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. I can’t wait for a ‘real business cycle’ model to ‘explain’ the last three or so years.

  2. One question about Zombie Economics.

    What is the go with using the spelling “privatization” on the Wiki rather than “privatisation”?

  3. Micro-based Macro (representative agent models, static or dynamic). These models cannot be used when markets are incomplete because the condition MRS(k;i) = p(k) for all i is not defined for at least one k. (i.e. they are not suitable for environmental economic topics such as transport noise or AGW).

    If I remember correctly, this point is not as yet in your book. Apologies if I am mistaken.

  4. One part of the post is important and not something one generally sees: how sunk costs and incentives influence the work that economists do. This was something Keynes had no problem noting but economists are often loathe to apply these same criteria to their own work. One thing that is missing is the role of economists as the leaders of the secular priesthood, defenders of the faith and comforters of the comfortable. There are always rewards for defending these kinds of ideas and it is unlikely that facts will often get in the way of their promulgation.

  5. Hello again

    Look. There is an elephant in the room. All I am reading and hearing about is that the Budget Deficit(USA, here, GB, etc) MUST be cut back, but this at a time of underproduction. Can some light PLEASE be shed on this as I think the conservatives are going ballistic at this and lots of people are buying their message of the household/government budget analogy?


  6. @Daniel


    From the abstract one would hope that the author, Mulligan, is a heavy illicit drug taker, but I doubt he is. If he was he would have some excuse.

    This paper is probably a good example of a defiant Zombie. Surely even the author knows that an explanation without the financial sector, is, at least in this case, no explanation at all. Although I imagine, some excellent econometric prestidigitation is performed.

    The impact of Hank Paulson’s decision to let Lehman Bros collapse (for ‘moral hazard’ reasons) to teach them and others a lesson would be especially difficult to model but had a dramatic global impact in a critical situation.

    Because so many of these clowns are involved in such sophistry with numbers (with plenty of loose, to be fitted, parameters), when they are presented with properly constituted scientific modelling by climate scientists, they assume, wrongly, that the results are as bogus as the stuff they regularly churn out.

  7. Greece is about to suffer a major infestation of Zombies over its debt crisis thanks to pressure from ECB zombie-in-chief Jean Claude Trichet:

    ‘Trichet made it clear that the ECB sees the stability and growth pact, which limits deficits to 3% of gross domestic product, as sacrosanct. Greece last year ran a deficit of nearly 13% and has vowed to cut it to 2.8% by 2012.’


    The EU’s ‘Stability and Growth Pact’ certainly doesn’t appear promote growth, which will not be conducive to stability. The Pact must count as a basket full of zombie ideas (to mix metaphors).

  8. Perhaps the book should be called “Dead on Arrival”.

    Sorry, I couldn’t help myself. 😉

  9. Pr Q said:

    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.

    If you want a revolution in economic policy then you should be prepared to openly advocate it and stop with the faint-hearted words of polite intellectual discourse. These people are not just sadly mistaken, they are your enemies. Politeness to a fault!

    The financial bailout and fiscal stimulus appear to have worked well enough to avoid the worst case scenario, another Great Depression. Everyone is so relieved that they think they can continue Business as Usual.

    As I said back in 2003, we need a “purge” to rid ourselves of the financial incubus. To really kill free-market financial liberalism stock brokers have to be throwing themselves off buildings, sans golden parachutes. But Davos Man is not prepared to jump and no one in the office is prepared to push.

    Where is the Political Left in all this? Pre-occupied with political correctness, cultural liberalism and making nice to the high flyers with MBAs, as usual. As useless as tits on a bull.

    The thing that kills really bad powerful ideas is not empirical refutation (much as Pr Q’s efforts in this direction are praiseworthy) but the death or disgrace of the paradigmatic thinkers and the destruction of their ideological hegemony.

    And that requires institutional disintegration not intellectual refutation ie an Intervention which destroys the social basis of the corrupt establishment. Start by banning certain kinds of transaction outright. Declaring some companies outlaws. Taxing other activities right out fo existence. Shutting down useless and parasitic academic institutions.

    None of that will happen, of course. People are just too much invested in a quiet life and too darned polite to make such a scene.

    So we will probably have to wait until bad-debt laden companies start to go belly up and debt-burdened governments go cap in hand to all-tapped out international financial authorities before states begin to heed the wake up call, loud and clear.

    By that time the PRC will be in a position to make hostile take over bids of Wall Street giants, and start slashing bonuses. I cant imagine anyone without in interest in this raising an objection.

    A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.


  10. There is no point in arguing with a zombie.

    Legend has it that actual and existing zombies were not deflected by a polite direction to resume their positions in the grave. Rather they were shot through the heart with a silver bullet or decapitated.

    There is a political lesson in this myth.

    PS I am of course arguing for institutional, not individual, annihilation.

  11. Ha. I was just looking at a paper in The Journal of Neuroscience that looks at the way the brain stops processing incoming information when it imagines it’s got enough.

    The results indicate that, when making decisions on the basis of sequential information, the human nervous system integrates evidence in a nonlinear manner, using the amount of previously accumulated information to constrain the accumulation of additional evidence.

    To put it slightly differently, science – ie, ongoing attempts to disprove your assumptions – is an unnatural activity for humans. It was too energy inefficient for life in African forests a hundred thousand years ago.

  12. the truth is , zombie-economic ideas are a subset of zombie-societal ideas,

    people look at Obama and are disappointed, but only because they are using the zombie-political idea that Obama is who he says he is, when it is clearly not true,

    politics is not working the way everyone thinks it does,
    economics doesnt work the way everyone thinks it does,

    our whole conception of the modern world is a zombie form the 18th century

  13. @Jarvo
    Jarvo…the clearly it will get worse before it gets better in the US. May have a way to go yet before the broom arrives.

  14. Excellent piece. I never quite understood exactly why the Great Moderation story was so widely accepted. The ‘we have learned to manage the economy’ line that Coibion and Gorodnichenko push is rather self-congratulatory and fials in the absence of identifying exactly what policies led to the reduced volatility and why these policies should not be seen as having in the current example. I have not read their paper but the excerp on Voxeu is not encouraging: seems like ex post statistical mumbo-jumob to me to be frank.

    In any event, the Great Moderation meme fails on basic mean reversion grounds. Russell’s inductivist turkey should’ve put it to rest in any event.

  15. #5, Mulligan is insane: P Krugman’s been on a crusade to stop people from believing in Mulligan’s ‘recessions are explained by voluntary unemployment’ nonsense for quite some time now and whatever you think of Krugman, this time he is 100% spot on.

  16. @Norbert
    “economists are often loathe to apply these same criteria to their own work…’

    Good point. Norbert. Sadly diminished by the malapropism. The word you’re searching for is ‘loath’, alternative spelling ‘loth’. First rule about using an archaic construction: get it right. 😉

  17. Is micro-based-macro being “revived”?
    how can it be “revived” if it never went away?
    Of course it may have proven itself useless, but it never actually went away, did it?
    When so much of the profession has built their career on it, they’re not in much of a mood to say, “oh, turns out all that work we did is actually useless, let’s start over”. Instead they’ll just plod on, papering over the empirical and logical gaps with increasingly contorted arguments like the one above.
    and even when they know their arguments are untenable, they’ll say, “Well, there’s no alternatives, are there?”, and that will be reason enough not to try and develop alternatives. And they’ll be making sure that tenure and research grants are much easier to get for up-and-coming economists who believe what they believe.

    Meanwhile, PAECON’s Real World Economics Review blog is taking votes for their new dynamite prize in economics, which will be awarded to the three economists who contributed the most to blowing up the world economy. You can vote now.

  18. @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 ?

  19. @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]

  20. 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.

  21. 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.

  22. 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.

  23. @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.

  24. 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?

  25. 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.

  26. 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

  27. 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!

  28. 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?

  29. @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.

  30. 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.


  31. @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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