We understand much of the economy’s hydraulics; we just don’t always apply what we know.

January 25th, 2015 at 10:18 am

Over at the WaPo. And I got more words to fool around with than usual!

I tried, you’ll let me know how successfully, to bring some nuance to the argument, as the point is decidedly not “look, we’ve done all this great policy and the US recovery is stellar!”

It’s that contrary to what I think is probably conventional wisdom, many economists actually understand the basic hydraulics, as it were, of both the macroeconomy and critical sub-systems like health care quite well. We basically can diagnose problems and prescribe solutions that if implemented, will roughly have their intended effect. The piece considers the Recovery Act, Fed actions, Obamacare, the bailouts–all worked in much the way I would have expected–plus and minus.

A key part of the argument is the mistakes made along the way, both here and more so in Europe. For example, the fact of inadequate stimulus actually underscores my point: there were prominent economists at the time who, based on known hydraulics since Keynes (and not just the need for fiscal stimulus but the fact that multipliers are amplified when the Fed’s stuck at the zero lower bound), recognized that inadequacy and proscribed the implied actions. Some of those economists worked for Obama at the time!

And, as the piece explicitly underscores, none of this is to deny the economic amnesia among many in my trade.

Europe is a poignant and tragic example. They’ve consistently bucked the “known hydraulics” at tremendous cost to their citizens.

Obviously, knowledge that doesn’t get implemented because of politics and bad economics is wasted, so I’m not trying to tell a happy story here. But I do think I’m broadly right about this.

Some figures that didn’t make it into the paper:

recov2 recov1

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2 comments in reply to "We understand much of the economy’s hydraulics; we just don’t always apply what we know."

  1. Matt Shevrin says:

    Government intervention “lite” has certainly been better than nothing at all, but it should never have to get to this point. The bubble and burst cycle is a result of rapacious and short-sighted financial and business decisions that elevates risk to everyone (else) and causes those unable to weather the “hydraulic” churn to suffer needlessly. We have to do better than “until demand improves, the beatings will continue”. Plutocrats once felt compelled to be more rational about this, but no longer. Please keep proposing credible solutions that will truly prevent another Great Recession. The fact that this is a slow and unequal recovery is partly due to the same shameful mind set that brought on the first one. It’s unbearable, both economically and socially.

  2. Richard Solomon says:

    People ignore or dispute these ‘basic hydraulics’ when their own, short term self interests suggest that it will not help them to endorse more government spending to stimulate the economy. They sometimes couch their rationalizations in moralistic terms. Eg why should they spend tax dollars to help out those ‘lazy people who don’t do enough to help themselves?’ This is what the Germans are saying about Greece, Spain, etc. They fail to see that raising all boats in the water would ultimately help them as well. It’ll be interesting to see what the Germans will do now after the Greek election, eh?!?