Zombie ideas rise again

A glutton for punishment, I’ve decided the Zombie Economics book manuscript I submitted a month ago (mostly online here) is in urgent need of more zombies. I’ve been struck, even in that short space of time by the extent to which, with undeniable “green shoots” now appearing, the zombie ideas I’ve written about are clawing their way through the softening soil and walking among us again. The most amazing example is that of the Great Moderation – surely you would think no one could believe in this anymore, but they do.

So, I’m planning to add a bit to each chapter, pointing to examples of these ideas being revived. I’d appreciate good examples for the rest: Trickle Down, Micro-based Macro the Efficient Markets Hypothesis and Privatisation (of course, the Queensland government gives an example v close to home).

With unemployment still above 10 per cent in the US, budget deficits in the trillions, and bankruptcy and foreclosure taking place on a massive scale, you might think that the idea of the Great Moderation would be, not just dead, but buried once and for all. You would be wrong.

This zombie idea was never really killed and it is already climbing out of the grave. In a blog post entitled ‘Does the Great Recession really mean the end of the Great Moderation?’ Coibion and Gorodnichnenko answer this question with a resounding ‘No’ present a series of graphs on the variability of real GDP growth to support the conclusion that ‘we are experiencing a particularly severe business cycle that nonetheless pales in comparison to the volatility experienced in the 1970s.’?Such a claim looks convincing if you look only at the absolute variability of GDP. But that variability reflects the combined impact of a massive fiscal stimulus from the public sector

Not only have the components of GDP fluctuated wildly, but so have all sorts of other macroeconomic variables. Brad DeLong points out that the variance of the employment/population ratio has shown the biggest spike since at least the Korean War.

More fundamentally, the idea that we are still in a ‘Great Moderation’ in which stability is the result of good policy fails the laugh test. The story used to be that the ‘good public policy’ that gave us stability consisted of the judicious adjustment of interest rates in line with a Taylor rule based on inflation rates and output growth. The response to the Global Financial Crisis started out that way, but the policymakers rapidly threw the rulebook out the window. Interest rates were cut all the way to zero. Then huge amounts of liquidity were pumped into banks and Wall Street firms through ‘quantitative easing’ and opening of the discount window. Then there was the trillion dollar bailout of late 2008, and the massive fiscal stimulus package of 2009.

Many words could be used to describe these responses, but ‘judicious’ and ‘moderate’ would not be among them. It could plausibly said that, massive as they were, the responses were still inadequate. But that just goes to point up the magnitude of the crisis.

Why then would anyone make such a claim? The answer can be sought in the internal dynamics of the economics profession. The Great Moderation vanished in 2008 and 2009, but the academic industry built to analyze it did not. Research projects based on explaining, measuring and projecting the Great Moderation, were not abandoned, and the careers based on those projects could not be diverted quickly into other ends.

Coibion and Gorodnichnenko are proponents of the view that the Great Moderation was the product of good public policy. They are the authors of a forthcoming paper in the American Economic Review making precisely this case. The paper is theoretically elegant and uses some impressive econometrics, reflecting the years of work that go into the production of such a piece (the article is based on a 2008 working paper and uses data from 1969 to 2002. But, if the Great Moderation is indeed over, such a paper becomes an exercise in economic history, and the ‘good policy’ explanation is clearly false.

Unsurprisingly, then, Coibion and Gorodnichnenko are attracted to the opposite view. A crisis that had destroyed whole national economies, bankrupted economies, doubled the US unemployment rate and threatened to bring down the entire financial system becomes, in their telling of the story, a ‘transitory volatility blip in 2009’.

We will be hearing a lot more of this kind of thing in the future. But, if we are to avoid repeating the mistakes of the last couple of decades, we must first recognise them for what they are. The Great Moderation is a dead idea, and it should be buried once and for all.

39 thoughts on “Zombie ideas rise again

  1. @Jim Birch – I think that’s why we coined the word ‘apperception’, isn’t it ?

    @Alice – missing you already.

    @gerard – you appear to be describing the essence of an ‘unfalsifiable system’, of which the exemplar is, of course, Freudian so-caled ‘psychology’ (and add Jung and Adler if you wish). So, does that mean ‘economics’ is in the same basket of irrational beliefs as homeopathy and Freudian psychology ?

  2. @Hal9000

    Indeed Hal

    [pedant’s corner] loath to depart is a generic term for a song sung at farewells and is attested from mediaeval times . The famous old song Greensleeves is perhaps the best known example.[/pedant’s corner]

  3. So, does that mean ‘economics’ is in the same basket of irrational beliefs as homeopathy and Freudian psychology ?

    Not “economics” per se. The debate on methodology goes back a long way. Different methodologies are suited for different questions, but it’s important to distinguish the empirical from the non-empirical.

  4. Jack’s at least partly right with the Plank quote about science progressing as the opponents die off. I think part of the problem we have now is that new developments are coming along faster and faster, but with extended lifespans the opponents are dying off more slowly. Consequently they hang around to obstruct new ideas about these developments for much longer.

  5. Oh and I’d also love to know whether, if Obama is not who he says he is, he is actually:

    *A giant lizard in disguise
    *A communist agent bent on achieving one world government
    *A muslim

    Clearly he is not a moderate progressive wrestling with an obstructive Senate voting structure and being let down by a lack of understanding of economics.

  6. @Stephen L

    Planck was right when he said it. Unfortunately, since then when have had the invention of the ‘young fogey’. Those youngsters who have old ideas that ought to have died with an earlier generation.

  7. how quaint stephen L “a moderate progressive wrestling with an obstructive Senate voting structure and being let down by a lack of understanding of economics”
    that really did bring a smile to my face
    one of the things that continues to entertain and delight me is the purely coincidental way that all these economic misunderstandings keep enriching a small elite group of bankers and corporations and keep robbing wealth from sovereign states and the middle class …
    but obviously all is as it appears eh?

  8. Sorry John if this is derailing the thread, but I fail to see how a major tax hike on the wealthy to subsidise medical insurance for the lower middle class, to the tune of hundreds of billions of dollars a year enriches the bankers etc… Likewise his latest proposed regulations on banks are not exactly causing bankers to turn cartwheels with glee, having led to a major slump in bank stocks when announced.

    I’m well to the left of Obama. I’d love to see him moving faster and further to reverse the inequalities he inherited. I realise this isn’t just all about the Senate, he is naturally cautious and moderate. But objectively his moves are fairly consistently to shift America to the left from where he found it, even if by centimeters not kilometers. Presumably it is quaint to compare his legislation with the pre-existing situation, rather than some ideal alternative.

  9. ok, which of Wall Streets mouthpieces are you getting these ideas from stephen L, WP? NYT?

    What is moving through on the House side is a bill that supposedly has a new rule, but has so many loopholes that the loophole eats the rule. We want to say we have transparency and regulation, but it will continue to have loopholes

    “Satyajit Das says that the new credit default swap regulations not only won’t help to stabilize the economy, they might actually help to destabilize it.”

    The best experts in the field — like Michael Greenberger of the University of Maryland — warn that the legislation might end up WEAKENING current law. That is no small achievement, because, as we saw in the collapse of AIG, current law is toothless…

    contributers to Obama’s presidential campaign
    #2 – Goldman Sachs – $994,795
    #5 – Citigroup Inc – $701,290
    #6 – JPMorgan Chase & Co –$695,132

    the banks put Obama in the seat, he brought in many former Goldman execs who were directly responsible for the meltdown, and continued the tenure of the financial elite that had already been operating under Bush

    why is this so hard for you to understand

  10. or how about this for power and control

    “If Greek banks, as the rumors goes, indeed sold Greek protection, and, as the rumor also goes, Goldman was the bulk buyer, either in prop or flow capacity, it is precisely Goldman, just like in the AIG case, that can now dictate what the collateral margin that Greek counterparties, and by extension the very nation of Greece, have to post on billions of dollars of Greek insurance …
    In essence, through its conflict of interest, its unshakable negotiating position, and its facility to determine collateral requirements and variation margin, Goldman can expand its previous position of strength from dictating merely AIG and Federal Reserve decision making, to one which determines sovereign policy!

  11. Sorry, the Efficient Markets “Hypothesis”, actually Dogma, does not belong to the realm of technical economic theory, but the realm of political lies, hucksterism, confidence games, Ponzi schemes, market manipulations, regulatory cheerleading for bubbles, Disaster Capitalism (Naomi Klein), Thorstein Veblen’s Theory of the Leisure Class staying richer than you, and more generally kleptocracy. Market efficiency requires certain preconditions (in the ultimate ideal, Perfect Competition) that cannot be the result of market forces. Governments and the public are not good at enforcing those conditions, and self-regulation is a bad joke.

    The biggest of the zombie ideas is The Free Market, meaning unlimited Laissez-Faire with no regulation, and without any of the elements of genuine competition, such as information for buyers, access to markets and technologies, and lack of market power (in its simplest form, the power to set prices). The greatest extension of this lie through the Efficient Markets “Hypothesis” has become known as Market Fundamentalism, the further lie that markets always function perfectly, especially without any of the factors that could make them perform well at all. Most of the rest come from this, including Trickle-Down Voodoo Economics, the Washington Consensus on how to keep developing countries dependent instead of allowing them to grow, no-bid government contracts, fierce anti-union measures (contradicting the no-regulation rule, but what of that? You can’t ask a zombie to be consistent.)

    Adam Smith shot all of these zombie ideas in the head well over 200 years ago, but that has kept them down only a little. The problem is worse in our day because the US Republican Party kleptocracy has allied itself since the 1960s with segregationists and other racists, and later with the intolerant, mostly lily-white churches that have made abortion and gay marriage their core issues. Thus Southern and also Northern White bigots routinely vote against their own economic interests, thinking that it is for the greater good. The benefit of all of this to the kleptocracy is that racism and bigotry translates quite directly into anti-union, anti-social-program measures that keep workers’ wages down and provide other opportunities for exploitation.

    I have addressed this at http://www.dailykos.com/storyonly/2009/9/15/780776/-Mathematical-Economics-an-Oxymoron

    So how is it where you are?

  12. @Freelander
    It was a bubble, just like the Clinton-era Tech Bubble before it, and the one before that, back to the South Sea Bubble and the Dutch Tulip Mania, and beyond. A bubble is a self-working Ponzi scheme in which everybody is telling everybody else that this one can’t fail. The problem with bubbles is not economics but politics. Anybody who bursts a bubble risks political death, and also retribution from very rich, very determined foes.

  13. objectively his moves are fairly consistently to shift America to the left from where he found it
    Stephen L

    Obama is two people, one superimposed on the other.
    The visible, surface man is the epitome of an enlightened, Ivy League, socially responsible liberal.
    To this portrait, we must juxtapose the other Barack Obama – the Barack Obama who has surfaced as he quickly shed his ‘liberal’ skin amidst the trappings of the White House. This other personality, I contend, is the underlying one – truer to the man’s core nature …
    a deeply conservative personality and conventional thinker who tips his hat to every establishment he encounters.
    The unhappy conclusion is that we have in Obama a President who is what we used to call a moderate Republican before the species became extinct.
    suspicions of government programs
    a strong belief that we should always give private interests the benefit of the doubt,
    an assumption that the rich deserve their riches,
    and an insensitivity to the plight of salaried Americans
    Abroad, Obama is ready to deploy military might in dubious causes defined by the country’s hawkish defense establishment.


  14. @Edward Mokurai Cherlin
    Couldnt agree more Edward – bubble prickers have always faced political death and career death and denigration and castigation and ridicule. The problem is “bubble prickers” are just not popular when some are making bucketloads of money playing (manipulating) the market.

    We all know who pays for bubbles anyway…. Why would the rich care to have their bubble pricked?. They retain their savings from riding the bubble. They dont lose their jobs. They shed their labour – its an inconvenience but they dont lose their house or shirt over it. Dont forget that BHP and Burns Philp posted almost 10% net profit every year of the Great Depression years in the 1930s. It wasnt bad was it? Labour was so dirt cheap.
    We also have government policies..to deal with burst bubbles. The poor man or the middle class man gets out his mop and does the majority of the sweating and cleaning up.

    Councils have lost money gambling on CDOs – so they put up the rates. Governments have lost money on investments and deficit spending…so they put up the retirement benefit access age, or privatise a few (more) police stations or schools or roads.

    Meanwhile the welfare queues get longer and stay long until the bubble is paid for in equal dollar values of hardship from the not very rich.

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