come from Silicon Valley where you see invention and innovation all over the place. But neither does John Hennessy, who knows as much as anyone about information and technology (also from Silicon Valley), or Paul Ryan, who knows as much as anyone about policy. You get a sense of the optimism from watching them on the video.

The cover of The Economist last week portrayed the US economy as a turtle crawling along as its rider tragically tries to get it to move faster, but it is clearly incapable. This may be the way that the secular stagnationists or high-hanging fruiters see it.

Economist turtle

To me a much better picture for the US economy is a a sleeping giant ready to be awakened or better yet, a caged eagle. If you removed the cage of poor policy. then the economy would soar again.

caged eagle

Posted in Slow Recovery, Teaching Economics