Before Milton Friedman, a significant percentage of top macroeconomists in the United States were convinced the money supply does not matter very much.
Friedman, working with David Meiselman and Anna Schwartz, produced a lot of good evidence that the money supply matters a great deal. Many people were convinced, even if they did not become hard-core monetarists.
Monetarist ideas start fading as early as 1982, when money supply control techniques did not work out so wonderfully. Litterman and Weiss (1983) raised doubts about whether money matters at all.
During the 1990s, many people thought we were in a productivity boom.
During the 2011-2013 period, many people became convinced that we had been in a productivity slowdown.
During the Clinton years, it was believed that investment crowding out was a big problem, and that Clinton fiscal reforms had limited that problem. Later it was believed that crowding out is not much of a problem at all, as deficits rose and real interest rates remained low.
Throughout the 1990s, the evidence showed that the Fed can influence real interest rates only small amounts and with difficulty. Circa 2023, it is believed that the Fed has a great deal of influence over real interest rates.
Leading up to 2008, the idea of “the Great Moderation” was popular.
Post-2008, Minsky-like and bubble ideas became extremely popular. The notion of a Great Moderation was dead.
Post 2009, it was believed that “liquidity trap economics” were highly relevant.
Post 2009, it was argued that “structural imbalances” were very important, in part due to liquidity trap conditions. Today, Pettis and Krugman still promote the relevance of structural imbalances for the medium- and long-term, even though the liquidity trap conditions are long since gone.
“Secular stagnation” was a popular idea in macro until recently, but no longer, in part due to high inflation and in part due to the investment boom.
Very recently, the doctrine of immaculate disinflation is gaining in credibility, after a long period of disbelief in it.
To be clear, I am not saying all of these (or even most of these) are wrong. I am saying that various doctrines appeared to be “quite true” on a temporary basis, and yes I stress that word temporary. Then they are not true, or at least not obviously true any more.
So which are the macro delusions of our current time? I would nominate a clear winner for number one:
1. Enough government action on the demand side can fix macroeconomic problems and ensure full employment
Maybe sometimes that is true. But it is not always true, and I hope you all can be wiser than the people who got caught up in earlier macroeconomic illusions, or should I call them delusions?
Furthermore, all discussions of the Phillips curve — no matter what the point of view — should be conducted with this blog post in mind.
The post Macro illusions — which ones are you suffering under? appeared first on Marginal REVOLUTION.
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