" Fiscal policy is contractionary, as the COVID stimulus wears off." -- No.
Going from very, wildly expansionary (Biden) to very expansionary (pre-Covid Trump) is still not absolutely contractionary, tho one might call it relatively contractionary. Like calling a Zuckerberg or Musk whose market wealth has dropped by tens of billions "now poor".
If a fiscal policy is at the non-inflationary maximally expansionist, as I feel Trump's was (prove me wrong!), than any more gov't spending / fiscal policy will be inflationary (by post hoc definition). So Biden's excessive stimulus was too much.
The memoir looks interesting. I'll be especially interested in the thoughts about Japan. I used to believe Friedman more, but now believe that, while printing money is a necessary condition for inflation, it's not always sufficient.
The 70s US & global inflation was part of the Baby Boomers economically being adult consumers faster than they became experienced & highly productive producers: - so a LOT more goods were being bought, including on new credit cards, with "working poor" folk wanting to become middle class consumers. And more workers, including more women, increased supply (production), but at lagged rate until high school graduation rates plateaued.
This demographic increased demand shock caused a lot more factories to be made and to expand to supply the desired products (at prices buyers would pay for).
There was also increased US money creation, especially after Nixon ended the final gold standard -- this was necessary, but not sufficient.
The HUGE increase in oil prices as OPEC became an effective cartel, resulted in big incomes shifts away from oil-importing countries, like the US was and became more so, even as oil import prices increased. Energy price increases look a lot like inflation, because everything sold includes some energy cost component.
Demographics, US policy, oil/energy shock -- all three were important in the 70s Stagflation.
<i>Data from the CDC says that 24,576 Americans were homicide victims in 2020, compared to 19,141 homicides in 2019, a 28% increase. Black America bore the brunt of the increase, with the number of Black homicide victims going from 10,187 in 2019 to 13,780 in 2020, a 35% increase. Use this link if you want to do a deep dive.</i>
There is a new factor impacting wester economies and that is "permissions" and that drastically changes economic growth. We now live in a "vetocracy" where where the "tragedy of the anti-commons" results in no real progress with every nut case or bureaucratic turf fight or extortion demand results in delays or project blocks. The best example being in the energy sector, where activists with narrow self-interest have shut down the nuclear reactors in the West and now we are worried about lack of carbon free energy. Meanwhile the time to obtain "permissions" for off shore wind farms is beyond a decade and fracking for lower carbon natural gas (available all over the world) has become impossible.
The economics profession has also forgot about dynamics where printing money and inflation have time delay and demand changes require time for supplies to respond.
Regarding your memoir, I'm surprised that the only substantive advice to a young macroeconomist is to focus on economic history and financial institutions. Yes, both are important but you are ignoring other relevant issues to understand "the economy", starting with how politics and governments work.
Also, I'm NOT surprised that you rely on Blinder's old macro to analyze what is going on. Your points, however, are wrong. First, the textbook's fiscal policy is not contractionary (remember that the G of the old model refers only to direct purchases of goods and services, not to transfer payments). Second, the textbook's monetary policy has nothing to do with what the Fed is doing (a little player in the world economy's financial markets trying "to fine tune" the prices and returns of a very large number of assets). Third, the textbook's supply shocks which could explain most of what is happening are not related to the war (by itself a minor issue in relation to the world economy) and China's recent grotesque responses to a fake pandemic (some day we should review seriously what has happened in China since January 2020). The relevant supply shocks are related to politics and government (at the national and especially at the international level) because of the uncertainty about emerging commitments to big "structural" changes (yes, the old macro is useless to analyze the consequences of the senile world "leaders" actions).
This is the abstract of Nicholas Stern's latest proposal for analyzing the consequences of and policy responses to climate change:
The case for action on climate change with urgency and at scale rests on the immense magnitude of climate risk, the very rapid emissions reductions which are necessary, and that there is a real opportunity to create a new and attractive form of growth and development. The analysis must be based on a dynamic approach to the economics of public policy, set in a complex, imperfect and uncertain world. The economics of climate change, and further, economics more broadly, must change to respond to the challenge of how to foster rapid transformation. It is time for economics and economists to step up.
Interesting points about the G and shocks. Arnold's main point about public intellectuals: explain your reasoning and consider likely refutations and weak points. In that light, what's your alternative model--the one that correctly incorporates your point above?
I don't have an alternative model to explain "the economy" --even small economies like Chile, where I live. If I had one, I would not be commenting Arnold's insights and frustrations.
I'm puzzled by "Monetary policy is contractionary (by traditional measures)". I thought economists considered the Taylor Rule to be one of the best of the traditional measures. It seems to be saying interest rates would need to get above around 9% to be contractionary. (I prefer to use the TIPS spread, which says policy is moderately inflationary).
As you once did, I teach economics to high school students. I like and have used your "Specialization and Trade" in my classes.
This is a specific history question you may be able to answer.
In Advanced Placement Economics, we make extensive use of the Aggregate Demand/Aggregate Supply Model. It's the introductory version of the "IS-LM-AS" model you mention. I studied economics in 1968 and 1969, then again from 1977-1979. My old Samuelson textbook used the expenditure-output model, or Keynesian Cross. Macro emphasis in graduate school (UChicago MBA) was mainly on money, and I don't recall any AD/AS; we had the 2nd edition of David Laidler's "The Demand for Money" which uses IS/LM and makes no mention of AD/AS. His 4th edition (1993) does include an excellent description of the IS/LM model and its relation to the AD/AS model.
Almost universally, it seems to me, current discussions use a now-standard AD/AS model (price level on vertical axis, real GDP on horizontal, downward sloping AD, upward sloping short run AS, vertical long run AS; equilibrium at intersection of AD & SRAS).
I have looked for but been unable to find the source of this AD/AS model. It seems odd to me that such a pervasive model would have no identifiable source in economic journals. Perhaps it appeared in a '70s or '80s textbook and caught on that way.
Thanks! A used Dornbusch & Fischer 1978 1st edition was delivered this week & confirms your good guess. Going back to the beginning usually aids my understanding. Whether this is the first publication of the model or just the first one I've found, their thorough treatment of AD/AS is helpful and serves my purpose.
You may or may not see my reply to Arnold. His hunch was correct, Dornbusch & Fischer did describe the AD/AS model in their 1978 1st edition. I'll hold off for now on the deep dive to the harder-to-find Hansen & McKenna works. I very much appreciate your suggestions and your frequent thoughtful comments here.
‘ If you live long enough, and haven’t been lobotomized…’
Only if you have a frontal lobe to start with. Today’s political class and Socialists are born without one.
" Fiscal policy is contractionary, as the COVID stimulus wears off." -- No.
Going from very, wildly expansionary (Biden) to very expansionary (pre-Covid Trump) is still not absolutely contractionary, tho one might call it relatively contractionary. Like calling a Zuckerberg or Musk whose market wealth has dropped by tens of billions "now poor".
If a fiscal policy is at the non-inflationary maximally expansionist, as I feel Trump's was (prove me wrong!), than any more gov't spending / fiscal policy will be inflationary (by post hoc definition). So Biden's excessive stimulus was too much.
The memoir looks interesting. I'll be especially interested in the thoughts about Japan. I used to believe Friedman more, but now believe that, while printing money is a necessary condition for inflation, it's not always sufficient.
The 70s US & global inflation was part of the Baby Boomers economically being adult consumers faster than they became experienced & highly productive producers: - so a LOT more goods were being bought, including on new credit cards, with "working poor" folk wanting to become middle class consumers. And more workers, including more women, increased supply (production), but at lagged rate until high school graduation rates plateaued.
This demographic increased demand shock caused a lot more factories to be made and to expand to supply the desired products (at prices buyers would pay for).
There was also increased US money creation, especially after Nixon ended the final gold standard -- this was necessary, but not sufficient.
The HUGE increase in oil prices as OPEC became an effective cartel, resulted in big incomes shifts away from oil-importing countries, like the US was and became more so, even as oil import prices increased. Energy price increases look a lot like inflation, because everything sold includes some energy cost component.
Demographics, US policy, oil/energy shock -- all three were important in the 70s Stagflation.
(This week, but not tonight, I'll read more...)
Glenn's substack has a few relevant charts about US Blacks and economics:
https://glennloury.substack.com/p/responding-to-the-present-crisis?s=r
(by guest Clifton Roscoe)
<i>Data from the CDC says that 24,576 Americans were homicide victims in 2020, compared to 19,141 homicides in 2019, a 28% increase. Black America bore the brunt of the increase, with the number of Black homicide victims going from 10,187 in 2019 to 13,780 in 2020, a 35% increase. Use this link if you want to do a deep dive.</i>
There is a new factor impacting wester economies and that is "permissions" and that drastically changes economic growth. We now live in a "vetocracy" where where the "tragedy of the anti-commons" results in no real progress with every nut case or bureaucratic turf fight or extortion demand results in delays or project blocks. The best example being in the energy sector, where activists with narrow self-interest have shut down the nuclear reactors in the West and now we are worried about lack of carbon free energy. Meanwhile the time to obtain "permissions" for off shore wind farms is beyond a decade and fracking for lower carbon natural gas (available all over the world) has become impossible.
The economics profession has also forgot about dynamics where printing money and inflation have time delay and demand changes require time for supplies to respond.
Regarding your memoir, I'm surprised that the only substantive advice to a young macroeconomist is to focus on economic history and financial institutions. Yes, both are important but you are ignoring other relevant issues to understand "the economy", starting with how politics and governments work.
Also, I'm NOT surprised that you rely on Blinder's old macro to analyze what is going on. Your points, however, are wrong. First, the textbook's fiscal policy is not contractionary (remember that the G of the old model refers only to direct purchases of goods and services, not to transfer payments). Second, the textbook's monetary policy has nothing to do with what the Fed is doing (a little player in the world economy's financial markets trying "to fine tune" the prices and returns of a very large number of assets). Third, the textbook's supply shocks which could explain most of what is happening are not related to the war (by itself a minor issue in relation to the world economy) and China's recent grotesque responses to a fake pandemic (some day we should review seriously what has happened in China since January 2020). The relevant supply shocks are related to politics and government (at the national and especially at the international level) because of the uncertainty about emerging commitments to big "structural" changes (yes, the old macro is useless to analyze the consequences of the senile world "leaders" actions).
This is the abstract of Nicholas Stern's latest proposal for analyzing the consequences of and policy responses to climate change:
The case for action on climate change with urgency and at scale rests on the immense magnitude of climate risk, the very rapid emissions reductions which are necessary, and that there is a real opportunity to create a new and attractive form of growth and development. The analysis must be based on a dynamic approach to the economics of public policy, set in a complex, imperfect and uncertain world. The economics of climate change, and further, economics more broadly, must change to respond to the challenge of how to foster rapid transformation. It is time for economics and economists to step up.
https://doi.org/10.1093/ej/ueac005
Can anybody argue for his approach?
Interesting points about the G and shocks. Arnold's main point about public intellectuals: explain your reasoning and consider likely refutations and weak points. In that light, what's your alternative model--the one that correctly incorporates your point above?
I don't have an alternative model to explain "the economy" --even small economies like Chile, where I live. If I had one, I would not be commenting Arnold's insights and frustrations.
I'm puzzled by "Monetary policy is contractionary (by traditional measures)". I thought economists considered the Taylor Rule to be one of the best of the traditional measures. It seems to be saying interest rates would need to get above around 9% to be contractionary. (I prefer to use the TIPS spread, which says policy is moderately inflationary).
I no longer believe that deficit spending causes higher interest rates. My belief in the merits of supply side economics has been fortified.
Arnold,
As you once did, I teach economics to high school students. I like and have used your "Specialization and Trade" in my classes.
This is a specific history question you may be able to answer.
In Advanced Placement Economics, we make extensive use of the Aggregate Demand/Aggregate Supply Model. It's the introductory version of the "IS-LM-AS" model you mention. I studied economics in 1968 and 1969, then again from 1977-1979. My old Samuelson textbook used the expenditure-output model, or Keynesian Cross. Macro emphasis in graduate school (UChicago MBA) was mainly on money, and I don't recall any AD/AS; we had the 2nd edition of David Laidler's "The Demand for Money" which uses IS/LM and makes no mention of AD/AS. His 4th edition (1993) does include an excellent description of the IS/LM model and its relation to the AD/AS model.
Almost universally, it seems to me, current discussions use a now-standard AD/AS model (price level on vertical axis, real GDP on horizontal, downward sloping AD, upward sloping short run AS, vertical long run AS; equilibrium at intersection of AD & SRAS).
I have looked for but been unable to find the source of this AD/AS model. It seems odd to me that such a pervasive model would have no identifiable source in economic journals. Perhaps it appeared in a '70s or '80s textbook and caught on that way.
Do you know the source?
Thanks for everything you do.
I would guess that the Dornbusch and Fischer text used that model
Arnold,
Thanks! A used Dornbusch & Fischer 1978 1st edition was delivered this week & confirms your good guess. Going back to the beginning usually aids my understanding. Whether this is the first publication of the model or just the first one I've found, their thorough treatment of AD/AS is helpful and serves my purpose.
Best regards,
John
Arnold,
I’d like to send you an email with comments in advance of your call tomorrow afternoon.
It’s long & not suitable for publication on your Substack.
Could you please let me know an email address where you'll see it?
If it does, more to follow.
Thanks, John
Send to arnoldsk at us dot net
Check Alvin Hansen's book on business cycles (1951) and Joseph P. McKenna on aggregate analysis (first edition 1955).
Dear EB-Ch,
You may or may not see my reply to Arnold. His hunch was correct, Dornbusch & Fischer did describe the AD/AS model in their 1978 1st edition. I'll hold off for now on the deep dive to the harder-to-find Hansen & McKenna works. I very much appreciate your suggestions and your frequent thoughtful comments here.
Best regards,
JJT