5. Certified macroeconomists were taken by surprise by what has happened. A lot of people saw the boulder of the housing bubble ready to roll down the mountain. Hardly anybody foresaw the financial avalanche that would ensue.
6. Certified macroeconomists were badly polarized in the early 1970's, with Chicago types essentially denying the idea of involuntary unemployment and the MIT types clinging to macroeconometric models. By the late 1970's, the arguments were over. The models had all sorts of problems, and everybody gave up on them, although people had different reasons for doing so. Methodologically, everyone agreed to work on irrelevant math probems, and substantively everyone agreed that reasonably stable money growth would lead to a reasonably stable economy.
7. We had reasonably stable money growth under Greenspan and Bernanke (at least that is what most people would have said at the time), but look what happened.
8. So now, it's back to the early 1970's, with Chicago denying reality and MIT back to thinking in terms of macroeconometric models.
History may not repeat itself, but it stutters like hell.
As the Austrians must point out, over and over and over, money growth under Greenspan and Bernanke was not reasonably stable, it was out of control. Aside from the minor tightening that raised rates in 1999/2000, Greenspan in particular ran the money spigot wide open from about 1993 until he retired.
I do not understand Arnold Kling about Chicago economists denying the idea of involuntary unemployment. How can the Chicago economists have been proven wrong in the absence of unregulated labor markets that allow for wage adjustments during recessions? The critical rationalist in me tells me that the Chicago position has not been properly falsified. Why dismiss it so easily?
Noah, while money growth under Greenspan was higher than GDP growth over the same period, it was below the average levels of period decades, at least according to the Fed itself. See here
and here
Modern American labor markets don't illegalize wage reductions. It seems that some employers simply prefer to lay off than reduce wages, even when unions are not in the picture and reducing wages would be an option.
There are definitely discrete cases where this makes obvious sense. Since labor is only one part of production costs, the case where sales fall below the level of fixed capital costs per unit would mean that wage labor cannot be justified at any cost. I believe this is the case in the car industry.
If Milton Friedman was around he would have easily seen that the low interest rates Greenspan was encouraging would create a bubble.
In third world countries you do tend to flexible labor markets that quickly adjust to encourage full employment. Developed countries prefer to provide safety nets. That is a choice made by governments.
Milton often warned that collusion between government and big business is a danger. Government interventions in the housing markets created distortions. Collusion between government and financial institutions fostered a lack of transparency that fed the bubble. Lastly, it is hard to predict that managers of these institutions would so conspire against the best interests of their investors.
I recall those decades an up and coming economist. I got Keynes first, then Chicago, then many years of applied math which was so irrelevant for a do gooder like me.
The Southern Regional Party will do anything to take Obama down a notch - I think they are still afraid of educated black folks down there. They are probably praying the damn thing doesn't work because demographically they have no future. Listening to their arguments on macro econ is like listening to my son's arguments on why candy is really all he need for dinner. If I were a Marxist, I'd toast them twice because they have become the contradiction.
One more day, one less bank.
How can the Chicago economists have been proven wrong in the absence of unregulated labor markets that allow for wage adjustments during recessions?
As a prior comment noted, there are no regulations against lowering wages in the great bulk of the private sector economy -- and there certainly weren't during the early 1930s.
Employers often prefer to cut costs by laying off workers rather than cutting wages generally for perfectly rational competitive reasons: Such as, it lets them get rid of their worst, deadwood employees while keeping the better employees they retain happy. In contrast, making all your workers unhappy by slashing wages across-the-board to keep the deadwood on the payroll may not look so attractive.
Also, in a turndown not all employers are equally harmed -- in fact, in every slump there are a few who profit from foresight or whatever. If you cut the wages you pay across the board you may well see your best employees jump ship to better off businesses, and find yourself being left with only your deadwood.