Are recessions abnormal (crosspost from Crooked Timber)

I’m on to the macroeconomics section of my book in progress, Economics in Two Lessons. The key point of this section is that, whereas the academic economics profession has wasted most of the last thirty years on the project of founding macroeconomics on (some near approximation of) standard neoclassical microeconomics, the validity of the core results of neoclassical microeconomics depend on the assumption that the economy is operating at full employment[^1]. This observation isn’t original – it was why Keynes saw his theory as saving capitalism from itself. Even the title I used in this post on the macro foundations of microeconomics turns out to be a reinvention of the wheel.

Having noted the importance of the full employment assumption in the abstract, how relevant is it? If the economy is, with notably rare exceptions, at, or close enough to, full employment, then it seems safe enough for economists to continue, as the profession has for 40 years or so, to treat macroeconomics as a special subfield with little relevance to the rest of the discipline.

To put the question simply, are recessions abnormal?

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Grattan Institute advocates cutting university research funding

Andrew Norton of the Grattan Institute has received quite a bit of attention for a piece arguing that universities don’t need additional funding because money intended to fund teaching is going to support research instead. Norton suggests that the funding going to research is around $2 billion a year

University research matters to Australia, but the evidence that it improves teaching is less clear. Direct spending on teaching, by contrast, is far more likely to ensure that universities offer the high-quality courses students want.

The obvious question is, if university research is important to Australia, won’t cutting $2 billion (or some substantial component of it) from research funding harm our national interest. As the quote above shows, Norton merely asserts that redirecting funding from research to teaching will benefit teaching.

The core of Norton’s piece is a misuse of accounting categories. The implicit claim that, since university funding is allocated on a per-student basis, it must be intended entirely for teaching. The further implicit assumption is that the only research that should be undertaken is that explicitly funded through bodies like the Australian Research Council.

But this has historically never been the case. In Australia, and (as far as I know) in every other country, university academics are expected to undertake research as part of their duties, whether or not they have grant funding. The standard proportion, which hasn’t changed in my 30+ year involvement in the system is 80 per cent teaching (and associated service), 20 per cent research, which appears to be exactly the proportion cited by Norton.

It’s true that more transparency in the allocation of resources between teaching and research would be a good thing, if it were feasible. But as the travails of exercises like the Excellence for Research in Australia process have found, this is easier said than done.

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