Understanding The “Sectoral Problem” In Business Cycles: A Note

by Mario Rizzo  

There has been some important discussion emanating from Paul Krugman’s unoriginal question implicitly about the Austrian Business Cycle Theory (as well as other sectoral theories of employment shifts both during and outside of business cycles). (See Econbrowser, Marginal Revolution, Econlog, Angry Bear, for examples.)   

His question, as Tyler Cowen states it: “…[W]hy, say, a housing boom – which requires shifting resources into housing – doesn’t produce the same kind of unemployment as a housing bust that shifts resources out of housing.”  Continue reading

The Great Moderation In Macroeconomics

by Mario Rizzo  

I have now read both Paul Krugman’s New York Times essay on the state of macroeconomics and John Cochrane’s reply. They are each, in very different ways, quite disappointing. The level of argument is poor, the prejudices are simplistic, and the tones are annoying.   Continue reading

Not Prediction But Explanation

by Mario Rizzo

Her Majesty Queen Elisabeth II asked why economists did not predict the current economic troubles. The British academic community (and some in the American) is using this opportunity to discuss views on the nature and limits of contemporary macroeconomics. This is very useful.  

Peter Boettke over at The Austrian Economics summarizes and discusses some of the main issues. I shall not repeat what he says in my post. Everyone should read Pete’s.  

It is convenient for those of us who never thought much of contemporary macroeconomics to support the complaints that the financial crisis and recession was not “predicted” by the Macroeconomics Top Brass. But, as tempting as it is, it would be a mistake. Continue reading

Lucas Defending Macroeconomics: Not Enough

by Mario Rizzo

Reportedly, Queen Elisabeth asked why didn’t any of the top-tier macroeconomists predict the financial meltdown and Great Recession. So now The Economist and other loyal subjects are trying to answer that question. The Chicago economist Robert Lucas, an American, has also added his opinion. It is deeply flawed but perhaps a comfort to the “Neoclassical Top Brass” (as my late colleague Ludwig Lachmann used to say). Continue reading

Bubble or Growth?

by Jerry O’Driscoll

In an interview with The Wall Street Journal, German Chancellor Merkel called for an end to risky growth policies built on asset bubbles.  “In recent years we’ve had the Asian crisis, the new economy crisis, and now this great international financial and economic crisis — we can’t slide into a crisis every five to seven years.”  As she notes, however, the central banks of the major economies have implemented “unorthdox” policies to increase borrowing and lending in the current crisis.  Those policies risk yet another asset bubble. Continue reading

Recovery and the Irreversibility of Time

by Mario Rizzo  

An increasing number of articles in the popular press are claiming that signs of economic recovery are becoming more numerous. That may be. However, I am not an economic prognosticator and so I don’t know what to make of that.  

There is a more basic question. What do people mean by “recovery”? It seems that, if articles in the Wall Street Journal are any guide, recovery is often taken to mean a return to normalcy in some key markets – in particular, the housing market.   Continue reading

Inappropriate Stimulation


by Mario Rizzo


Paul Krugman continues to say on his blog that the fiscal stimulus was too small. After all, unemployment is rising quickly:


“[I]t’s rapidly becoming clear that yes, the plan was too small.”


Brad DeLong has also added his voice to the call for bigger stimulus, again largely because of the deteriorating employment picture. He also instructs those who disagree with him as to which objections to stimulus are reasonable. (The one I raise here is not included.)


However, Krugman and DeLong’s inferences are superficial. If we look more carefully at what is going on we see that macro stimulus is designed to hit precisely the wrong targets. The problem is not size but appropriateness. Continue reading

An ally on the left? And bleg results

by Sandy Ikeda

This passage is from a piece in, of all places, Scientific American, from, of all people, Jeffrey Sachs:

During the decade from 1995 to 2005, then-Federal Reserve chairman Alan Greenspan over-reacted to several shocks to the economy. When financial turbulence hit in 1997 and 1998—the Asian crisis, the Russian ruble collapse and the failure of Long-Term Capital Management—the Fed increased liquidity and accidentally helped to set off the dot-com bubble. The Fed eased further in 1999 in anticipation of the Y2K computer threat, which of course proved to be a false alarm. When the Fed subsequently tightened credit in 2000 and the dot-com bubble burst, the Fed quickly turned around and lowered interest rates again. The liquidity expansion was greatly amplified following 9/11, when the Fed put interest rates down to 1 percent and thereby helped to set off the housing bubble, which has now collapsed. Continue reading

Bleg: Which Austrians called the Panic of 2008?

by Sandy Ikeda

A comment from Laeeth Isharc on an earlier post raises a fair but, at least for me, uncomfortable point:

…Austrians/Hayekians might perhaps be within a minority of economists able to foresee the disastrous consequences of the inevitable bust…. But I don’t recall seeing a single piece by Austrian economists in the academic or policy world warning about the dangers of such a policy in the contemporary context.

So help me out: Who, if anyone, firmly within the Austrian camp — let’s say associated with NYU, GMU, WVU or current members of the SDAE — called this latest boom and bust? I certainly didn’t.

I’ll be generous in interpretting “call” (i.e., exact timing and magnitudes not essential — so pattern predictions are OK), but please respond with references to published writings, including articles and, I guess, blog posts.

Taylor Rule and Fed Witches’ Brew

By Chidem Kurdas

Bubble, bubble, toil and trouble—that’s an apt metaphor for the Federal Reserve policies meticulously dissected by Stanford professor John Taylor, in the Wall Street Journal and other places.  He shows that the Fed set the financial crisis in motion and then made it worse.

Relative to the pattern that held since 1987 – a standard that has come to be known as the Taylor Rule – the Fed kept interest rates exceptionally low in 2002-2006.  Easy credit got real estate prices bubbling, which convinced folks that property prices go only one way and concealed the risk of price declines. Hence homeowners, developers and banks over-extended themselves.

Once the credit bubble collapsed in 2007, the excessive debt became rancid. Taylor argues that the Fed mis-diagnosed the problem as a lack of liquidity. Once again opening the spigot and cutting US rates, it brought down the US dollar. The price of oil, being denominated in dollars, consequently went through the roof. That wrecked household budgets and people responded by curtailing consumption. Thus economic conditions worsened. Continue reading

Orthogonal mindsets

by Sandy Ikeda

At the Colloquium lunch on Monday, one of my esteemed colleagues wondered aloud whether Paul Krugman’s insistence that the humongous stimulus package needs to be much bigger wasn’t evidence of madness. Then, something came up during the actual colloquium – with Larry White, with whom we were discussing a chapter, dealing with Hayek versus Keynes in the 1930s, from his forthcoming book on the “clash of economic ideas” in the 20th century – that helped a non-macro-guy like me better understand, from a sociological perspective, why economists on different sides of the bailout/stimulus debate often just don’t seem to get each other. Continue reading

What’s It All About?

by Gene Callahan

“History justifies whatever we want it to. It teaches absolutely nothing, for it contains everything and gives examples of everything.”
—Paul Valéry, De l’historie, Regards sur le monde actuel

My friend Larry White presented at the colloquium yesterday. He gave a nice presentation on the Roaring Twenties and the Great Depression, discussing the various policy recommendations that economists had offered at that time, and marshalling empirical evidence indicating that Mises and Hayek had gotten things essentially right in regards to those events.

But the paper raised, for me, the question of what “good” these sort of efforts yeild, in so far as they are aimed at practical persuasion. Continue reading

Tyler Cowen is Right about Stimulus — Niggling or Not.

by Mario Rizzo

From Tyler Cowen at Marginal Revolution:

Note that under standard theory neither monetary nor fiscal policy will set right the basic problems from negative real shocks and indeed the U.S. economy is undergoing a series of massive sectoral shifts.  That includes a move out of construction, a move out of finance, a move out of debt-financed consumption, a move out of luxury goods, the collapse of GM, and a move out of industries which cannot compete with the internet (newspapers, Borders, etc.).


I’ve never seen a stimulus proponent deny this point about real shocks but I don’t see them emphasizing it either.  It should be the starting point for any analysis of fiscal policy but so far it is being swept under the proverbial rug.


I think that Tyler Cowen is right on this issue. What follows is my congruent take on the issue, without implicating him in the details. Or implicating me in the details of his own view. Continue reading

Microfoundations are not a “Morality Tale”

by Mario Rizzo


In his column today in the Financial Times the often-excellent Martin Wolf drops the ball. He endorses the view which he associates with J.M. Keynes “that one should not treat the economy as a morality tale.”  

The third and most important lesson is that one should not treat the economy as a morality tale. In the 1930s, two opposing ideological visions were on offer: the Austrian; and the socialist. The Austrians – Ludwig von Mises and Friedrich von Hayek – argued that a purging of the excesses of the 1920s was required. Socialists argued that socialism needed to replace failed capitalism, outright. These views were grounded in alternative secular religions: the former in the view that individual self-seeking behaviour guaranteed a stable economic order; the latter in the idea that the identical motivation could lead only to exploitation, instability and crisis. ……

This same moralistic debate is with us, once again. Contemporary “liquidationists” insist that a collapse would lead to rebirth of a purified economy. Their leftwing opponents argue that the era of markets is over. Continue reading