Five years ago today, Lehman Brothers filed for bankruptcy. In contemplation of what followed, today’s Quote of the Day comes from a speech delivered a little over five years earlier:
Macroeconomics was born as a distinct field in the 1940’s, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with better incentives to work and to save, not from better fine-tuning of spending flows. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management.
-Robert Lucas, in his 2003 Presidential Address to the American Economic Association.
“Its central problem of depression prevention has been solved, for all practical purposes, and has in fact been solved for many decades.”
I think it’s very arguable that this is due to macroeconomics. Probably more convincing is the fact that regulatory capture of the government by the minions of high finance accounts for this more than any specific application of macroeconomic theory. Witness the fact that the banks were largely bailed out in our most recent Great Recession — and none of them went to jail. They’ve got theirs. The rest of us just have to suffer through. The only theory that explains why that happens is the greed fostered by a corrupt system that serves itself and not the public.
“Probably more convincing is the fact that regulatory capture of the government by the minions of high finance accounts for this more than any specific application of macroeconomic theory.”
Financial deregulation is something that the Chicago Boyz endorsed. Deregulation combined with the creation of financial mega-megacorps leads to a situation where mega-megacrashs are possible. At that point, the government has the option of massive intervention, or replaying the Great Depression. Not much of a choice.
Elaborating on Mike’s comment, what is also very arguable is that the first 3 and a half sentences in the Lucas quote are correct. However, Krugman has noted many times, economics has retrogressed in the last 4 decades.
One of the objections (made early and often*) to the basic model of macroeconomics for the last 3 decades is that it posits that the source or cause of recessions is negative technology shocks - that is sudden, unanticipated declines in productivity so that with the exact same stocks of capital and labor, we get less output. According to the objection, this can easily happen in, say, agriculture, where bad weather or a plague can reduce output, but no one has ever shown how this can happen in mfg or services. The response (probably also due to Krugman, but I am not certain) is that macroeconomists themselves are the best example of this, with a clear decline in knowledge since, roughly, 1970, leading to a decline in productivity and less (useful) output.
*appropriate since the basic change in macroeconomics 4 decades ago is associated with Chicago (that 3 decades ago, with Minneapolis/Minnesota).
Boy, Lucas doesn’t look so hot, now? I imagine that if things had held off a few more years, he might have gotten that Nobel Prize.
BTW: “Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply-side policies exceeds by far the potential from further improvements in short-run demand management.”
US performance since the Reagan era is worse than before, in the New Deal Era. Lucas just can’t tell the truth to save his soul, can he?
Lucas’s quotation is correct. See the working paper by eggertsson et al concerning liquidity provision in the last recession:
http://www.econ.brown.edu/fac/Gauti_Eggertsson/papers/DEFK.pdf
Weird to quote Lucas with no commentary.
You guys realize Lucas voted for Obama right? His economics is separate from his politics, which is obviously not the case on this blog.
Dan,
It is not weird to quote Lucas with no commentary. No weirder than any of the other Quotes of the Day on this blog, which similarly appear with no commentary. Those posts are intended as spaces for our people in our comment threads to reflect on what the quotes mean, either to themselves or to anything else they feel.
The notion that depression-prevention has been “solved” is an astonishing claim, and one worth reflecting on on a day as cataclysmic for many as the fall of Lehman.
And as for your snide remark about this blog as a whole, well, I’m sorry you think so.
I apologize for the remark.
As to depressions being solved, I guess I am not clear on why you find that an astonishing claim. Lucas, Bernanke, Friedman, and most macroeconomists see the Great Depression as a result of central bank errors with respect to contractions of the money supply. The paper I link to above uses that analysis to understand how Central Bank action prevented another ‘Great Depression’. Personally I have a difficult time seeing how the collapse of Lehman was anywhere near “cataclysmic” as what happened in ’29 and the ’30s. It certainly could have been, but CB policy stepped up and avoided many of the policy mistakes of the GD.
One would hope that economic policy improves overtime, otherwise I would not think the discipline would have much to offer.
We agree on more than I thought; many thanks for your clarification.
You evidently think the distinction between “recession” and “depression” is not only one of degree, but of kind. The assertion that macroeconomics has learned how to forestall depressions, while not limiting the possibility of recessions, is (perhaps) true under this assessment. Time will tell.
But I use the words “astonishing” and “cataclysmic” only to mean that for many people, the recession precipitated by the fall of Lehman was truly devastating, and the distinction between “recession” and “depression” is academic and trivial: it was experienced by a lot of people as a depression. In light of that, Lucas’ speech seems deeply unsatisfying.
That’s my read. But I’m very grateful for the paper you sent. For what it’s worth, you’ve modified my thinking on the matter.
And that guy still has more influence in economics than Krugman, I'll bet.