The bitter, political fight to create a new macroeconomics

THE big debates in macroeconomics have never been polite. I suppose it’s understandable that this is the case; after all, the stakes are high. Tyler Cowen excerpts a new blog post by Scott Sumner, which reads:

…what’s happened since 2009 involves not just one, but at least five new types of voodoo:

1. The claim that artificial attempts to force wages higher will boost employment, by boosting AD.

2. The claim that extended unemployment benefits—paying people not to work—will lead to more employment, by boosting AD.

3. The claim that more government spending can actually reduce the budget deficit, by boosting AD and growth. Note that in the simple Keynesian model, even with no crowding out, monetary offset, etc., this is impossible.

4. More aggregate demand will lead to higher productivity. In the old Keynesian model, more AD boosted growth by increasing employment, not productivity.

5. Fiscal stimulus can boost AD…Continue reading

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Improve your life by making huge decisions with a coin toss

FACING a difficult decision? Toss a coin. It will change your life.

This is the message from a new working paper, by Steven Levitt of the University of Chicago (the Freakonomist), which suggests people are too cautious for their own good. And he isn’t talking about the small-stakes decisions economists usually analyse—he is focused on big life choices, like whether to quit a job or end a relationship.

Working out whether people would be happier if they moved away from the status quo for big life decisions is tough. Running a randomised controlled trial would involve some tricky ethics and practicalities—we would rightly balk at the idea of Mr Levitt demanding that half of his sample group go get divorced to see whether they regret it. Mr Levitt got around such problems by making his experiment…Continue reading

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