Friday, September 19, 2014

What Have We Learned Since 2009?

In September 2009, Paul Krugman wrote "How Did Economists Get It So Wrong? The key points in that magazine article were:

1. Economists did not see the financial crisis coming, therefore there is something wrong with economics.
2. It's not hard to see what is wrong with economics - it got seriously sidetracked, roughly in 1970.
3. What to do? According to Krugman:
First, they have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds. Second, they have to admit — and this will be very hard for the people who giggled and whispered over Keynes — that Keynesian economics remains the best framework we have for making sense of recessions and depressions. Third, they’ll have to do their best to incorporate the realities of finance into macroeconomics.
So, what's changed since 2009, at least in Krugman's mind? Not much, apparently. Krugman's Monday NYT column was titled "How to Get it Wrong." Now it's not just the economists who are stupid/misguided/nefarious - it's the policymakers as well. Maybe this is good news if you are an economist. If you are an economist and a policymaker, not so good, I'm afraid.

Not one to shy away from hyperbole and invective, Krugman tells us about an "enormous intellectual failure" in economics, and the "sins of economists, who far too often let partisanship or personal self-aggrandizement trump their professionalism." Economists are clearly a group of bad people, and if you follow the links in his piece, you can figure out who some of the bad guys are. Bob Lucas, for example, who played a starring role in Krugman's 2009 piece. Apparently Lucas was one of those people who imagined an "idealized vision of capitalism, in which individuals are always rational and markets always function perfectly."

So, let's start with that. Part of Krugman's game is to convince you of the moral inferiority of the people he disagrees with, which serves to excuse his name calling. That's what he says in this post:
And if you look at the uncivil remarks by people like, well, me, you’ll find that they are similarly aimed at people arguing in bad faith ... what I’m doing is going after bad-faith economics — economics that keeps trotting out claims that have already been discredited.
The problem of course, is that "discredited" is in the eye of the beholder - Krugman's eye basically. If I follow those rules, I can "discredit" someone, then abuse them all I want.

So, what do the "discredited" economists do? Apparently, those bad people think that "individuals are always rational and markets always function perfectly." First, on rationality, I don't think Krugman has a published paper with irrational economic agents in it (someone please point one out to me, if this is incorrect). So, if we follow what Krugman does, rather than what he says, that might actually conform to my defense of rationality in economics:
In my view, irrationality is the great cop-out, and simply represents a failure of imagination. Rationality is so weak a requirement that the set of potential explanations for a particular phenomenon that incorporate rationality is boundless. If the phenomenon can be described, and we can find some regularity in it, then it can also be described as the outcome of rational behaviour. Behaviour looks random only when one does not have a theory to make sense of it, and explaining it as the result of rational behaviour is literally what we mean by ‘making sense of what we are seeing’.
Second, modern macroeconomics (which Krugman detests) is replete with frictions - it's hardly about markets functioning perfectly. For example, Evil Ed Prescott did some work, with Finn Kydland, on models in which markets work really well. RBC models are basically special cases of Arrow-Debreu. The whole idea is to see how much you can explain without having to resort to frictions. But Kydland and Prescott received the Nobel Prize in 2004, in part for their work on time consistency. The basic idea is that the ability of a policymaker to commit is critical. Even a benevolent policymaker could choose bad policies if there is nothing to stop him or her from breaking promises. So, that's a world that doesn't work perfectly, and the time consistency idea has been highly influential in policy circles and in macroeconomic modeling. Indeed, it's very important in New Keynesian economics. That's an example of specific research by someone in Krugman's bad-person camp, that doesn't fit the profile. More generally, if you look through this year's SED program, you're going to find a lot of frictions - more frictions than you can shake a stick at. And this is from the society founded by the Minnesota macros, basically.

A new complaint of Krugman's is that the academic economic journals are ignoring good work:
...starting in the 1980s it became harder and harder to publish anything questioning these idealized models in major journals.
By "idealized models," I think he means Arrow-Debreu. That's quite a charge - apparently the economics profession is so ill that scientific progress is grinding to a halt. So, what's the evidence for the charge? Krugman quotes Ken Rogoff, who has a gripe:
There are more than a few of us in my generation of international economists who still bear the scars of not being able to publish sticky price papers during the years of new neoclassical repression.
Yes, and poor Rogoff was so repressed that he carried his scars from UW-Madison, to Berkeley, to Princeton, and now must reside, scarred, in that intellectual backwater, Harvard University. Complaints about academic journals are universal. There is no shortage of whining about the nasty Keynesians, the nasty theorists, the nasty new old non-neoclassical whoevers who reject one's papers. Being misunderstood comes with the territory in economics, I'm afraid. Best have a thick skin if you want to survive. If the best Krugman can come up with is a complaint from 13 years ago about what happened 30 years ago, this isn't worth much.

If there is an important change in Krugman's approach from 2009 to today, it's in what he expects from the profession. In 2009, he wanted people "to admit that Keynesian economics remains the best framework we have for making sense of recessions and depressions." Presumably "Keynesian economics" includes New Keynesian economics. Further, Krugman was willing to recognize, at that time, that there was interesting work going on outside of what we might call Keynesian thought:
One line of work, pioneered by none other than Ben Bernanke working with Mark Gertler of New York University, emphasized the way the lack of sufficient collateral can hinder the ability of businesses to raise funds and pursue investment opportunities. A related line of work, largely established by my Princeton colleague Nobuhiro Kiyotaki and John Moore of the London School of Economics, argued that prices of assets such as real estate can suffer self-reinforcing plunges that in turn depress the economy as a whole.
That seemed promising. At least Krugman was aware of some of the work, preceding the financial crisis, which dealt with financial frictions. A lot of that work continues, and there is much more of it now, propelled of course by the financial crisis experience. Some of that recent work was presented at a conference that I organized, with Mark Gertler (see above) at the St. Louis Fed late last year. The people at that conference were from both sides of the fence that Krugman imagines divides the macroeconomics profession. The papers were very interesting, and they went some way toward helping us understand the causes and consequences of the financial crisis. Progress!

The 2014 Krugman has lowered his sights considerably.
...the world would be in much better shape than it is if real-world policy had reflected the lessons of Econ 101.
This isn't a call for refurbishing macroeconomic thought with irrationality and frictions. What Krugman wants is a reversion to the technology of 1937. Why? From this blog post:
Why is output so low and jobs so scarce? The simple answer is inadequate demand — and every piece of evidence we have is consistent with that answer...there is a deep desire on the part of people who want to sound serious to believe that big problems must have deep roots, and require many hours of solemn deliberation by bipartisan panels.
So, now I'm confused. Krugman says macroeconomics went wrong after 1970, and one of the primary culprits was Lucas, who apparently told us that economies work perfectly, and don't need help from policymakers. Krugman also links to this 2003 paper by Lucas from which this quote is extracted:
Macroeconomics was born as a distinct field in the 1940’s, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.
This quote is intended as an example to show us how out to lunch mainstream economics was before the financial crisis. Obviously, Krugman is telling us, these guys didn't have a clue what was in store. But, in the conclusion to his paper, Lucas also tells us:
If business cycles were simply efficient responses of quantities and prices to unpredictable shifts in technology and preferences, there would be no need for distinct stabilization or demand management policies and certainly no point to such legislation as the Employment Act of 1946. If, on the other hand, rigidities of some kind prevent the economy from reacting efficiently to nominal or real shocks, or both, there is a need to design suitable policies and to assess their performance. In my opinion, this is the case: I think the stability of monetary aggregates and nominal spending in the postwar United States is a major reason for the stability of aggregate production and consumption during these years, relative to the experience of the interwar period and the contemporary experience of other economies. If so, this stability must be seen in part as an achievement of the economists, Keynesian and monetarist, who guided economic policy over these years.
This sounds nothing like the Lucas that Krugman is telling us about. In fact, he seems to have a lot in common with Krugman. Seems the 2003 Lucas thought that important inefficiencies exist in the absence of government intervention, and that "stabilization or demand management policies" can and did fix these problems. Lucas also tells us that the Depression problem has been fixed. We don't have to worry about it anymore - because stabilization and demand management are at the ready. Krugman says our current problems, as he sees them, can be fixed by standard "Econ 101" stabilization and demand management. Apparently Lucas was a dummy for thinking the depression problem had been solved by stabilization and demand managment. You idiot, our modern depression problem needs to be solved by stabilization and demand management.

Krugman is right, in a sense. The solutions to economic policy problems can indeed be simple - once you know the answer. It's determining the answer that is hard. If the solution to our policy problems was all in Econ 101, we wouldn't hire economists with PhDs to do economic policy. We wouldn't spend all the time we do hashing over policy problems, or arguing with Paul Krugman about why it's not as easy as he claims. Further, to say that the solution is in Econ 101 is actually an insult to Econ 101 students. Econ 101 students, if they are taught properly, know that the inefficiencies resulting from price and wage rigidity, if they exist, don't last forever, and if they lasted 6 years after a financial crisis occurred, we would be very surprised. Thus, a smart Econ 101 student might question why conventional demand management is going to solve whatever problem exists. Well-trained Econ 101 students also understand that, if we want to solve an economic problem, it will help a lot to understand the cause of the problem. If as Krugman tells us "textbook economics...didn't predict the crisis," or indeed tell us anything about what a crisis is, or what would cause it, what's it going to say about how to fix things up once the crisis hits, or six years after it went away?

27 comments:

  1. "Econ 101 students, if they are taught properly, know that the inefficiencies resulting from price and wage rigidity, if they exist, don't last forever, and if they lasted 6 years after a financial crisis occurred, we would be very surprised."

    Econ 101 students, if they are taught properly, know how long the great depression lasted. They know FDR had a cooperative Congress. Show your Econ 101 students the parallel to repeated House brinkmanship on Federal debt payment. No wonder Krugman dismisses his persistent dedicated critics so easily. Get a life. Preferably not teaching.

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    1. It's very hard to understand what your point is. The great depression lasted a long time. FDR had a cooperative congress. What am I to infer about economic policy from this, and about what is going on today? Maybe you should talk to some Econ 101 students.

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    2. It seems you haven't taken Econ 101. The issue is not how long the Great Depression lasted, but why it lasted that long. Because prices and wages are sticky? Well, here is a nice post on that by Roger Farmer.
      http://rogerfarmerblog.blogspot.com/2014/02/keynes-and-sticky-pricestime-to-think.html

      Someone does need to get a life, but not who you think!

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  2. "Econ 101 students, if they are taught properly, know that the inefficiencies resulting from price and wage rigidity, if they exist, don't last forever, and if they lasted 6 years after a financial crisis occurred, we would be very surprised"

    Steve, you seem to really like that point, which kind of puzzles me. If you look at the "zero lower bound'' papers written by Eggertson etc., you will see that you can have inefficiently low output for pretty much as long as the natural rate of interest remains below the actual one and, in fact, if you make price less sticky, things get worse! The aggregate distortions in the new keynesian model with ZLB do not occur because firms didn't have the time to adjust their prices to the long-run optimal. They occur because the equilibrium equations are different and, so long as monetary policy is forced to be pegging nominal interest rates at zero, real interest rates do not move in the way you would like them to, at any horizon.

    Now, you may have very good reasons to not like that kind of model. But for people who like them, there is no obvious, Econ 101 level inconsistency.

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    1. I'm glad you mentioned that.

      1. In NK zero-lower-bound analysis, typically people are linearizing, but especially at the zero lower bound, nonlinearities can be important. For example, in some instances where you know the solution, "paradoxes" can go away when you do it right, for example see this paper:

      http://www.frbatlanta.org/pubs/wp/12_05.cfm

      Also see:

      http://economics.sas.upenn.edu/~jesusfv/ZLB.pdf

      Cochrane has also made the point that some of these "funny" results come from equilibrium selection.

      2. In Eggertsson/Krugman for example, the key friction comes from a debt constraint. Tighten the debt constraint, monetary policy goes to the zero lower bound, and we have another problem, which is that the real interest rate is too high. EK then fuss around a lot about government spending at the zero lower bound, paradoxes, and how more government spending makes us better off. But the obvious policy that fixes the problem is just an expansion in government debt, given the lump-sum taxes available to the government. This bypasses the debt constraint in the usual fashion. So they're not even thinking about the best policies given the environment they are working with.

      Conclusion: This ain't Econ 101. There are technical issues with how we solve these models and equilibrium selection issues. How we do the fiscal policy may matter, i.e. what we spend on, whether we spend more at all and just lower taxes and increase government debt. There's a question of whether we think these NK models are any good. See if your Econ 101 students can figure that out.

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    2. Well, you were the one saying that "Econ 101 students, if they are taught properly, know that the inefficiencies resulting from price and wage rigidity, if they exist, don't last forever." All I am saying is, papers are still being published using a framework where this is not the case. You can cite some new research in progress saying this framework is not good, but this is all still in the works and under dispute, and reasonable people who know their Econ 101 very well can disagree.

      Also, it is not even clear to me that in the cases you mentioned, what your properly taught Econ 101 students know is true (although it may well be, the research is still ongoing!). The key thing is that the first order effect of nominal rigidities in setups where the monetary policy is non-responsive is not that prices are misaligned vis a vis their long run level (although this surely ought to matter), it is that in sticky price models the real interest rate is not determined in the same way as in flexible price models, a discrepancy which may persist for a very long time.

      Going a bit deeper: Your intuition about prices having to go back to where they ought to be after 6 years looks a lot like what you would get in a sticky information model, a la Mankiw and Reis. As soon as firms realize what is going on, they put their price at the flexible level and if there is no news after 6 years, you are back to normal. In contrast, in a sticky price environment, firms' prices lag behind what is optimal even if there is no news, so prices are being reset all the time, and inflation, and hence the real interest rate (given a fixed nominal rate) will be determined by these updates whichever way they take place. It may or may not coincide with the natural rate and this misalignment may stick around for a very long time indeed.

      Just to be clear, not trying to push an agenda here, as I mostly sympathize with your post. But you seem to come back again and again to that argument, and I think the literature is just not in a place where this is a valid one to make.

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    3. "...papers are still being published using a framework where this is not the case."

      My point was that there seems to be some question about what the implications of some of these models are, taking the models as given. For example, the result that the more flexible the prices are, the worse it gets certainly is counterintuitive. There's a discontinuity at pefectly flexibility. Some people seem to be saying it's counterintuitive for a reason. If we look at another equilibrium or take nonlinearities into account, it works the way you would think it should.

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  3. "Econ 101 students, if they are taught properly, know that the inefficiencies resulting from price and wage rigidity, if they exist, don't last forever, and if they lasted 6 years after a financial crisis occurred, we would be very surprised."

    It is only New Keynesians who think that wage and price rigidity are the main source of the underemployment equilibrium (ironically the notion that more wage and price flexibility would alleviate the issue was precisely the classic position Keynes argued against). Sure, that New Keynesian DSGE models are the mainstream nowadays but this does not imply that they are correct. Money is the issue (and all macro school of thoughts, be they Keynesian or monetarist or whatever agree on this), not wage and price rigidity.

    There is more truth to be found in the previous research which was agnostic about the source of the underemployment equilibrium. If you asked Tobin or Solow about it they said that there are probably multiple market failures that "aggregate" into underemployment equilibrium. Of course this is interesting from a, to use Mankiw's lingo, "macroeconomist as a scientist" perspective but from a "macroeconomist as an engineer" perspective only the solution is important ... and Krguman is right about the fact that the solution to this problem has been known since over seventy years. Last time I checked newer research papers about the liquidity trap, e.g. Woodford's, don't arrive at a fundamentally different conclusion than Keynes': at the ZLB we need deficit spending as monetary policy is virtually ienffective.

    "The solutions to economic policy problems can indeed be simple - once you know the answer. It's determining the answer that is hard."
    Nope, in this case the answer is simple and has been well-known for decades. Unless you are in demand denial and not caring one iota about tens of millions of unemployed.

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    1. I only mentioned price and wage rigidity, as that's the source of inefficiency that Krugman seems to be concerned with. When he actually writes down models, that's what's going on, basically. That's not what I think, though. For me Keynesian economics is unfinished business, and Keynesians have not convinced me that price and wage stickiness is the source of all our problems. If there are inefficiencies that are holding us back in the wake of the financial crisis, a good bet is that those inefficiencies are financial, and those are in fact the ones that I study in my research.

      You seem to be telling me that there can be all kinds of inefficiencies, but it really doesn't matter what they are, as we know the answers anyway. To me that sounds like religion, not science, and that's where we disagree.

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    2. "To me that sounds like religion, not science, and that's where we disagree."
      Demand denial, ignoring tens of millions of involuntarily unemployed people, is indeed religion.

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    3. Be quiet, John D, grownups are speaking here. Yes, that's right, I spotted you.

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    4. "For me Keynesian economics is unfinished business, and Keynesians have not convinced me that price and wage stickiness is the source of all our problems. If there are inefficiencies that are holding us back in the wake of the financial crisis, a good bet is that those inefficiencies are financial, and those are in fact the ones that I study in my research."

      That is very much what Keynes said. The General Theory was an answer to how to deal with insufficient demand in a price-flexible economy. Prices and wages were very flexible in the pre-WWII, an economy as close to pure-capitalism that ever existed. (This was an economy absence even basic labour market protections - well described by Charles Dickens.) The reasons we get a situation of permanent insufficient demand, according to the General Theory, are to do with uncertainty, deflation psychology and animal spirits. Absolutely nothing to do with price rigidity.

      Some of this has been picked up by the likes of Lars Syll and Roger Farmer, and of course much earlier by the likes of Hyman Minsky. But these people are rare.

      The real problem is that economists do not know the history of their discipline and are not familiar with the philosophical foundations of it - that means Marx, Smith and Keynes. The PHD in economics today is basically a pick up ground for applied mathematicians, to the exclusion of a hell of a lot of other knowledge and skills.

      I think also some heavy study of philosophy would be helpful for economist's brains. Human knowledge is not linear. 1937 technology is not a useful analogy. We forget lessons learned. Knowledge, like markets, is prone to swings, fads and group behaviour.

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  4. Krugman's shtick is so, well, boring. What is amazing is that there is an appetite for his pronouncements. Even taking his nostrum (a noun, a verb, and more G!) at face value, one is left with the question of how much spender-of-last-resort action is needed (why not infinity?) (also, how it should be financed, who wins and loses, etc. need some attention, no?) Maybe we should have the government buy a ton of stuff and throw it away? That should help spur "demand"--of course we should just as readily welcome a hurricane to do its worst too--it too would waste resources.

    But I will say that to portray, as he incessantly does, that no one besides him is asking questions about the efficacy of additional spending is a solid scorched-earth move. He is a Lee Atwater type of guy, it is now clear.

    All of this is a bold gambit (which I wish you would deal by ignoring him, not feeding him or his trolls), it must be conceded: Though he now looks like well out of touch to many in the profession (and is irrelevant in policy discussions--except when Eggertson forces him to drop the baloney and write something serious), the NYTs op-ed readers clearly eat it up: A brave man fighting a malign and powerful horde. This is the type of fan base that gave you the previous jerk in the comment thread who asserted that opponents of Krugman care not on iota about unemployed people. I hope PK is proud.

    Lastly, his readers cannot be blamed for having no idea that macroeconomics is crammed with models of imperfect markets. The baseline used for monetary policy is, for instance. So this part is amazingly deceitful, and when he first started doing it, my jaw dropped a tad. I'm now used to it. And I say all of this as a staunch Democrat, and progressive by any definition-so I don't want to hear any crap about my concern for the unemployed.

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    1. Nostrum. Good word. At least the two of us are on the same page, for the most part. Does ignoring the beast starve it? I'm not sure.

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    2. "And I say all of this as a staunch Democrat, and progressive by any definition"

      You are a neoliberal and not a progressive if you consider aggrgegate demand management to be pointless.

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    3. Really? So, the definition of a progressive now includes as a necessary condition that one subscribe to any and all AD-boosting policies? It is not about how one might best assist the downtrodden, and make a plural, color-blind, just, and giving world? Nice try, but please don't bully people by trying to co-opt language.

      Welcome to Paul Krugman's world---purify by first relabeling all opponents as working for the other team, and then call yourself a liberal.

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    4. "Welcome to Paul Krugman's world---purify by first relabeling all opponents as working for the other team, and then call yourself a liberal."

      Well put! By the way, it is a strategy that conservatives tried, and now "true conservatives" are so few that they know each other by name. I do not know why a liberal would want to go down that path.

      Anyway, my advice is not to engage this troll. He lurks in the darkness until a new post appears and then recycles the same comments from, what I recon, is a page of sentences that include the cliche "demand denial", Stiglitz's "Incentives and risk sharing in sharecropping" paper, and so on. He either enjoys being a troll or has untreated mental issues, even though the two are not mutually exclusive. In any case, engaging in a dialogue with him is like trying to teach calculus to a snail; it is utterly futile!

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    5. The troll's name is John D, and he's a not-too-bright lawyer from St Louis. For a while I had managed to drive him from the Internet, but it seems he's back.

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    6. Engaging in a dialogue with the right-wing scum of the earth is indeed utterly futile. In any decent world demand denialists who think that soup kitchens caused the Great Depression would not be in charge of anything more complex than vacuum cleaners.

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    7. If that's true, why won't you go away?

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  5. "It's easier to smell the incense than it is to have the religious experience."

    -A N Whitehead

    -OR-

    Try Hegel. If we can never get to "das Noumena" then all we have left is "Phenomena".

    I tried, SW, I really did but, in the end, the answer to "What have we learned since 2009" is the same thing we've been learning the hard way for a coupla' hundred years. It's Erich Honecker Monetarism, where some Brutalist Monstrosity is hailed as the Clear Path to the Paradise. Personal choice is replace by The Model, chosen by the Appropriate member of the Cult of the Scientific Priesthood.

    "Time", the thing that moderates any Set of Choices in Capitalism, must be replaced by a Model that allows the Correct Political Decision to replace the personal one, and right now. If the old model doesn't work, we can rename it and call it something new - as long as "Our Group" gets to do the renaming and implementing of the "New Economic Policy".

    Where is the Monetarism in the New Monetarism? I have searched for it and it is not there, at least in any recognizable form that is different from the "New Keynsianism", which differs from the Old Keynsianism only in that there are New Acolytes that want to pull the levers of Power at the expense of the Old Acolytes.

    The Model is not the Reality and it was Friedman who recognized that as much as anyone. The Model, however, allows the Politically Few to make the decisions for the Many in markets that the Few do not even imagine. Friedman knew that as well.

    Where is the Monetarism? In the incense? In the solemn Pronouncements of the Few? If we cannot get to the decisions of the Many, should we simply pretend they do not exist over our Precious Models, which we can manipulate to our heart's desire? Perhaps there is a False Choice here. It would make a difference to realize this.

    Where is the Monetarism?

    CW

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    1. That's K-E-Y-N-E-S.
      "Ever have one of those decades?..."

      CW

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  6. I hope, Charles, you will not consider me too out of line if I suggest you seek some kind of counseling. Do you have family who can help ?

    p

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    1. Einstein stated that a good joke should not be repeated and this Reply by Anonymous isn't even a good joke. As for Counseling, allow me to refer you to one of mine:

      https://www.youtube.com/watch?v=RFmMm9NPj3U

      Please take the time to watch this. For those short on time, please go to the 24 minute mark and listen to what this person has to say about Keynes and his followers.

      Nor is my criticism limited to the Demand Schools, of which Monetarism is but one. There is Wanniski, who supplies an answer to the ambiguities cited by this person as to whether the State caused the Depression or merely made it worse.

      My criticisms are valid and have not been refuted. I enjoy SW's work or I wouldn't be here. Friedman gave us an empirical database with which to critique our Theories of Money. It is based on Freedom and Friedman, to the regrets of his critics - especially ABCT - provides an analysis of the relationship between the individual and the State. We live in an epoch of giant intrusions by the State into the lives of the individual. Friedman also provides us with a way out of this swamp which, if remained unchecked, might well be the undoing of us all. It is not limited to his Theory of the Quantity of Money. All I want to see is that someone, somewhere is providing the empirical examination of what is happening today.

      Where is that Monetarism these days?

      CW

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    2. I second the call for counseling. Charles is quite clearly unhinged.

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  7. What went wrong? It was simply a continuation of what's been wrong since the late 50's. Using interest rates as the monetary transmission mechanism, our twin deficits, thinking nominal-gDp is aggregate demand - not money flows, impounding savings within the CB system, remunerating excess reserves, etc.

    It's Gresham’s law: a statement of the “principle of substitution” applied to money or other words, that a commodity (or service) will be devoted to those uses which are most profitable. It is another one of the paradoxes of money that, unlike articles in the market, the bad drives out the good.

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  8. I believe that any friction will disappear in the long-run. More safely, frictions become irrelevant to real allocations as time goes on.

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