This all hinges on how you define expert economists.
Economics as a field is dominated by a very small handful of elite institutions. If you want to publish regularly in top journals, you need to be a professor at one of these institutions. These journals also gatekeep what gets published so as to define narrow parameters of what is mainstream economics. In fact famous economists often complain that there is in practice a strict formula to get published and that this is detrimental to the field. However the problem never actually changes.
So the system is almost run like a cartel. And it is effectively protected from criticism.
This elite system is what Matt refers to when he mentions economic expertise. If you surveyed all economists from the top 200 universities globally you might get a different picture.
In my view this system of elite protection is as much the reason for the 'bias' as the other reasons Matt identifies.
It's also true that within this elite group it's common to be very involved in policy. That is a very important source of bias on this controversy. If the economy has been way bellow its growth potential for the last decade that implies that the last decade of policy has been a huge failure. For obvious reasons those involved in policy would rather avoid this implication. The idea that we need to experiment with policy in order to get more information is also not very appealing since it implies we don't know what we are doing.
The confluence of economists involved in policy and academic macro at an institution like Harvard also has powerful incentives to stay within a certain 'Beltway consensus'. This helps explain a form of groupthink even more powerful than simply having the experience of being well of and not working starting level jobs etc.
One final point.
I find a good differentiator of mainstream vs heterodox schools to be that all the heterodox people believe economics should be open to outside schools of thought.
I would just say that 2019 was a pretty normal stable economy that had been trucking along for many years. What we have now is the immediate aftermath of a large exogenous economic shock that is still being absorbed. Pursuing the same polices against those two different backdrop will not necessarily produce the same results.
I would posit the risk of inflation is far higher right now given the dislocation of so many industries and the supply chain disruptions, the uneven economic activity (no one went out to dinner for a year, but everyone built a deck), the desperately needed 5% of the workforce still not back at work for various reasons, etc. These things may be considered "transient" but all it takes for inflation is for the collective psychology of the markets to determine that enough prices have gone up for long enough that they are likely to keep going up. With Covid being where it is globally, I see many more disruptions in the next few years. All this while consumer savings are at high point, the fed keeps rates at the lower limit, and fiscal stimulus is at multiples of prior records. From where I sit, inflation seems like a far more likely in 2021 than in 2019.
Full employment is great...if it's not built on a fiscal and monetary house of cards.
"Follow the science", but economics is rightly called the "dismal science". I don't care what kind of sophisticated analysis says we can just keep borrowing and printing money. It's too convenient for politicians who love nothing better than showering their constituents and campaign contributors with all kinds of goodies.
This is a great post. Only thing I take issue with is your "biased worldview" argument. The macroeconomic establishment may have a biased worldview, but I don't see why your anecdotal evidence about help wanted signs in the window is any better. You can come up with anecdotal evidence mixed with a fun story to justify just about anything. It would be better to see links to actual empirical research on this topic. By empirical I mean microeconometric studies with some sort of causal identification strategy. If few exist, then say that. I actually see that as a great argument in favor of your position. The argument against raising the minimum wage before Krueger and Card was mostly theoretical, and look how that turned out. In general, macro theory has a lot of problems. If DSGE models were completed halted tomorrow, absolutely nothing would be lost.
I'm old enough to remember the late nineties when people were debating the "natural" rate of unemployment and what it meant that the Clinton economy was below it without inflation. I can't believe it was another two decades before policy makers started questioning it again.
It takes me back to the good (bad) old days of Greenspan warning that it was dangerous to pay down the national debt too quickly and giving cover to W's tax cuts.
This is a terrific post from Matt. I think one thing I'd add is that the "we're at full employment" chorus to my recollection started MUCH earlier than 2015 and that the econ blogosphere spent a lot of time kicking around ideas that (1) the natural rate was like 5-6% unemployment and (2) even if that was the natural rate, the difference between the natural rate and the current rate could be explained by the near/actual 0 value add of many of those employees.
I'm a big MR fan but the subsequent developments in the labor market make e.g. these posts look not so hot:
But it really is the case that TC, along w many others, just didn't (doesn't?) grok make up growth. He'd later post:
"…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. "
Clearly his premise is that there's some "real" reason the economy will get booming again when it's pretty literally just making sure all the NGDP the CB implicitly promises ends up back in the economy after a miss. If that premise doesn't anchor your analysis, you can come up w all kinds of reasons the number of folks the economy can employ might suddenly change for the worse.
Parenthetically: I realize that Cowen is not an orthodox economist but as much as Matt's point that economic orthodoxy has still not come around to any of the "run it hot" strands of thinking is important, I think remembering the policy debate that produced the Biden consensus is similarly relevant. Cowen is easy to foreground bc he's prolific and his blog still exists.
I really did not realize that “full employment is really good” was at all a controversial statement. This seemed so obvious to me in my first macro class.
It's not that nobody realizes that full employment is good. It's that it's historically been viewed as something that is traded off with inflation. NAIRU, recall, means "non-accelerating inflation rate of unemployment" and the debate has consistently been about where exactly that is. Circa 2010, the consensus was that was, say, 5-6%. As U3 dropped to 6% in late 2014, the policy debate really heated up even as indicators of future inflation never took off.
I agree with you on US macro policy, and I’m very excited to see how this strategy plays out. However, just looking at the FRED graph with the red line, isn’t it worrying that the times when the economy has hit its “true” potential have preceded large crashes? It certainly feels like we’re in an asset price bubble - see Tesla, GME, Bitcoin, etc - though I don’t want to put too fine a point on it since this situation is so unique.
It's been a long time since I took economics, but I suspect Matt's right on full employment. One thing I will say about economic policy: we do not know what we do not know, and with something as complex and multifaceted as the economy we're going to have numerous unintended consequences. Some of those consequences will be good, some will be bad. The best we can do is try to help as many people as possible as simply as possible.
This means it may be time to get out of the stock market. For years, corporations have had exceptionally high profits that have goosed their share prices into what used to be frothy territory (based on the usual metrics) while wages remained stagnant. Labor being one of the largest components of corporate expense, this stagnancy goes a long way to explain those extra profits.
This won't effect corporations that primarily employ knowledge workers like tech companies (who have long paid premiums for the scarce supply), but those that employ retail, manufacturing and service workers? This full employment could depress their future profits enough that their stock prices take a hit.
I'm not saying this is a bad thing at all - as Matt alludes to, this mechanism may be what gets us closer to "equity" and real wage gains for the underclasses as well as the middle class.
My question is epistemological and not at all a criticism of Matt's point, but how do we know what the "mainstream consensus of economists" is? It is merely posited in this piece and, fine, life is short, so I accept Matt's shortcut. But is it true? How do we know? I read Krugman and DeLong all the time, and they're very respected economists and they certainly share Matt's position. I'm sure one could throw Stiglitz in there as well, if one wants to collect names of Nobel Prize winners.
Most economists are working slobs doing what most academics do, and their voices don't really play in the national debate as they pursue their day jobs. So how would we know what the "mainstream consensus" is and why should we actually care? I say, we can't because there isn't one. You pick your team, you try to implement your policies, you roll the dice and you see what happens.
That said, I'm totally on board with everything Matt is proposing.
As a Philadelphian who's been to Sheetz and had a reasonably pleasant experience, I'm torn on this. (OTOH, I have previously expressed that Fetterman and Josh Shapiro have their 2022 ambitions backwards--Fetterman should be running for Governor and Shapiro should be the consensus pick for the Senate.) (I've expressed this in greater detail in this thread: https://www.slowboring.com/p/thursday-thread-882/comments#comment-1810206)
Aside: A slightly wonky primer of how macro got here and how economists might want to think a little more about the sociology of economic impacts is in Akerlof's 2007 AER piece. Two sections might be of interest for those who want to dive into it: the section on natural employment levels and the section on wages: https://pubs.aeaweb.org/doi/pdf/10.1257/aer.97.1.5
This all hinges on how you define expert economists.
Economics as a field is dominated by a very small handful of elite institutions. If you want to publish regularly in top journals, you need to be a professor at one of these institutions. These journals also gatekeep what gets published so as to define narrow parameters of what is mainstream economics. In fact famous economists often complain that there is in practice a strict formula to get published and that this is detrimental to the field. However the problem never actually changes.
So the system is almost run like a cartel. And it is effectively protected from criticism.
This elite system is what Matt refers to when he mentions economic expertise. If you surveyed all economists from the top 200 universities globally you might get a different picture.
In my view this system of elite protection is as much the reason for the 'bias' as the other reasons Matt identifies.
It's also true that within this elite group it's common to be very involved in policy. That is a very important source of bias on this controversy. If the economy has been way bellow its growth potential for the last decade that implies that the last decade of policy has been a huge failure. For obvious reasons those involved in policy would rather avoid this implication. The idea that we need to experiment with policy in order to get more information is also not very appealing since it implies we don't know what we are doing.
The confluence of economists involved in policy and academic macro at an institution like Harvard also has powerful incentives to stay within a certain 'Beltway consensus'. This helps explain a form of groupthink even more powerful than simply having the experience of being well of and not working starting level jobs etc.
One final point.
I find a good differentiator of mainstream vs heterodox schools to be that all the heterodox people believe economics should be open to outside schools of thought.
Ok I looked at some surveys and I'm totally wrong.
I would just say that 2019 was a pretty normal stable economy that had been trucking along for many years. What we have now is the immediate aftermath of a large exogenous economic shock that is still being absorbed. Pursuing the same polices against those two different backdrop will not necessarily produce the same results.
I would posit the risk of inflation is far higher right now given the dislocation of so many industries and the supply chain disruptions, the uneven economic activity (no one went out to dinner for a year, but everyone built a deck), the desperately needed 5% of the workforce still not back at work for various reasons, etc. These things may be considered "transient" but all it takes for inflation is for the collective psychology of the markets to determine that enough prices have gone up for long enough that they are likely to keep going up. With Covid being where it is globally, I see many more disruptions in the next few years. All this while consumer savings are at high point, the fed keeps rates at the lower limit, and fiscal stimulus is at multiples of prior records. From where I sit, inflation seems like a far more likely in 2021 than in 2019.
Full employment is great...if it's not built on a fiscal and monetary house of cards.
"Follow the science", but economics is rightly called the "dismal science". I don't care what kind of sophisticated analysis says we can just keep borrowing and printing money. It's too convenient for politicians who love nothing better than showering their constituents and campaign contributors with all kinds of goodies.
This is a great post. Only thing I take issue with is your "biased worldview" argument. The macroeconomic establishment may have a biased worldview, but I don't see why your anecdotal evidence about help wanted signs in the window is any better. You can come up with anecdotal evidence mixed with a fun story to justify just about anything. It would be better to see links to actual empirical research on this topic. By empirical I mean microeconometric studies with some sort of causal identification strategy. If few exist, then say that. I actually see that as a great argument in favor of your position. The argument against raising the minimum wage before Krueger and Card was mostly theoretical, and look how that turned out. In general, macro theory has a lot of problems. If DSGE models were completed halted tomorrow, absolutely nothing would be lost.
Man - Uber and Lyft are so screwed.
I'm old enough to remember the late nineties when people were debating the "natural" rate of unemployment and what it meant that the Clinton economy was below it without inflation. I can't believe it was another two decades before policy makers started questioning it again.
It takes me back to the good (bad) old days of Greenspan warning that it was dangerous to pay down the national debt too quickly and giving cover to W's tax cuts.
This is a terrific post from Matt. I think one thing I'd add is that the "we're at full employment" chorus to my recollection started MUCH earlier than 2015 and that the econ blogosphere spent a lot of time kicking around ideas that (1) the natural rate was like 5-6% unemployment and (2) even if that was the natural rate, the difference between the natural rate and the current rate could be explained by the near/actual 0 value add of many of those employees.
I'm a big MR fan but the subsequent developments in the labor market make e.g. these posts look not so hot:
https://marginalrevolution.com/marginalrevolution/2010/07/zero-marginal-product-workers.html
https://marginalrevolution.com/marginalrevolution/2011/01/scott-sumner-on-zero-mp-workers.html
But it really is the case that TC, along w many others, just didn't (doesn't?) grok make up growth. He'd later post:
"…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. "
https://marginalrevolution.com/marginalrevolution/2011/01/cowen-and-lemke-on-the-job-market.html
Clearly his premise is that there's some "real" reason the economy will get booming again when it's pretty literally just making sure all the NGDP the CB implicitly promises ends up back in the economy after a miss. If that premise doesn't anchor your analysis, you can come up w all kinds of reasons the number of folks the economy can employ might suddenly change for the worse.
Parenthetically: I realize that Cowen is not an orthodox economist but as much as Matt's point that economic orthodoxy has still not come around to any of the "run it hot" strands of thinking is important, I think remembering the policy debate that produced the Biden consensus is similarly relevant. Cowen is easy to foreground bc he's prolific and his blog still exists.
I really did not realize that “full employment is really good” was at all a controversial statement. This seemed so obvious to me in my first macro class.
It's not that nobody realizes that full employment is good. It's that it's historically been viewed as something that is traded off with inflation. NAIRU, recall, means "non-accelerating inflation rate of unemployment" and the debate has consistently been about where exactly that is. Circa 2010, the consensus was that was, say, 5-6%. As U3 dropped to 6% in late 2014, the policy debate really heated up even as indicators of future inflation never took off.
https://fred.stlouisfed.org/graph/fredgraph.png?g=Erey
https://fred.stlouisfed.org/graph/fredgraph.png?g=EreL
I agree with you on US macro policy, and I’m very excited to see how this strategy plays out. However, just looking at the FRED graph with the red line, isn’t it worrying that the times when the economy has hit its “true” potential have preceded large crashes? It certainly feels like we’re in an asset price bubble - see Tesla, GME, Bitcoin, etc - though I don’t want to put too fine a point on it since this situation is so unique.
It's been a long time since I took economics, but I suspect Matt's right on full employment. One thing I will say about economic policy: we do not know what we do not know, and with something as complex and multifaceted as the economy we're going to have numerous unintended consequences. Some of those consequences will be good, some will be bad. The best we can do is try to help as many people as possible as simply as possible.
This means it may be time to get out of the stock market. For years, corporations have had exceptionally high profits that have goosed their share prices into what used to be frothy territory (based on the usual metrics) while wages remained stagnant. Labor being one of the largest components of corporate expense, this stagnancy goes a long way to explain those extra profits.
This won't effect corporations that primarily employ knowledge workers like tech companies (who have long paid premiums for the scarce supply), but those that employ retail, manufacturing and service workers? This full employment could depress their future profits enough that their stock prices take a hit.
I'm not saying this is a bad thing at all - as Matt alludes to, this mechanism may be what gets us closer to "equity" and real wage gains for the underclasses as well as the middle class.
My question is epistemological and not at all a criticism of Matt's point, but how do we know what the "mainstream consensus of economists" is? It is merely posited in this piece and, fine, life is short, so I accept Matt's shortcut. But is it true? How do we know? I read Krugman and DeLong all the time, and they're very respected economists and they certainly share Matt's position. I'm sure one could throw Stiglitz in there as well, if one wants to collect names of Nobel Prize winners.
Most economists are working slobs doing what most academics do, and their voices don't really play in the national debate as they pursue their day jobs. So how would we know what the "mainstream consensus" is and why should we actually care? I say, we can't because there isn't one. You pick your team, you try to implement your policies, you roll the dice and you see what happens.
That said, I'm totally on board with everything Matt is proposing.
Since I fundamentally disagree with the author on core economic principles and I'm not going to change his mind, nor he mine, I'll just say this:
Sheetz > Wawa.
Fetterman 2022!
I had no idea what you were on about, so I looked it up. Crazy.
As a Philadelphian who's been to Sheetz and had a reasonably pleasant experience, I'm torn on this. (OTOH, I have previously expressed that Fetterman and Josh Shapiro have their 2022 ambitions backwards--Fetterman should be running for Governor and Shapiro should be the consensus pick for the Senate.) (I've expressed this in greater detail in this thread: https://www.slowboring.com/p/thursday-thread-882/comments#comment-1810206)
What does smets wouters say?
Aside: A slightly wonky primer of how macro got here and how economists might want to think a little more about the sociology of economic impacts is in Akerlof's 2007 AER piece. Two sections might be of interest for those who want to dive into it: the section on natural employment levels and the section on wages: https://pubs.aeaweb.org/doi/pdf/10.1257/aer.97.1.5
Great piece. Hope you write this in a more accessible venue.