The ‘grumpy’ John H. Cochrane provides some interesting commentary on the “The failure of macroeconomics” in today’s WSJ. Missing – recognition of Higgs’s important ‘regime uncertainty’ and the Mises-Hayek-BIS view of credit-booms recently highlighted here and here in warnings from the Bank of International Settlements of central bank excesses. Dave Howden comments here.
Where macroeconomists differ, sharply, is on the causes of the post-recession slump and which policies might cure it. Broadly speaking, is the slump a lack of “demand,” which monetary or fiscal stimulus can address, or one of structural sand-in-the gears that stimulus won’t fix?
Cochrane provides blistering commentary on the “demand –side” view, as argued by the likes of Larry Summers, Brad DeLong, Paul Krugman. He states, “this diagnosis and these policy predictions are fragile.” And “None [of the New Keynesian models] produces our steady low-inflation slump as a ‘demand’ failure.” As a result, “The reaction in policy circles to these problems is instead a full-on retreat, not just from the admirable rigor of New Keynesian modeling, but from the attempt to make economics scientific at all.”
Cochrane provides added commentary here. Note especially his graph at the beginning of his commentary.
The alternative explanations of the Bush-Obama-Fed Great Stagnation Cochrane provides; John Taylor’s “uncertainty induced by seat-of-the-pants policy” which stifles investment and hiring, Ed Prescott’s distorting taxes and stifling regulation, or Casey Mulligan’s “unintended disincentives of social programs”, all of which stifle growth and innovation, are better than the “the … new [demand side] thinking which “is largely old thinking: traditional Keynesian ideas of the 1930s to 1960s.” These alternative explanations at least point toward reforms that might improve economic conditions and facilitate recovery. They are however, inferior to a capital-structure based macroeconomic understanding of recession and recovery supplemented by Robert Higgs’s Regime Uncertainty. Even better suggestions for a sustainable recovery can be found here.