May 12, 2014

Macroeconomic Policy

Editor’s note: This article was published under our former name, The Open Philanthropy Project. Some content may be outdated. You can see our latest writing here.

This is a writeup of a medium investigation, a brief look at an area that we use to decide how to prioritize further research.

In a nutshell

What is the problem?

The recent Great Recession points to the large humanitarian costs of business cycle downswings. Going forward, it seems reasonable to expect recessions to cost the global economy an average of hundreds of billions of dollars a year in lost output due to idle capacity. To the extent that better stabilization policy is possible, it could carry large humanitarian benefits.

Who already works on this issue?

Central banks, including the U.S. Federal Reserve, are generally the most active players, as both economic policymakers and researchers. Academic economists outside of central banks do a significant amount of research on policy-relevant questions, and there is some philanthropic support for research. A few think tanks and international organizations also work on the topic.

What could a new philanthropist support?

A philanthropist could focus on advocacy or research. Advocacy work might involve supporting think tanks, educating the public, or building interest group coalitions. There seem to be a number of unresolved research questions of substantial policy relevance, and a funder aiming to facilitate progress on them could pursue any of a number of approaches.

What is the problem?

Economic recessions can carry enormous humanitarian costs. For instance, the 2008 financial crisis and the associated Great Recession appear to have:

Cost the US economy roughly ten trillion dollars, and the rest of the global economy a comparable amount, in lost output due to idle capacity.^[1]“The final step to calculate the output loss from the financial crisis is to discount the costs to the present value in 2007, to account for the fact that consumption in the present is preferred to consumption in the future. We use the discount rate of 3.5 percent as prescribed in Moore et al. … Continue reading
Reduced potential output over the long run by forcing some people out of the workforce, reducing investment, and delaying productivity improvements.^[2]“CBO’s projections for growth of all three factors that underlie potential output have been dampened by the recent recession and the ensuing slow recovery. In particular, CBO estimates the following: Persistent long-term unemployment will lead some workers to leave the workforce earlier than … Continue reading
Caused millions of people to suffer bouts of long-term unemployment, which may carry significant psychosocial and health costs and result in permanent income losses.^[3]“Even if we were to know for certain the output lost or, equivalently, the income lost, it would not completely encompass the crisis’s negative consequences on households. Goods and services represent only one input that determines society’s overall well-being. While the recession was an … Continue reading

Despite these harms, the impacts of the recession could plausibly have been much worse had the response of policymakers been less aggressive.^[4]“Improvements in monetary and fiscal policy have likely contributed to the patterns in the high-frequency data originally identified as the Great Moderation, although one could debate the share of the credit they deserve. I believe policy steps have also played a critical role at lower … Continue reading

The 2008 financial crisis prompted an unusually deep recession, and it is difficult to assess the likelihood of similarly deep recessions in the future. A very rough approximation, based only on the occurrence of the Great Depression and the Great Recession, might be to expect such events twice per century, which would suggest that recessions carry annual global costs in the hundreds of billions of dollars range.^[5] Combining the global and domestic figures cited above from Atkinson, Luttrell, and Rosenblum 2013 pgs 6-9, we might estimate that the Great Recession cost economies about $20 trillion. A 2% annual risk of such a recession would suggest an annual cost of about $400 billion. Accordingly, the possibility of reducing the frequency or depth of recessions would carry significant humanitarian value, though the extent to which such reductions are possible or desirable is disputed amongst economists.^[6]“The first objection to stabilization policy is that output fluctuations are optimal or nearly irrelevant. The stronger version of this view is real business cycle theory, which posits that fluctuations are optimal responses to productivity and taste shocks,9 an idea that flies in the face of the … Continue reading

It is not clear to what extent we should expect certain features of the recent recession to recur in the medium to long term. The relatively stable economic conditions observed in the U.S. during the decades prior to the recession may have prompted an underestimate of the magnitude of variability in the economy – deep recessions may be more likely than the recent experience prior to the Great Recession would suggest.^[7]“One aspect of the broad historical data stands out: sharp declines in economic activity occur relatively frequently. To put this in perspective, per capita real U.S. GDP fell by 3.7 percent in 2009. In the broad historical experience represented by these seventeen countries, a decline of that … Continue reading Real interest rates also appear to have been declining throughout the developed world for much of the last thirty years,^[8]“Real interest rates worldwide have declined substantially since the 1980s and are now in slightly negative territory. Common factors account for much of these movements, highlighting the relevance of global patterns in saving and investment. Since the late 1990s, three factors appear to account … Continue reading increasing the probability that economies will reach the “zero lower bound” on nominal interest rates, as they have recently, with greater frequency in the coming years. (The “zero lower bound” presents a particularly challenging situation for monetary policy, discussed more below.)

Note: this page focuses on macroeconomic issues related to business cycle stabilization. We may investigate other macroeconomic policy issues separately at a later date.

Who already works on this issue?

The Federal Reserve (“the Fed”), the United States’ central bank, plays an enormous role in U.S. macroeconomic policy and research.^[9]“Research on monetary policy is primarily conducted within the Federal Reserve System (“the Fed”). The Fed is a fairly insular institution. Prior to the US government bailout in 2008, the Fed made little effort to be transparent. Since 2008, the Fed has slightly increased its transparency, … Continue reading Its “dual mandate” is to promote maximum employment and stable prices.^[10]“In recent years, the Committee has taken a sequence of steps to improve public understanding of its policy objectives (Table 1). Of course, those objectives are ultimately provided by Congress in the Federal Reserve Act, which states that the Federal Reserve’s mandate is “to promote … Continue reading During recessions, the Fed typically uses monetary policy tools, e.g. lowering short term interest rates, to attempt to return the economy to full employment. Recently, having hit the “zero lower bound” on short term nominal interest rates, the Fed has been pursuing “unconventional policies” including large scale asset purchases (“quantitative easing”) and forward guidance about the future trajectory of interest rates that aim to stimulate the economy using other channels. Economists are not in full agreement about the likely impacts of these policies.^[11]“Looking ahead, there remain a number of key unresolved issues related to the ZLB. Three come immediately to mind. First, should central banks change their policy frameworks from inflation targeting to one of price-level or nominal-GDP targeting in order to better anchor expectations of future … Continue reading

It is difficult to accurately estimate the resources that the Fed devotes to monetary policy research, but the Board of Governors budgeted $64 million for “research and statistics” in 2013, while the twelve regional banks budgeted a total of $602 million for “monetary and economic policy” in 2013.^[12] Federal Reserve Annual Report: Budget Review 2013 Table B.1, pg 35, and Table C.3, pg 41.

There are also hundreds or thousands of economists, primarily based in universities, who conduct research on macroeconomics, though they do not necessarily produce research that aims to influence policy.^[13]“However, many hundreds of research economists, spread out across hundreds of institutions, are working in areas that may be relevant to improving US macroeconomic policy. Increasing knowledge about macroeconomic policy is a major issue on economists’ research agenda today.” Notes from a … Continue reading Some people we spoke with noted that the outsize influence of the Fed extends to academic macroeconomists, who tend to be hesitant to criticize it too stringently for fear of alienating friends or harming their careers.^[14]“INET also tries to encourage more independent thinking. A large portion of all academic macroeconomists are or have been at some point in their careers affiliated with the Federal Reserve system. As a result, there is a tendency not to be too critical of the Federal Reserve’s … Continue reading Accordingly, it may not be correct to view academic economists as a fully independent check on the research and decisions of the Fed.

There is relatively little philanthropic engagement in macroeconomic research and policy.^[15]“It seems that, generally, foundations pay little attention to macroeconomic policy issues. This may be because: Macroeconomics has traditionally been seen as a complex, technocratic, politically neutral policy area that should be left to the experts in the field, such as policymakers at the … Continue reading Funders of macroeconomic research or advocacy include:^[16]“Macroeconomists generally do not need high levels of funding. Existing sources of funding include: The National Science Foundation (NSF). The Institute for New Economic Thinking (INET). The Washington Center for Equitable Growth. The Russell Sage Foundation, to a small extent.” Notes from a … Continue reading

The National Science Foundation (a U.S. government institution), which spends roughly $40 million a year on grants for economic research (most of which is not for macroeconomics).^[17] Active NSF Economics Awards 3-26-14
The Institute for New Economic Thinking (INET), which was initially funded by a $50 million, 10-year grant from George Soros.^[18]“INET was established with a founding grant of $50 million over 10 years from George Soros in October 2009.” In their first 18 months of operation, they spent a total of $8.6 million. Institute for New Economic Thinking Inaugural Grant Report 2010-2011 pg 30.“Professor Wolfers doubts that … Continue reading
The Washington Center for Equitable Growth, which seems to focus primarily on inequality and growth rather than fiscal or monetary policy, expects to fund a few million dollars a year of research.^[19]“John Podesta, a longtime adviser to Bill and Hillary Clinton and President Obama, is starting a research center in Washington to investigate the causes and effects of growing economic inequality…. The center ultimately plans to award a few million dollars in research grants a year, Mr. Podesta … Continue reading
The Russell Sage Foundation, which spent $4 million on a program (now ended) on the impacts of the Great Recession.^[20] The Social and Economic Effects of the Great Recession: Recent Awards
The Alfred P. Sloan Foundation, which makes grants to support research on “economic institutions, behavior, and performance” including the economic implications of the Great Recession.^[21] Economic Institutions, Behavior, and Performance
The Peter G. Peterson Foundation, which spent $12.8 million in 2012, predominantly focuses on efforts to limit the federal budget deficit (as opposed to other macroeconomic research or policy focus areas, such as unemployment).^[22]The Peter G. Peterson Foundation 2012 Form 990 reports total spending of $12.8 million (including grants of $4.1 million).“Professor Wolfers doubts that recent efforts on these topics by foundations have been particularly effective. The Peterson Foundation spends millions of dollars a year on … Continue reading

Think tanks working on these issues include:^[23]“Organizations that a funder might be able to work with to support economic research or advocacy might include: The National Bureau of Economic Research (NBER). The NBER is committed to ideological balance and avoids making policy prescriptions, so it is unlikely to be a good fit for a funder … Continue reading

The Brookings Institution, which houses the new Hutchins Center on Fiscal and Monetary Policy and the Brookings Papers on Economic Activity.
The Peterson Institute for International Economics (PIIE).
The Center on Budget and Policy Priorities’ Full Employment project.

Our discussion has focused primarily on research and policy in the United States, but macroeconomic research and policy is highly globalized. A number of international organizations, like the International Monetary Fund, play important roles, as do central banks in other countries.

What could a new philanthropist support?

Philanthropic efforts to reduce the frequency or depth of recessions would likely have to aim to ultimately change (or prevent changes to) policy or the behavior of institutions such as the Federal Reserve. Toward this end, a philanthropist might support advocacy for particular policies and behaviors or research to help determine which policies and behaviors would be the best ones to adopt. Though the distinction between advocacy and research may not always be clear, we discuss them separately below.

Advocacy

A number of people who we spoke with noted that most advocacy on monetary policy tends to come from people who are skeptical of the Federal Reserve and want to focus on limiting inflation or return to the gold standard, and they argued that supporting groups that are more concerned about unemployment to engage in debates around monetary policy could be valuable.^[24]“The Federal Reserve System (“the Fed”) received a significant amount of pressure from conservatives to reduce its intervention in the economy following its response to the Great Recession, but it received little pressure to increase its efforts to reduce unemployment. The lack of pressure … Continue reading An example of such an opportunity might be to support more liberal/progressive think tanks to be more involved in debates over monetary policy.^[25]“In the past several years, progressive think tanks have been underrepresented in debates about monetary policy. Progressive think tanks were not sufficiently prepared to make significant contributions during the development of the Troubled Asset Relief Program (TARP) after the 2008 financial … Continue reading One risk from supporting progressive advocates on monetary policy is that they might continue to advocate for looser monetary policy even when it was appropriate for the Fed to tighten, potentially leading to worse policy in the long term.^[26]“Dr. Bivens believes that many Fed policymakers worry that additional political engagement in monetary policy would be a mistake. Although policymakers might welcome support for their current policies, they seem to worry that more vocal engagement by political agents might be harmful in the … Continue reading

Other advocacy opportunities might include:

Attempts at improving public communication around macroeconomic policy in order to help people understand the issues and tradeoffs.
Supporting think tanks or advocacy groups to work on proposals for other countercyclical policies, such as automatic aid to states during recessions or other automatic stabilizers.^[27]“The Center on Budget and Policy Priorities’ Full Employment project, run by economist Jared Bernstein, does research but is more on the advocacy end of the spectrum. It commissioned papers, including one coauthored by Professor Ball, that were launched at an event in Washington, D.C. that was … Continue reading
Creating a “shadow” Federal Open Market Committee to offer informed commentary and alternative policy proposals after Federal Open Market Committee meetings.^[28]“A philanthropist could fund a “shadow” Federal Open Market Committee of economists that would comment on the Fed’s actions after each Federal Open Market Committee meeting. If prominent economists were on such a committee, it might be able to attract significant attention. Tom Schlesinger … Continue reading
Supporting advocates for stricter financial regulation, which may reduce the risk of recessions caused by financial crises like the one in 2008.
Collecting and disseminating the consensus views of economists on macroeconomic policy questions, whether through surveys or credible nonpartisan research institutions.^[29]“Efforts to better understand the consensus among economists and to communicate the consensus to policymakers could help bridge the gap between economics and public policy. Models for accomplishing this include: A survey conducted by the Initiative on Global Markets (IGM) Forum that describes … Continue reading
Mobilizing business groups to convey points of economic consensus to a conservative audience.^[30]“Some progress could be made by advocating for policymakers to be better educated about the consensus in economics. The U.S. Chamber of Commerce, a business lobbying group, might be a good organization to lead these advocacy efforts, since they tend to be perceived as credible on the … Continue reading
Designing a model stimulus bill to have prepared in case of a future recession.
Advocacy for more federal funding for macroeconomic research.

As with other advocacy efforts, it is difficult to predict what the likely impact of these efforts might be.

To pursue these strategies, a philanthropist might support think tanks like Brookings or PIIE, or more explicitly ideological groups like the Center on Budget and Policy Priorities’ Full Employment project, the Economic Policy Institute, or the Center for American Progress.^[31]“It would be valuable to fund an advocacy organization or a center at an existing institution to influence the debate about macroeconomic policy issues and to direct attention to the problem of high unemployment. Such an organization could also pursue other important activities, … Continue reading We aren’t aware of many other organizations advocating on macroeconomic policy (while placing a strong emphasis on the importance of reducing unnecessary unemployment as opposed to focusing on controlling inflation).

Research

Strategies for supporting policy-relevant research

A philanthropist aiming to eventually improve macroeconomic policy by supporting research might pursue any of a variety of strategies:

Conventional research grants, similar to those provided by the National Science Foundation to economists.^[32]“A grant could provide financial support for an economics professor to do research instead of teaching for a summer or a semester. The National Science Foundation (NSF) has an economics program that provides some grants. However, it is unclear to what extent the grants cause research to be done … Continue reading
Supporting journals, such as the Brookings Papers on Economic Activity, which focus on policy-relevant questions and aim to have some influence.^[33]“Funding journals similar to the Brookings Papers on Economic Activity (BPEA) could help make economics more relevant to policy. However, BPEA has been doing this kind of work for about thirty years, and starting a similar journal from scratch would be quite difficult. BPEA has an annual budget … Continue reading
Summer programs to bring young economists up to speed on the state of a field and encourage them to pursue research in it.^[34]“Summer programs for graduate students can be hugely influential. As a graduate student, Professor Wolfers attended a two-week program on behavioral economics funded by the Russell Sage Foundation. The young economists who attended this program, all of whom are now professors, were able to … Continue reading
Offering economists training or support to communicate their work to a policy audience.^[35]“Academic economists who are interested in policy often lack the skills or means to engage in the policy debate. It might be useful to train academics to write and place op-eds and to provide them with the contact information of editors of top newspapers. That said, academics do not need to be … Continue reading
Increasing the representation of women and people of color in economics.^[36]“Increasing the representation of women and people of color in the field of economics, for example by creating summer graduate programs and workshops for underrepresented groups, could result in a more diverse group of economic policymakers (especially since people from historically … Continue reading
Supporting awards for policy-relevant macroeconomic research or public communication.
A fellowship or sabbatical program to fund a semester or year of paid leave for young macroeconomists interested in policy-relevant research.
Funding economics PhD graduate programs to train more students.
Supporting a conference or an edited volume on a topic of particular interest.^[37]“Another funding opportunity might be to commission an edited volume. John Taylor, a conservative economist, edited The Road Ahead for the Fed, which included policy essays written by ten prominent conservative economists. This is somewhat similar to CBPP’s Full Employment project but has a … Continue reading

We expect that these different approaches to supporting research might have very different cost-effectiveness profiles, though we do not have much sense of which are likely to get the strongest returns.

It is generally quite difficult to determine how much impact funding for research has on research output. At the margin, we would guess that grants allow academics to devote more of their time to a research project, but a number of people we spoke with mentioned the possibility that grants end up “supporting” research that would have occurred anyway, which intuitively strikes us as plausible.^[38]“A grant could provide financial support for an economics professor to do research instead of teaching for a summer or a semester. The National Science Foundation (NSF) has an economics program that provides some grants. However, it is unclear to what extent the grants cause research to be done … Continue reading

Important unresolved research questions

There appear to be a number of potentially important policy-relevant questions about macroeconomics that are, to the best of our knowledge, unresolved:

Which securities are best to purchase under a quantitative easing policy? Is it better to simply purchase the securities or explicitly target longer-term interest rates?
What specific short-run fiscal policies have the best tradeoff of economic impacts and political plausibility? What kinds of automatic stabilizers might be adopted to reduce the need for discretionary fiscal policy in the future?^[39]“Policy tools such as nominal GDP targeting and automatic stabilizers could help make policy more responsive to economic needs. Macroeconomists are not as focused on such tools as they could be. However, political constraints will make it difficult to pass such policies, and few economists … Continue reading
Should the Fed adopt a higher inflation target?^[40]“The recent discussion amongst academic macroeconomists has been too narrowly focused on the Federal Reserve’s current policies of quantitative easing (QE) and forward guidance; it would be better if academics were doing research on a more expansive portfolio of unconventional monetary policy … Continue reading
Should the Fed target a price level or an inflation rate?
Should the Fed target a Nominal Gross Domestic Product (NGDP) level?
Should long-term debt contracts be structured in non-traditional way to reduce the likelihood of future financial crises?^[41]“Evan: This isn’t a conventional argument that accumulating too much debt is bad, but rather a more radical one that the idea of debt is a bad one — that it’s flawed by design, right? Amir: There are basically three flaws. The first is that debt contracts have horrible risk-sharing. … Continue reading
To what extent do unconventional monetary policies (such as quantitative easing) increase risks of financial instability?
In measuring economic slack, should policymakers focus on short term unemployment, long-term unemployment, or the labor force participation rate? To what extent are declines in the labor force participation rate cyclical or demographic? How do high unemployment rates affect wage growth for people who are employed?^[42]“More research on why high numbers of people are leaving the labor force would be valuable. When people leave the labor force, they are not considered to be “unemployed” by official government statistics, so some analysts argue that the government may be underestimating the “real” … Continue reading
What would be the costs and benefits of moving to a system of electronic money (which could conceptually overcome the zero lower bound problem), and how politically feasible might such a system be?

To the extent that there is a literature on these questions (which varies), it is often difficult to find credible, unbiased syntheses of the literature that are accessible to a non-economist reader. We are not aware of any institutions that regularly publish authoritative, unbiased systematic reviews of the economics literature on questions like these ones.

Novel methodological approaches to macroeconomic research

Critics often claim that traditional macroeconomic research tools are not well-suited to reaching conclusive answers to such questions, and call for novel approaches.^[43]“[T]he reason we don’t have a new economic paradigm isn’t that economists are dumb, or even that all of them are rigid in their beliefs (obviously some are, or I wouldn’t have as many arguments as I do.) The reason, instead, is that it’s hard. Specifically: we have a body of economic … Continue reading It is difficult to anticipate in advance what kinds of new approaches might be helpful, but an incomplete list might include:

Novel data collection efforts, whether qualitative (such as Alan Blinder or Truman Bewley’s research on wage stickiness), quantitative (such as the Billion Prices Project), or historical (such as digitizing archival bankruptcy records).^[44]“I cannot resist closing with a conclusion about methodology rather than substance. I think this survey demonstrates that we can learn things of interest by asking actual decision makers to tell us about their behavior. If the survey approach is right, people will cooperate. If the questions are … Continue reading
Using large-scale multi-player online games to experiment with macroeconomic phenomena.^[45]“Just as video game designers are in dire need of economic advice, many academic economists are keen on studying video games. A virtual world, after all, allows economists to study concepts that rarely occur in real life, such as non-fractional-reserve banking, a popular libertarian alternative … Continue reading
Using agent-based models to develop a more sophisticated understanding of the impact of various economic policies.^[46]“In today’s high-tech age, one naturally assumes that US President Barack Obama’s economic team and its international counterparts are using sophisticated quantitative computer models to guide us out of the current economic crisis. They are not. The best models they have are of two types, … Continue reading
Incorporating approaches from other disciplines, such as economic history, into macroeconomic research.^[47]“INET seeks to change the assumptions that underlie academic research on monetary policy to be more reflective of political and economic realities. Academic economists tend to work with models of financial markets that assume a level of structure and predictability that practitioners do not … Continue reading

We do not have a strong sense of whether support for more conventional research approaches or these (or other) more radical new approaches are likely to be more valuable.

Potential grantees

Potential grantees for a funder aiming to support research might include:^[48]“Organizations that a funder might be able to work with to support economic research or advocacy might include: The National Bureau of Economic Research (NBER). The NBER is committed to ideological balance and avoids making policy prescriptions, so it is unlikely to be a good fit for a funder … Continue reading

The National Bureau of Economic Research (NBER)
The Brookings Institution, which houses the new Hutchins Center on Fiscal and Monetary Policy and the Brookings Papers on Economic Activity
The Peterson Institute for International Economics (PIIE)
Academic centers that conduct research on fiscal or monetary policy
Individual academics or research projects

We do not have a strong sense of which of these potential grantees are likely to be most promising. Funding individual academics or research projects would presumably give a funder more control but would also require more internal capacity.

Questions for further investigation

Our research in this area has been fairly limited, and many important questions remain unanswered by our investigation.

Amongst other topics, further research on this cause might address:

What is the macroeconomic policy and research situation in other countries? What impacts do unconventional policies that may be beneficial for developed countries have on emerging market economies?
How effective is marginal funding in producing policy-relevant economic research? Are there cases where important research projects have not occurred because of a lack of funding?
What kind of advocacy efforts are most likely to be effective in promoting better policy?
To what extent do economists agree about the appropriate macroeconomic policies to adopt? In areas of disagreement, is further research likely to result in a consensus? Do important unresolved questions represent a natural process of research progress or a more problematic shortcoming?
How likely is the zero lower bound to be an ongoing problem? Is additional research over and above that likely to occur in the status quo necessary in order to develop optimal policy responses to the zero lower bound problem?
To what extent are monetary policy disagreements partisan ones? To the extent that they are, how should we weigh intervening in them?

Our process

Our investigation of the field of macroeconomic research and advocacy has been relatively limited: we’ve followed a number of blogs on the topic, reviewed some of the academic literature, and spoken with people with knowledge of the field. Public notes are available from our conversations with:

Joseph Gagnon, Senior Fellow, Peterson Institute for International Economics; former Associate Director at the Division of International Finance and Senior Economist, US Federal Reserve Board
Mike Konczal, Fellow, Roosevelt Institute
Josh Bivens, Research and Policy Director, Economic Policy Institute
Robert Johnson, President, Institute for New Economic Thinking; Senior Fellow and Director of the Project on Global Finance, Roosevelt Institute; former Chief Economist, U.S. Senate Banking Committee
Justin Wolfers, Professor of Economics and Public Policy, University of Michigan; Senior Fellow, The Brookings Institution
Robert Bloomfield, Professor of Management and Accounting, Johnson Graduate School of Management, Cornell University
Laurence Ball, Professor of Economics, Johns Hopkins University
Scott Sumner, Professor of Economics, Bentley University

After reading this page, Jared Bernstein of CBPP sent some feedback, which we’ve shared here.

Sources

DOCUMENT	SOURCE
Active NSF Economics Awards 3-26-14	Source (archive)
Amir Sufi explains how old consumer debt holds back today’s economy	Source (archive)
Atkinson, Luttrell, and Rosenblum 2013	Source (archive)
Blinder 1994	Source (archive)
CBO 2013	Source (archive)
Economic Institutions, Behavior, and Performance	Source (archive)
English, López-Salido, and Tetlow 2013	Source (archive)
Farmer and Foley 2009	Source
Federal Reserve Annual Report: Budget Review 2013	Source (archive)
Furman 2014	Source (archive)
GAO 2013	Source (archive)
Institute for New Economic Thinking Inaugural Grant Report 2010-2011	Source (archive
International Monetary Fund 2014	Source (archive)
Krugman 2014	Source
Leonhardt 2013	Source
Notes from a conversation with Joe Gagnon on February 4, 2014	Source
Notes from a conversation with Josh Bivens on February 6, 2014	Source
Notes from a conversation with Justin Wolfers on February 26, 2014	Source
Notes from a conversation with Laurence Ball on April 17, 2014	Source
Notes from a conversation with Mike Konczal on January 23, 2014	Source
Notes from a conversation with Robert Bloomfield on April 4, 2014	Source
Notes from a conversation with Robert Johnson on February 18, 2014	Source
Peter G. Peterson Foundation 2012 Form 990	Source (Peterson_Foundation_990_2014 archive)
Plumer 2012	Source (archive)
The Social and Economic Effects of the Great Recession: Recent Awards	Source (archive)
Williams 2014	Source (archive)

Footnotes[+]Footnotes[−]

Footnotes
1	“The final step to calculate the output loss from the financial crisis is to discount the costs to the present value in 2007, to account for the fact that consumption in the present is preferred to consumption in the future. We use the discount rate of 3.5 percent as prescribed in Moore et al. (2004), which corresponds to costs that do not span multiple generations and have no crowding-out effects.8 Table 2 displays the resulting estimates of lost output. The cost is estimated to be between 40 and 90 percent of 2007 output ($6 trillion to $14 trillion), depending on assumptions about the strength of trend growth and the possibility of an oil-shock recession in the absence of the financial crisis. The estimates in Table 2 are broadly consistent with other studies. The GAO (2013), which reviewed the literature on output losses from past financial crises, expects a range from a few trillion dollars to more than $10 trillion. Boyd and Heitz (2012) conclude that approximately 45 percent of one year’s output was the lowest conceivable estimate of output loss, close to our lowest estimate of 40 percent. Underlying all of these estimates are assumptions that the financial crisis didn’t lower the U.S. trend and that the economy will return to trend in the foreseeable future–neither of which is certain. There is no consensus in the literature as to whether the level of potential output downshifted permanently. Possible drivers of a downshift include labor skill deterioration during extended periods of unemployment, a lower capital stock, and an increase in risk aversion that lowers productivity (Bernanke 2012). The difference between the precrisis and lower level of output would then extend indefinitely, greatly increasing the discounted cost of the crisis. Furceri and Mourougane (2009) find that past financial crises lowered potential by 1.5 to 2.4 percent and the magnitude of this shift increased with the severity of the crisis. Papell and Prodan (2011), alternatively, find that while the output gaps associated with financial crises are large, output eventually returns to potential–unaffected by the crisis–an average of nine years after the beginning of the crisis. However, five years after the beginning of the 2007-09 crisis, U.S. output has made up none of the ground it lost on its trend. It would take an average of 4.3 percent growth per year to reach the lowest trend level by the end of 2016, which appears unlikely judging from the rate of recovery to this point. Our forecast again provides a reasonable middle ground between near-term rapid growth and uncertain indefinite output losses, with output returning to trend approximately 14 years after the beginning of the crisis. As shown in the orange line in Figure 3, the Blue Chip survey of professional forecasters is much more pessimistic about output growth. Using the Blue Chip long-range projections instead of the forecasting model and counting lost output only through 2023, the output loss estimate is 65 to 165 percent of 2007 output ($9.9 trillion to $25.2 trillion). However, the Blue Chip forecasts suggest an upper bound on output loss because output growth at such distant horizons is mainly driven by forces that are not predictable. The forecasters most likely perceive a lower potential output level, but it is not obvious if they believe it was lowered primarily by the crisis. Therefore, the Blue Chip forecasts do not provide an economically meaningful estimate of output loss but do suggest it is possible that the range in Table 2 could understate the cost if tepid growth drags on for much longer. A final point about lost output: The financial crisis triggered (or is at least associated with) a worldwide downturn. A similar exercise for world GDP excluding the U.S., making no attempt to forecast and only counting through 2012, results in an $8.1 trillion output loss (Figure 4). This number is not intended to be included as a cost of the crisis because it is even less certain than the U.S. estimate. It is not clear that the financial crisis is to blame for all of the slowdown on the world stage. It does suggest that if the financial crisis is to blame, the international output loss is likely on a similar scale as the domestic loss.” Atkinson, Luttrell, and Rosenblum 2013 pgs 6-9. “Research suggests that U.S. output losses associated with the 2007- 2009 financial crisis could range from several trillion to over $10 trillion. In January 2012, the Congressional Budget Office (CBO) estimated that the cumulative difference between actual GDP and estimated potential GDP following the crisis would amount to $5.7 trillion by 2018.27 CBO defined potential output as the output level that corresponds to a high rate of use of labor and capital. CBO reported that recessions following financial crises, like the most recent crisis, tend to reduce not only output below what it otherwise would have been but also the economy’s potential to produce output, even after all resources are productively employed. In its estimate, CBO assumed that GDP would recover to its potential level by 2018, noting that it does not attempt to predict business cycle fluctuations so far into the future. Other studies have reported a wide range of estimates for the output losses associated with past financial crises, with some suggesting that output losses from the recent crisis could persist beyond 2018 or be permanent. In an August 2010 study, a working group of the Basel Committee on Banking Supervision reviewed the literature estimating output losses.28 According to the Basel Committee working group’s review, studies calculating long-term output losses relative to a benchmark (such as an estimated trend in the level of GDP) estimated much larger losses than studies calculating output losses over a shorter time period. In a June 2012 working paper, International Monetary Fund (IMF) economists estimated the cumulative percentage difference between actual and trend real GDP for the 4 years following the start of individual banking crises in many countries.29 They found a median output loss of 23 percent of trend-level GDP for a historical set of banking crises and a loss of 31 percent for the 2007-2009 U.S. banking crisis. Other researchers who assume more persistent or permanent output losses from past financial crises estimate much larger output losses from these crises, potentially in excess of 100 percent of precrisis GDP.30 While such findings were based on crisis events before 2007, if losses from the 2007- 2009 crisis were to reach similar levels, the present value of cumulative output losses could exceed $13 trillion. Studies that estimate output losses can be useful in showing the rough magnitude of the overall costs associated with the 2007-2009 financial crisis, but their results have limitations. Importantly, real GDP is an imperfect proxy of overall social welfare. As discussed below, real GDP measures do not reveal the distributional impacts of the crisis, and the costs associated with a financial crisis can fall disproportionately on certain populations. In addition, it is difficult to separate out the economic costs attributable to the crisis from the costs attributable to other factors, such as federal government policy decisions before, during, and after the crisis.” GAO 2013 pgs 15-17.
2	“CBO’s projections for growth of all three factors that underlie potential output have been dampened by the recent recession and the ensuing slow recovery. In particular, CBO estimates the following: Persistent long-term unemployment will lead some workers to leave the workforce earlier than they would have otherwise and will erode the skills of other workers, making it harder for them to find work in the coming years; The cumulative effect of the projected rebound in investment over the next decade will not entirely makeup for the investment lost during the recession; and Growth in total factor productivity has been held down as the recession and slow recovery have delayed the reallocation of workers to their most productive uses, slowed the rate at which workers gain new skills as technologies evolve, and lowered spending by businesses on research and development. Combining those effects, CBO estimates that potential output will be about 1 1⁄2 percent lower in 2023 than it would have been without the recession and slow recovery; each of the three factors accounts for about one-third of the reduction.12” CBO 2013 pgs 44-45.
3	“Even if we were to know for certain the output lost or, equivalently, the income lost, it would not completely encompass the crisis’s negative consequences on households. Goods and services represent only one input that determines society’s overall well-being. While the recession was an economic phenomenon, it has many dimensions beyond those effects captured by the sizable drop in output. Nonfarm payrolls fell by more than 8.7 million, or 6.3 percent, over the course of the recession. This forced many workers to face extended bouts of unemployment or to leave the labor force altogether. By the recession’s end in June 2009, the ranks of the underemployed–those who are available and searching, discouraged and not looking, or finding only part-time work–had risen 94 percent to 12 million. Lack of employment prospects and an uneven rebound in labor market conditions creates psychological burdens beyond those arising from foregone income.10 Branches of economics that survey broader measures of life satisfaction apart from income have conformed the intuition of the nonpecuniary costs of being unemployed (Bernanke 2010). Stress, shame, and feelings of loss of control also negatively affect the unemployed. Higher unemployment has spillover effects to the rest of society. While lost output implies additional unemployment to a certain extent, the amount of foregone production would not include the psychological strains that society must bear. Poor labor market conditions affect not just the underemployed and unemployed, but also the employed. A higher unemployment rate decreases job security and diminishes belief that another job could be found if a layoff occurred. The percentage of employees who quit–voluntarily left a job–plummeted during the recession, reflecting anxiety about job prospects (Figure 6). In fact, total separations (voluntary and involuntary) also fell because the drop in employees quitting was much larger than the increase in employees involuntarily losing their jobs. While the psychological cost of a weakened economy may be small for an employed worker relative to the burden experienced by the unemployed, the aggregate societal effects can be significant due to the sheer number of employed civilians.11 These kinds of surveys are hard to interpret because of difficulties quantifying personal well-being. One strategy is to use the effect from the loss of a specified amount of income as a measurable comparison. Helliwell and Huang (2011) analyzed a U.S. survey and found that a 1-percentage-point increase in the unemployment rate reduces the well-being of the unemployed as a group five times more than the direct effect from the lost income. The impact on the employed as a group, which is much larger than the unemployed, was found to be ten times that from the loss of income on the unemployed, bringing the total population effect to fifteen times the income loss due to unemployment. In 2008-12, unemployment related to the weak economy prevented roughly $900 billion in earnings.12 According to the findings in Helliwell and Huang, society would have given up fifteen times this–$14 trillion (in 2012 dollars, 90 percent of 2007 output)–to avoid the negative consequences to well-being from unemployment rising above its natural rate through year-end 2012. As usual, caution comes with such a large number. The various survey-based studies that estimate the cost of unemployment on well-being have arrived at different results depending on what questions were asked to measure well-being, in what country or countries the survey was taken, and the segment of the population that was surveyed. For example, Clark (2003) found no statistically significant spillover to society from a high unemployment rate in the U.K. Some studies have argued that surveys of well-being are not measuring the correct concept. Most surveys inquire about the respondents’ “life satisfaction.” Answering this requires a person’s cognitive judgment about what constitutes happiness and likely a comparison to people around them and to other points in their own life. This comes with baggage not associated with economists’ concept of utility. Knabe et al. (2010) instead aggregate up “experience utility” from how German survey respondents spend their time and how they feel during various situations. They find that while the unemployed are sadder than the employed during a given activity, the unemployed are able to spend more time on activities that are more pleasant than work, which offsets the negative effect from unemployment. They find the net effect of unemployment on time-weighted well-being to be negligible. These results may not hold in the U.S., and intuition suggests that unemployment is not a pleasant experience. However, they highlight the issues with directly asking people about their well-being and drawing macroeconomic conclusions from the results. One behavioral researcher in this area has noted that a lack of “earned success” has displaced the satisfaction of millions of Americans who have fallen on hard times.13 Surveys also suggest that the intangible consequences of joblessness are not just psychological because unemployment is also associated with worse physical health. The psychological and physical impact of unemployment worsens with the length of unemployment as stress accumulates and savings are depleted (McKee-Ryan et al. 2005). The median duration of unemployment was 16.3 weeks as of June 2013, remaining elevated above even previous recession highs (Figure 7). This implies that the total nonpecuniary costs were great not only due to the number of unemployed, but also because the burden on the average unemployed worker was greater than in previous recessions. Long-term unemployment is troubling from an economic perspective as well. It is possible that extended bouts of unemployment could cause workers to lose familiarity with technical aspects of their occupation. There is also some evidence that employers view extended unemployment as a stigma, making those workers less likely to be hired even if the extended unemployment is due only to weak economic conditions (CBO 2012). Both of these effects would reduce workers’ lifetime earnings and the U.S. economy’s potential output. We do not add the large nonpecuniary costs of unemployment to the total cost of the crisis because of the uncertainty of measurement. However, the burden of unemployment should further reinforce the possibility that the output loss estimate of 40 to 90 percent of one year’s output drastically understates the true cost of the crisis.” Atkinson, Luttrell, and Rosenblum 2013 pgs 11-13. “As shown in figure 3, the unemployment rate rose substantially following the onset of the financial crisis and then declined, but it remains above the historical average as of November 2012. The monthly unemployment rate peaked at around 10 percent in October 2009 and remained above 8 percent for over 3 years, making this the longest stretch of unemployment above 8 percent in the United States since the Great Depression.31 The monthly long-term unemployment rate—measured as the share of the unemployed who have been looking for work for more than 27 weeks— increased above 40 percent in December 2009 and remained above 40 percent as of November 2012. Persistent, high unemployment has a range of negative consequences for individuals and the economy. First, displaced workers—those who permanently lose their jobs through no fault of their own—often suffer an initial decline in earnings and also can suffer longer-term losses in earnings.32 For example, one study found that workers displaced during the 1982 recession earned 20 percent less, on average, than their nondisplaced peers 15 to 20 years later.33 Reasons that unemployment can reduce future employment and earnings prospects for individuals include the stigma that some employers attach to long-term unemployment and the skill erosion that can occur as individuals lose familiarity with technical aspects of their occupation. Second, research suggests that the unemployed tend to be physically and psychologically worse off than their employed counterparts. For example, a review of 104 empirical studies assessing the impact of unemployment found that people who lost their job were more likely than other workers to report having stress-related health conditions, such as depression, stroke, heart disease, or heart attacks.34 Third, some studies find negative outcomes for health, earnings, and educational opportunities for the children of the unemployed. Fourth, periods of high unemployment can impact the lifetime earnings of people entering the workforce for the first time. For example, one study found that young people who graduate in a severe recession have lower lifetime earnings, on average, than those who graduate in normal economic conditions.35 In prior work, we reported that long-term unemployment can have particularly serious consequences for older Americans (age 55 and over) as their job loss threatens not only their immediate financial security but also their ability to support themselves during retirement.36 Persistent high unemployment can also increase budgetary pressures on federal, state, and local governments as expenditures on social welfare programs increase and individuals with reduced earnings pay less in taxes.” GAO 2013 pgs 17-20.
4	“Improvements in monetary and fiscal policy have likely contributed to the patterns in the high-frequency data originally identified as the Great Moderation, although one could debate the share of the credit they deserve. I believe policy steps have also played a critical role at lower frequencies as well, with the best example being the Great Recession itself, which in many ways started off looking like it could be as bad or worse than the Great Depression. To appreciate this point, consider that the plunge in stock prices in late 2008 proved similar to what occurred in late 1929, but was compounded by sharper home price declines, ultimately leading to a drop in overall household wealth that was substantially greater than the loss in wealth at the outset of the Great Depression (Romer 2009). The crisis had global reverberations, and world trade volumes fell even more sharply from mid-2008 to mid-2009 than they did in the early stages of the Great Depression (Almunia, et al. 2010). Moreover, Alan Greenspan (2013) has argued that short-term credit markets froze more severely in 2008 than in 1929, and to find a comparable episode in this regard one has to go back to the panic of 1907. However, in large part because of an aggressive policy response, the unemployment rate increased 5 percentage points, compared to a more than 20 percentage point increase in the Great Depression from 1929 to 1934. And real GDP per working age population returned to its pre-recession peak more quickly in the United States than in other countries that also experienced systemic crises in 2007-08.” Furman 2014
5	Combining the global and domestic figures cited above from Atkinson, Luttrell, and Rosenblum 2013 pgs 6-9, we might estimate that the Great Recession cost economies about $20 trillion. A 2% annual risk of such a recession would suggest an annual cost of about $400 billion.
6	“The first objection to stabilization policy is that output fluctuations are optimal or nearly irrelevant. The stronger version of this view is real business cycle theory, which posits that fluctuations are optimal responses to productivity and taste shocks,9 an idea that flies in the face of the patently sub-optimal results that are recessions. Some of the more extreme policy implications of this view are generally not taken as seriously anymore, even in freshwater circles, which often accept that a variety of market or government imperfections allow for the possibility of sub-optimal equilibria. The weaker version of this view is associated with Robert Lucas (1987, 2003), who undertook a calibration exercise showing that assuming perfect insurance and a particular utility function, then a person would only be willing to give up less than 0.1 percent of his or her lifetime consumption to avoid volatility in consumption generated by aggregate economic fluctuations. A number of responses have been made to this claim, including technical objections to Lucas’s assumption about the degree of risk aversion people exhibit, as well as a recalibration of the same exercise that recognizes the possibility of rare disasters.10 But one of the most fundamental issues with Lucas’s calculation is that it assumes a representative agent (or equivalently perfect insurance), so that in his model a downturn means that everyone is consuming 5 percent less—not that 5 percent of the people lose their jobs, their earnings power, and thus see a much larger hit to their consumption. As a number of researchers have pointed out, people would pay a lot more to avoid this risk.11 Moreover, this risk is not spread identically across the economy because downturns disproportionately hurt the most vulnerable groups. Figure 6 shows the well-known pattern of black and Hispanic unemployment rates rising much higher than white unemployment rates in recessions and falling back slowly in recoveries, albeit with a persistent gap. The second objection to stabilization policy is that output fluctuations are actually supportive of future growth—as Joseph Schumpeter (1934) famously noted “[recessions] are but temporary. They are the means to reconstruct each time the economic system on a more efficient plan.” In other words, the relative return of productive activities to productivity-enhancing activities falls in a recession, increasing the return to the latter and thus fostering more innovation. Theory and evidence, however, suggest the opposite is true. As Garey Ramey and Valerie Ramey (1991) argued in an early reply to Lucas, higher volatility can be harmful for growth because increased uncertainty reduces investment, especially when firms must commit in advance to a certain scale of production. On a similar note, Barlevy (2007) shows that even though it might be rational to devote more resources to research and development (R&D) during a downturn when sales are lower, the empirical fact is that R&D activity is pro-cyclical, which compounds the cost of negative macroeconomic shocks. Moreover, the relationship between growth and volatility is much more nuanced than the original Schumpeterian formulation allows for. Research by Philippe Aghion and others, for example, has linked long-run growth with credit constraints, cyclical fiscal policy, and exchange rates, all of which are used to attempt to account for the observed inconsistency between Schumpeter’s claim and the observed behavior of countries and industries.12 DeLong and Summers (1988) also pointed out that stabilization policy is not symmetric; rather, it means that the economy spends less time operating well below potential and thus increases average output. This observation is also another flaw in Lucas’s calculation of the welfare cost of business cycle fluctuations, which assumed that fluctuations had no impact on the average level of output. Finally, a third objection to stabilization policy is that even if fluctuations are undesirable for distributional reasons and harmful (or neutral) for growth, there is still nothing we can do about them. This view goes back at least to President Herbert Hoover, was formalized by Milton Friedman (1953), and has unfortunately been the theory most often advanced against efforts to combat the Great Recession.13 While this general set of ideas was a useful caution against attempts to fine-tune the economy in more normal times, it is a potentially dangerous perspective when the economy is clearly operating below potential and, despite progress, will be operating below potential for a sustained period of time.” Furman 2014
7	“One aspect of the broad historical data stands out: sharp declines in economic activity occur relatively frequently. To put this in perspective, per capita real U.S. GDP fell by 3.7 percent in 2009. In the broad historical experience represented by these seventeen countries, a decline of that magnitude or larger occurs 5.2 percent of the time—that is, about once every nineteen years on average. Even if one abstracts from the experiences of the other countries and looks only at the U.S. data from 1871 to 2012, a decline of this magnitude occurs in 7.8 percent of the sample years, or about once every thirteen years. Based on these metrics, recent events would scarcely be considered rare or unprecedented. Instead, history teaches us that very large downturns are not only possible—they are probable. It is interesting to note that these large declines in output do not represent extreme tail events relative to the rest of the distribution. If one takes the mean and variance of the observations from the broad historical sample, the normal distribution implies a probability of declines of 3.7 percent or greater 8.2 percent of the time, somewhat higher than the observed rate of 5.2 percent. Thus, one does not need to resort to arguments about fat-tailed distributions to understand the data: it suffices to allow for a sufficiently large variance. A very different perspective on the likelihood of recent events is provided if one instead looks exclusively at the postwar U.S. experience. In the fifty years before the crisis, there was no year in which U.S. per capita real GDP fell by more than 3 percent. Given the dearth of extreme tail events, one is forced to construct a theoretical probability based on the available data. The green dashed lines in figure 2 illustrate one such attempt. The red lines show the histogram for a hypothetical economy with the same sample mean growth rate as the long sample of seventeen countries, but with the variance of the growth rate set equal to that observed in the U.S. data over 1958–2007. The distribution of outcomes is assumed to be normally and independently distributed. This distribution illustrates the types of assumption regarding macroeconomic variability typically used in past research on the ZLB. Based on the experience of the postwar period, the probability of experiencing a year as bad as 2008 is exceedingly low. Using the variance in the U.S. data over the fifty years prior to the crisis, one would expect a downturn as bad as occurred in 2008 less than one-quarter of 1 percent of the time, or about once every 430 years. The corresponding figure based on variance in the data during the Great Moderation period is essentially zero, at 0.003 percent, or once every 33,000 years! These overly optimistic predictions are due to the historically low variance in per capita real output growth during the decades before the crisis. The numbers tell the story. The standard deviation of the U.S. per capita GDP growth over 1958–2007 is 2.1 percentage points, half that of the broad historical data (4.2 percentage points). The difference is even greater if one looks at data from the Great Moderation period: the standard deviation of per capita real GDP growth over 1983–2007 is a mere 1.45 percentage points, about one third that of the broad historical experience. The miniscule implied probabilities of a severe downturn simply reflect the predicted rarity of approximately three and four standard deviation tail events.” Williams 2014
8	“Real interest rates worldwide have declined substantially since the 1980s and are now in slightly negative territory. Common factors account for much of these movements, highlighting the relevance of global patterns in saving and investment. Since the late 1990s, three factors appear to account for most of the decline. First, a steady increase in income growth in emerging market economies during 2000–07 led to substantially higher saving rates in these economies. Second, the demand for safe assets increased, largely reflecting the rapid reserve accumulation in some emerging market economies and increases in the riskiness of equity relative to bonds. Third, there has been a sharp and persistent decline in investment rates in advanced economies since the global financial crisis. This chapter argues that global real interest rates can be expected to rise in the medium term, but only moderately, since these three factors are unlikely to reverse substantially. The zero lower bound on nominal interest rates will remain a concern for some time: real interest rates will likely remain low enough for the zero lower bound to reemerge should risks of very low growth in advanced economies materialize.” International Monetary Fund 2014
9	“Research on monetary policy is primarily conducted within the Federal Reserve System (“the Fed”). The Fed is a fairly insular institution. Prior to the US government bailout in 2008, the Fed made little effort to be transparent. Since 2008, the Fed has slightly increased its transparency, e.g. by holding more frequent press conferences, because it has received increased political scrutiny and has used historically unprecedented tools, such as quantitative easing.” Notes from a conversation with Mike Konczal on January 23, 2014 “The Federal Reserve plays an outsize role in research on monetary policy, prompting some concerns about the potential for harmful “groupthink.” More independent sources of research support could help address that issue, though the structure of the Federal Reserve System, which includes twelve separate regional banks, already achieves that goal to some extent.” Notes from a conversation with Justin Wolfers on February 26, 2014
10	“In recent years, the Committee has taken a sequence of steps to improve public understanding of its policy objectives (Table 1). Of course, those objectives are ultimately provided by Congress in the Federal Reserve Act, which states that the Federal Reserve’s mandate is “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates” (Federal Reserve Act, Section 2a). In general, the Committee has judged that moderate long-term interest rates would follow if the Federal Reserve achieves its objectives of maximum employment and stable prices; hence, policymakers often refer to the “dual mandate” (Mishkin (2007a)). While the dual mandate was formally established by Congress in 1977, until recently, the Committee had not provided more specific guidance regarding its interpretation of either “maximum employment” or “stable prices.”” English, López-Salido, and Tetlow 2013 pg 4.
11	“Looking ahead, there remain a number of key unresolved issues related to the ZLB. Three come immediately to mind. First, should central banks change their policy frameworks from inflation targeting to one of price-level or nominal-GDP targeting in order to better anchor expectations of future policy actions? One lesson from the recent past is the difficulty in anchoring policy expectations when the short-rate is at the ZLB. Although quantitative forward guidance has proven a useful tool, it suffers from a number of limitations. Experience has shown that it is impossible to convey the full reach of factors that influence the future course of policy. As a result, forward guidance ends up being overly simplified and prone to misinterpretation. Moreover, forward guidance several years in advance may not be credible, especially in light of the change in policymakers over time. In theory, alternative frameworks such as nominal GDP targeting, if fully understood by the public, could help resolve these communication difficulties (Williams 2006; Woodford 2013), but at some potential cost. Second, should large-scale asset purchases be a standard tool of monetary policy at the ZLB, and, if so, how should they be implemented? As noted above, asset purchases have proven a potent but blunt tool, with uncertain effects on financial markets and the economy. In addition, there are nagging concerns that large-scale asset purchases carry with them particular risks to the economy or the health of the financial system that we still don’t understand well. Although most central banks used a quantity-based approach to implementing asset purchases, the Swiss National Bank used a price-based approach. These are issues that require further study and analysis.” Williams 2014
12	Federal Reserve Annual Report: Budget Review 2013 Table B.1, pg 35, and Table C.3, pg 41.
13	“However, many hundreds of research economists, spread out across hundreds of institutions, are working in areas that may be relevant to improving US macroeconomic policy. Increasing knowledge about macroeconomic policy is a major issue on economists’ research agenda today.” Notes from a conversation with Joe Gagnon on February 4, 2014 Academic macroeconomists typically conduct research on esoteric problems rather than policy-relevant issues such as how to prevent recessions and how to achieve full employment. Therefore, academic macroeconomists are not always well placed to provide helpful policy advice to the Fed and other institutions.” Notes from a conversation with Mike Konczal on January 23, 2014
14	“INET also tries to encourage more independent thinking. A large portion of all academic macroeconomists are or have been at some point in their careers affiliated with the Federal Reserve system. As a result, there is a tendency not to be too critical of the Federal Reserve’s decisions.” Notes from a conversation with Robert Johnson on February 18, 2014 “Nearly all of the leading American monetary economists have worked for the Federal Reserve at some point or aspire to do so. The close ties between monetary economists and the Federal Reserve make them reluctant to criticize the conduct of U.S. monetary policy – they would be criticizing decisions made by their friends and professional colleagues. These close ties may also mean that Federal Reserve research and research conducted by academics are not as independent as they seem.” Notes from a conversation with Laurence Ball on April 17, 2014
15	“It seems that, generally, foundations pay little attention to macroeconomic policy issues. This may be because: Macroeconomics has traditionally been seen as a complex, technocratic, politically neutral policy area that should be left to the experts in the field, such as policymakers at the Fed. The idea that liberal pressure on the Fed could lead to better policy outcomes was unpopular for the last 30 years. This may be partly because in many periods, such as the late 90s, the labor market was strong enough that looser Fed policy would have been undesirable. Foundations want tangible results, but it would be difficult to measure the results of a macroeconomic policy campaign. A campaign to raise the minimum wage in the next year has a clearly defined goal, whereas in macroeconomic policy, the campaigns would likely not be able to achieve results on a short time horizon and it would be difficult to link outcomes, e.g., Fed decisions, to a foundation’s activities.” Notes from a conversation with Josh Bivens on February 6, 2014
16	“Macroeconomists generally do not need high levels of funding. Existing sources of funding include: The National Science Foundation (NSF). The Institute for New Economic Thinking (INET). The Washington Center for Equitable Growth. The Russell Sage Foundation, to a small extent.” Notes from a conversation with Justin Wolfers on February 26, 2014 “Funders in this space include: The Alfred P. Sloan Foundation. The Peter G. Peterson Foundation. George Soros, the founder of INET and the Open Society Foundations (OSF). Few major foundations have supported work on macroeconomics and finance.” Notes from a conversation with Robert Johnson on February 18, 2014
17	Active NSF Economics Awards 3-26-14
18	“INET was established with a founding grant of $50 million over 10 years from George Soros in October 2009.” In their first 18 months of operation, they spent a total of $8.6 million. Institute for New Economic Thinking Inaugural Grant Report 2010-2011 pg 30.“Professor Wolfers doubts that recent efforts on these topics by foundations have been particularly effective. The Peterson Foundation spends millions of dollars a year on efforts to address the budget deficit, with most of the support going to advocacy rather than rigorous research, and seems to have achieved relatively little. The Institute for New Economic Thinking (INET), a think tank launched by George Soros, has struggled to have much influence because it funds thinkers who are too far outside the mainstream. In both cases, the clear ideological agenda of the funders have undermined their impact.” Notes from a conversation with Justin Wolfers on February 26, 2014
19	“John Podesta, a longtime adviser to Bill and Hillary Clinton and President Obama, is starting a research center in Washington to investigate the causes and effects of growing economic inequality…. The center ultimately plans to award a few million dollars in research grants a year, Mr. Podesta said. Initial funding will come from the Sandler Foundation.” Leonhardt 2013
20	The Social and Economic Effects of the Great Recession: Recent Awards
21	Economic Institutions, Behavior, and Performance
22	The Peter G. Peterson Foundation 2012 Form 990 reports total spending of $12.8 million (including grants of $4.1 million).“Professor Wolfers doubts that recent efforts on these topics by foundations have been particularly effective. The Peterson Foundation spends millions of dollars a year on efforts to address the budget deficit, with most of the support going to advocacy rather than rigorous research, and seems to have achieved relatively little. The Institute for New Economic Thinking (INET), a think tank launched by George Soros, has struggled to have much influence because it funds thinkers who are too far outside the mainstream. In both cases, the clear ideological agenda of the funders have undermined their impact.” Notes from a conversation with Justin Wolfers on February 26, 2014
23, 48	“Organizations that a funder might be able to work with to support economic research or advocacy might include: The National Bureau of Economic Research (NBER). The NBER is committed to ideological balance and avoids making policy prescriptions, so it is unlikely to be a good fit for a funder aiming to support advocacy efforts, but it may be an appropriate venue for some research support. The Brookings Institution. The Peterson Institute for International Economics (PIIE). CBPP’s Full Employment project. A funder could also issue requests for proposals and fund research independently.” Notes from a conversation with Laurence Ball on April 17, 2014 “Other groups addressing these topics include: The Hutchins Center on Fiscal and Monetary Policy, a new group at the Brookings Institution. The Peterson Institute for International Economics. The Washington Center for Equitable Growth” Notes from a conversation with Robert Johnson on February 18, 2014
24	“The Federal Reserve System (“the Fed”) received a significant amount of pressure from conservatives to reduce its intervention in the economy following its response to the Great Recession, but it received little pressure to increase its efforts to reduce unemployment. The lack of pressure from the organized left was especially notable. There may have been less liberal pressure on the Fed because many liberals believe that fiscal policy is a more effective means of reducing unemployment at the zero lower bound than monetary policy.” Notes from a conversation with Josh Bivens on February 6, 2014 “It would be good for unions and advocates for low-income people to be more vocal in calling for the Federal Reserve to aggressively address unemployment. In the past, liberal populists criticized the Federal Reserve for raising interest rates too much during economic prosperity, but today the main critics are on the political right.” Notes from a conversation with Laurence Ball on April 17, 2014 Notes from a conversation with Mike Konczal on January 23, 2014: “Traditionally, many right-wing think tanks have had monetary policy researchers, but these researchers have generally been driven by ideology, have not produced rigorous research, and have focused on fringe topics, such as the benefits of a gold standard.” “Many high-profile economists, such as Paul Krugman and Christina Romer, have advocated for the Fed to increase its effort to reduce unemployment. However, there is no advocacy network or advocacy institution that works to improve macroeconomic policy in the short- or long-term. Macroeconomic policy is the political issue with the least advocacy capacity relative to the size of the issue. When policy ideas such as increasing the minimum wage receive public attention, a network of scholars and activists are prepared to influence the discourse around that issue. No such network exists for macroeconomic policy, as is evident from the lack of advocacy during the current macroeconomic downturn.” “’Tight money’ advocates were very critical of the Federal Reserve’s response to the Great Recession, predicting that the Fed would cause high inflation with its policies. Tight money advocates’ predictions turned out to be incorrect. ‘Loose money’ advocates were much less organized and played less of a role in the public debate. If loose money advocates had been more engaged, the Federal Reserve might have done more to reduce unemployment. Dr. Gagnon believes that it would have been good for loose money advocates to have been more politically active.” Notes from a conversation with Joe Gagnon on February 4, 2014
25	“In the past several years, progressive think tanks have been underrepresented in debates about monetary policy. Progressive think tanks were not sufficiently prepared to make significant contributions during the development of the Troubled Asset Relief Program (TARP) after the 2008 financial crisis. Progressive think tanks tend not to hire people with expertise in finance, whereas conservative think tanks, such as the American Enterprise Institute (AEI), the Cato Institute, and the Manhattan Institute for Policy Research, tend to have teams or several individuals with financial expertise. Progressive think tanks should be more engaged in monetary policy, which has important ramifications for labor markets.” Notes from a conversation with Robert Johnson on February 18, 2014 “It would be valuable to fund an advocacy organization or a center at an existing institution to influence the debate about macroeconomic policy issues and to direct attention to the problem of high unemployment. Such an organization could also pursue other important activities, including: Educating senators about monetary policy. The questions senators ask during hearings make it clear that their understanding of monetary policy is limited. Responding quickly to news events relevant to macroeconomic policy. Carrying out public education campaigns. A few outstanding people could have a large impact in this area. This organization would be especially valuable in the near future as the Fed begins its tapering process. An organization that focused exclusively on Fed policy might be assumed to be purely ideological. Having the validation of a respected institution, such as the Center for American Progress, would be important for such an organization’s credibility.” Notes from a conversation with Mike Konczal on January 23, 2014
26	“Dr. Bivens believes that many Fed policymakers worry that additional political engagement in monetary policy would be a mistake. Although policymakers might welcome support for their current policies, they seem to worry that more vocal engagement by political agents might be harmful in the future when the Fed needs to raise interest rates to prevent inflation. Dr. Bivens believes that fears about popular control of macroeconomic policy are overblown because: The economy is still far from achieving full employment today. More pressure from liberals would likely lead to better policies in the short term, and long-term consequences could be dealt with in the future if they become a problem. The Fed is usually too conservative in its projections of the non-accelerating inflation rate of unemployment (NAIRU). When the unemployment rate nears 5.5%, experts will debate whether the economy is approaching the NAIRU. Dr. Bivens does not want the Fed to be overly cautious in this situation; he would like to see evidence of accelerating inflation before the Fed slows the growth of the economy. People have generally been confident that the NAIRU is near 5.5%, but in the late 90s, the unemployment rate fell below 4% for a couple of months without accelerating inflation. As Lawrence Summers argues, it might be the case that the economy will consistently struggle to generate sufficient demand for the next couple of decades. In such a situation, pressure from liberals for more aggressive macroeconomic policy would be very useful and would be unlikely to lead to problems.” Notes from a conversation with Josh Bivens on February 6, 2014
27	“The Center on Budget and Policy Priorities’ Full Employment project, run by economist Jared Bernstein, does research but is more on the advocacy end of the spectrum. It commissioned papers, including one coauthored by Professor Ball, that were launched at an event in Washington, D.C. that was intended to market its policy recommendations to journalists.” Notes from a conversation with Laurence Ball on April 17, 2014“A particular policy issue that could use more advocacy and organizational support is aid to state and local governments during macroeconomic downturns. During recessions, state budgets decrease dramatically, which causes a significant drag on the economy. Empirical estimates of the effect of increased federal Medicaid matching funds during the recession show that aid to state and local governments is a very effective countercyclical policy. Advocates should work to support a policy of automatic revenue sharing with states that is based on eligibility requirements (in the same way that unemployment insurance and food stamps are based on eligibility requirements) so that states automatically receive aid during recessions. An ambitious policy change idea, once proposed by Alan Blinder, is to create a Fed-like institution that would have significant control over fiscal policy. This would be a technocratic group that would have authority to increase government spending on shovel- ready projects during economic downturns and enact taxes when the economy seems to be overheated. It would also be beneficial to fund research and advocacy on ways that the Fed could directly provide people with money during recessions. For example, perhaps the Fed could use postal checking accounts to give out money. In general, ways to reduce Congress’s total control of fiscal policy, whether through more automatic stabilizers or other mechanisms, would improve macroeconomic policy.” Notes from a conversation with Josh Bivens on February 6, 2014
28	“A philanthropist could fund a “shadow” Federal Open Market Committee of economists that would comment on the Fed’s actions after each Federal Open Market Committee meeting. If prominent economists were on such a committee, it might be able to attract significant attention. Tom Schlesinger of the Financial Markets Center may have tried this idea in the 1990s.” Notes from a conversation with Josh Bivens on February 6, 2014
29	“Efforts to better understand the consensus among economists and to communicate the consensus to policymakers could help bridge the gap between economics and public policy. Models for accomplishing this include: A survey conducted by the Initiative on Global Markets (IGM) Forum that describes the positions of top economists on a variety of issues. It is useful to cite this survey when communicating with journalists and policymakers. The IGM surveys do not get as much attention in the media as Professor Wolfers thinks they should. The Congressional Budget Office (CBO), which acts as a research digester and has deep expertise and a reputation for honesty. It might be useful to have small, non- profit versions of the CBO, similar to the Brookings-Urban Tax Policy Center (TPC), that are focused on macroeconomic issues. The Center for Budget and Policy Priorities (CBPP), which has been successful.” Notes from a conversation with Justin Wolfers on February 26, 2014
30	“Some progress could be made by advocating for policymakers to be better educated about the consensus in economics. The U.S. Chamber of Commerce, a business lobbying group, might be a good organization to lead these advocacy efforts, since they tend to be perceived as credible on the right.” Notes from a conversation with Justin Wolfers on February 26, 2014
31	“It would be valuable to fund an advocacy organization or a center at an existing institution to influence the debate about macroeconomic policy issues and to direct attention to the problem of high unemployment. Such an organization could also pursue other important activities, including: Educating senators about monetary policy. The questions senators ask during hearings make it clear that their understanding of monetary policy is limited. Responding quickly to news events relevant to macroeconomic policy. Carrying out public education campaigns. A few outstanding people could have a large impact in this area. This organization would be especially valuable in the near future as the Fed begins its tapering process. An organization that focused exclusively on Fed policy might be assumed to be purely ideological. Having the validation of a respected institution, such as the Center for American Progress, would be important for such an organization’s credibility.” Notes from a conversation with Mike Konczal on January 23, 2014
32	“A grant could provide financial support for an economics professor to do research instead of teaching for a summer or a semester. The National Science Foundation (NSF) has an economics program that provides some grants. However, it is unclear to what extent the grants cause research to be done that would not have occurred otherwise.” Notes from a conversation with Laurence Ball on April 17, 2014“More macroeconomists might work on research that benefits society if there were more funding for this type of research. Monetary incentives to conduct policy-relevant research may help counteract the academic incentives to focus on esoteric research topics. For example, Dr. Gagnon believes that more funding for National Science Foundation-type grants to macroeconomists to work on policy-relevant research would be valuable. With $100,000, a funder could likely pay for one semester of an academic’s time, a research assistant, and computer and data support.” Notes from a conversation with Joe Gagnon on February 4, 2014
33	“Funding journals similar to the Brookings Papers on Economic Activity (BPEA) could help make economics more relevant to policy. However, BPEA has been doing this kind of work for about thirty years, and starting a similar journal from scratch would be quite difficult. BPEA has an annual budget of about $1 million, and it is difficult to say how the returns to investing those funds in BOEA compares to the returns from other activities they might be used to support.” Notes from a conversation with Justin Wolfers on February 26, 2014
34	“Summer programs for graduate students can be hugely influential. As a graduate student, Professor Wolfers attended a two-week program on behavioral economics funded by the Russell Sage Foundation. The young economists who attended this program, all of whom are now professors, were able to produce cutting-edge research much more rapidly as a result of attending the program. This was a highly cost-effective intervention. A similar program for young macroeconomists on the relationship between economics and public policy could be useful. In general, focusing on younger economists may be more cost-effective. Commissioning papers from senior academics can be expensive, and may not be effective since much of the work might have been done anyway in the absence of funding.” Notes from a conversation with Justin Wolfers on February 26, 2014
35	“Academic economists who are interested in policy often lack the skills or means to engage in the policy debate. It might be useful to train academics to write and place op-eds and to provide them with the contact information of editors of top newspapers. That said, academics do not need to be published in top newspapers to have an impact. Engaging in the economics blogosphere, which many policymakers follow, is a good way for economists to engage in the policy debate. Other interventions might include putting academics in contact with public relations people, funding media outlets similar to VoxEU, and funding professional writers to summarize and popularize academic work.” Notes from a conversation with Justin Wolfers on February 26, 2014
36	“Increasing the representation of women and people of color in the field of economics, for example by creating summer graduate programs and workshops for underrepresented groups, could result in a more diverse group of economic policymakers (especially since people from historically underrepresented groups seem to be disproportionately likely to be interested in policy). The Committee for the Status of Women in Economics hosted a mentoring workshop in which senior female academics advised young female economists on how to succeed in academia. A randomized controlled trial found that, six years later, the women who participated in this workshop had published, on average, 0.5 more papers in the American Economic Review (AER) than women who did not. Generally, it costs about $100K to fund a new AER paper. The workshop was a small, inexpensive intervention with a large impact. Creating a similar program for other minorities in economics might have a similar impact.” Notes from a conversation with Justin Wolfers on February 26, 2014
37	“Another funding opportunity might be to commission an edited volume. John Taylor, a conservative economist, edited The Road Ahead for the Fed, which included policy essays written by ten prominent conservative economists. This is somewhat similar to CBPP’s Full Employment project but has a more academic tone.” Notes from a conversation with Laurence Ball on April 17, 2014“To generate more policy-relevant research, a funder could also work with a prestigious academic journal (such as the American Economic Review, the Quarterly Journal of Economics, or the Journal of Political Economy) to organize a conference. The funder would sponsor the conference and provide funding for papers from top applicants. If the journal were prestigious enough, many top economists would likely be interested, though the framing of the conference would matter substantially. The topic would have to be well articulated and motivated in order to yield a focused and productive conference. Scholarly associations that run journals may be willing to work with a funder on this project.” Notes from a conversation with Joe Gagnon on February 4, 2014
38	“A grant could provide financial support for an economics professor to do research instead of teaching for a summer or a semester. The National Science Foundation (NSF) has an economics program that provides some grants. However, it is unclear to what extent the grants cause research to be done that would not have occurred otherwise.” Notes from a conversation with Laurence Ball on April 17, 2014
39	“Policy tools such as nominal GDP targeting and automatic stabilizers could help make policy more responsive to economic needs. Macroeconomists are not as focused on such tools as they could be. However, political constraints will make it difficult to pass such policies, and few economists understand or care enough about political economy considerations to write realistic policy proposals.” Notes from a conversation with Justin Wolfers on February 26, 2014“At the zero lower bound, it is easier to design effective fiscal policy than monetary policy. Lawrence Summers is right that a fiscal stimulus would be very effective in improving the economy under current conditions. However, it is difficult to see a political scenario that would lead to such a bill passing in the near future. A comparative advantage of automatic stabilizers is that they wouldn’t require rapid congressional action during a recession in order to be implemented, which might make them more successful. On the other hand, most economists believe that, compared to monetary policy, fiscal policy is a blunt instrument that does not permit fine control over the economy. The importance of automatic stabilizers in the future depends on how likely the zero lower bound is to continue to be a problem; if we move away from the zero lower bound, a return to more standard monetary policy tools for addressing recessions would be appropriate. Some economists, including Lawrence Summers, think the zero lower bound is likely to continue to be a major problem going forward.” Notes from a conversation with Laurence Ball on April 17, 2014“Valuable macroeconomic research opportunities include: More empirical estimates of the effect of fiscal and monetary policy interventions. For example, there have not been enough empirical studies of the effects of quantitative easing. More analyses of the effect of high unemployment rates on wage growth for people across the wage distribution. Increased monitoring of current trends in the economy. Data collection on current conditions in various markets takes a lot of time and effort but is essential to effective macroeconomic policymaking.” Notes from a conversation with Josh Bivens on February 6, 2014
40	“The recent discussion amongst academic macroeconomists has been too narrowly focused on the Federal Reserve’s current policies of quantitative easing (QE) and forward guidance; it would be better if academics were doing research on a more expansive portfolio of unconventional monetary policy options. There are a number of unconventional monetary policy approaches that are worth considering more extensively. Unconventional policies that Ben Bernanke had discussed in the context of Japan when he was an academic include: A 4% inflation target. Policymakers at the Federal Reserve are opposed to raising the inflation target. While some theoretical models have computed the optimal inflation rate to be very close to zero, Professor Ball is skeptical of these results and believes that more rigorous empirical research would show that a higher inflation target would be beneficial. Depreciating the dollar Targeting longer-term interest rates Helicopter drops, i.e. printing additional money to distribute to consumers in order to stimulate demand More research may also be warranted on other even less conventional approaches, such as: Direct intervention by the Federal Reserve to aid struggling small banks A program for the Federal Reserve to subsidize, guarantee, or buy loans for small businesses.” Notes from a conversation with Laurence Ball on April 17, 2014
41	“Evan: This isn’t a conventional argument that accumulating too much debt is bad, but rather a more radical one that the idea of debt is a bad one — that it’s flawed by design, right? Amir: There are basically three flaws. The first is that debt contracts have horrible risk-sharing. They’re protecting people who don’t need any protection and forcing losses on those who do. That is a failing of the financial system. It’s not doing the proper risk-sharing job we need it to do. The second is the foreclosure effect of debt. Imagine that a downturn occurs, and the economy has a misallocation of resources and needs to reallocate. Maybe we have too many houses, and we don’t need so many of them. One of the major points we make in this book is that debt does a horrible job of facilitating that reallocation. The foreclosure process exacerbate prices declines, and that has its own knock-on effect on economic activity. The third is that one thing debt does is that it gives buying power to the most optimistic people in the economy. That theory comes from the economist John Geanakoplos, and it works like this. If you’re in an economy without only debt, only someone with has enough money to buy a house can bid prices up. But what debt does is allow the guy who doesn’t think house prices are going up to lend to the guy who does…. In the book we offer two broad policy prescriptions, one for the short run and one for the long run. The one for the short run is more aggressive debt forgiveness amid severe downturns. In 2014, that recommendation is probably not going to help now. But imagine a scenario in which the default rate on student loans skyrockets: right away, the government should start to facilitate debt reduction. I don’t mean bailouts. I mean government pushing losses onto creditors. The long-run answer is to make debt financing more equity-like, to correct the bad risk-sharing. We’re calling our proposal “shared responsibility mortgages.” The idea is that you have a mortgage contract where your debt is indexed to the average home price in your zip code. If the value of homes go down, the principal balance and the monthly payment would go down. That would reduce foreclosures in a major way because you would have more equity in the home amid downturns. It would also prevent bubbles in the first place, because lenders would understand they are taking on some downside risk, changing their incentives to lend. We understand this is an enormous challenge and that the current financial system is dependent on debt. What we hope to do is prod people to think about debt in this way. What’s good news is that the financial industry has become more interested recently in this equity-sharing idea — though for a funny reason. They’re angry that coupon payments on mortgage bonds are so low, so they want some upside on home value.” Amir Sufi explains how old consumer debt holds back today’s economy
42	“More research on why high numbers of people are leaving the labor force would be valuable. When people leave the labor force, they are not considered to be “unemployed” by official government statistics, so some analysts argue that the government may be underestimating the “real” unemployment rate. More research is needed on long-term unemployment, which is one factor that may be affecting labor force participation. Research could focus on the reasons for long-term unemployment and the potential for the long-term unemployed to become re-employed in the future. To better understand labor force dynamics, the US government could alter its surveys in order to collect more useful data.” Notes from a conversation with Mike Konczal on January 23, 2014“Valuable macroeconomic research opportunities include: More empirical estimates of the effect of fiscal and monetary policy interventions. For example, there have not been enough empirical studies of the effects of quantitative easing. More analyses of the effect of high unemployment rates on wage growth for people across the wage distribution. Increased monitoring of current trends in the economy. Data collection on current conditions in various markets takes a lot of time and effort but is essential to effective macroeconomic policymaking.” Notes from a conversation with Josh Bivens on February 6, 2014
43	“[T]he reason we don’t have a new economic paradigm isn’t that economists are dumb, or even that all of them are rigid in their beliefs (obviously some are, or I wouldn’t have as many arguments as I do.) The reason, instead, is that it’s hard. Specifically: we have a body of economic theory built around the assumptions of perfectly rational behavior and perfectly functioning markets. Any economist with a grain of sense — which is to say, maybe half the profession? — knows that this is very much an abstraction, to be modified whenever the evidence suggests that it’s going wrong. But nobody has come up with general rules for making such modifications. So, on the behavioral side, clearly people aren’t perfectly rational — but there are lots of ways to be slightly stupid, and it’s very hard to come up with a general theory about which of these ways they will choose in any given situation. Behavioral economics is a fine thing, but it’s more a collection of interesting and sometimes useful observations than a general, well, paradigm that can offer guidance across a wide range of cases. Meanwhile, markets also fail much of the time — but while we know a fair bit about what happens to particular markets in practice, we don’t seem close to a general paradigm here either. So how do you do useful economics? In general, what we really do is combine maximization-and-equilibrium as a first cut with a variety of ad hoc modifications reflecting what seem to be empirical regularities about how both individual behavior and markets depart from this idealized case. And people using this kind of rough-and-ready approach have done really well since 2008, on everything from inflation to interest rates to the effects of austerity. But here’s the thing: economists have done their work this way for generations. So it’s really not a new paradigm. If anything, the true new paradigm was the attempt to justify everything with maximization and equilibrium — but that’s the paradigm that failed. Now maybe, someday, someone will find a way to do something truly new — integrate neuroscience into economics for real, not as a marginal research topic, or turn agent-based models into a useful tool. I’m for it! But merely noting the foolishness of some economists and calling for a new paradigm in the abstract won’t get us there.” Krugman 2014 “Academic macroeconomists often point out the difficulty of doing convincing research when experiments are not possible. Mr. Konczal agrees that data and verification issues are a major limitation to the potential certainty that macroeconomic research can provide.” Notes from a conversation with Mike Konczal on January 23, 2014
44	“I cannot resist closing with a conclusion about methodology rather than substance. I think this survey demonstrates that we can learn things of interest by asking actual decision makers to tell us about their behavior. If the survey approach is right, people will cooperate. If the questions are well-posed, people will give thoughtful and coherent answers. Some of the information we can learn through attitudinal surveys can apparently be obtained in no other way. I would be the last to argue that other more conventional modes of economic inquiry should be abandoned. But the law of diminishing returns suggests that learning by asking, the most underutilized of all economic research tools, may now offer high returns. The total cost of this research project was the equivalent of about two standard National Science Foundation grants to senior researchers. Who doubts that the survey described here added more to our knowledge than two such typical grants?” Blinder 1994But see Olivier Blanchard’s response to Blinder: “In his conclusion, Alan Blinder challenges us: “Who doubts that the survey described here added more to our knowledge than two such typical [National Science Foundation] grants?’ As Blinder was embarking on his study, I was sure I would not be among the doubters. I believed that we would get fairly sharp answers as to what firms viewed as important or unimportant, and that this would help focus further theorizing. I must admit to being disappointed by the results. Look at table 4.4, and take the ratio of column 6, the acceptance rate, to column 7 , the proportion of firms for which the premise of the theory is at all applicable. For nine out of twelve theories, the ratio is above 46 percent. For seven out of twelve, the ratio is between 46 percent and 60 percent. The image this evokes and that recurs throughout my reading of the results is, that con- fronted with the twelve statements, the firms often had the reaction: “Now that you say it, yes, maybe that is kind of what we do.” There is, I suspect, a lesson here about the limits of the approach that Blinder has taken in the survey. Firms do think about pricing in their own way. Presented with short summaries of alternative academic theories, they find that most capture something, but that none is quite right. Role reversal may be useful here. Suppose that a businessman decided to find out how economists thought about inflation. Having drawn a list of theories-inflation is due to money growth; inflation is due to changes in relative prices; inflation is due to budget deficits, inflation is due to union militancy, inflation come from depreciation, and so on-he came to Blinder and asked him to rank the theories from 1 to 4. Blinder would boil at the idea of being so constrained in his answers, but would see most statements as having a grain of truth, and would give a lot of 2s and 3s. Being an academic, he would then qualify his answers at length. But businessmen are not academics. They may not have a clear, explicit view of how they set prices, and may not want to spend the time needed to qualify their answers. Thus, they give the 2s and the 3s, do not bother qualifying very much, but it does not quite capture what they do. It is interesting to contrast the approach taken by Blinder to that recently taken by Truman Bewley and Bill Brainard in asking firms about wage setting (Bewley and Brainard 1993). Bewley and Brainard also start from the idea that we can learn a lot from listening to firms. But in sharp contrast to Blinder, Bewley and Brainard act like psychoanalysts, remaining mostly silent as personnel officers explain what they do and why they do it. The picture which comes out is both rich and confusing. Whether and how the arguments used by firms relate to our theories of wage setting is often unclear. But what is clear is that the interviewees would not have felt at ease evaluating the relevance of our various theories of fairness, efficiency wages, and so on, had they been put to them as short statements.” Blanchard 1994“Truman Bewley, an eminent economist at Yale University, talked to ordinary workers and unemployed people about unemployment and wrote a book on his findings called Why Wages Don’t Fall During a Recession. A generation ago, people might have said “that is not real economic research,” but economists today may be more sympathetic to that kind of data collection. That said, collecting such data is not likely to fit the career incentives of most academics, especially young ones.” Notes from a conversation with Laurence Ball on April 17, 2014“INET supports some efforts to collect and clean data sets and make them accessible to scholars. For example, INET and the Alfred P. Sloan Foundation funded the digitization of a large number of bankruptcy records, including personal bankruptcy data from 1870 to 1990, which may have otherwise been destroyed. INET has also supported efforts to collate data sets on the price of rice and other food grains in China and Japan dating from the 1400s. ” Notes from a conversation with Robert Johnson on February 18, 2014
45	“Just as video game designers are in dire need of economic advice, many academic economists are keen on studying video games. A virtual world, after all, allows economists to study concepts that rarely occur in real life, such as non-fractional-reserve banking, a popular libertarian alternative to the current banking system that cropped up in Eve Online. The data is richer. And it’s easier to run economy-wide experiments in a video game — experiments that, for obvious reasons, can’t be run on countries. That ability to experiment on a massive scale, academics say, could revolutionize economics. “Economic theory has come to a dead end — the last real breakthroughs were in the 1960s,” says Yanis Varoufakis, a Greek economist recently hired by the video-game company Valve. “But that’s not because we stopped being clever. We came up against a hard barrier. The future is going to be in experimentation and simulation — and video game communities give us a chance to do all that.” At least, that’s the dream. The reality, as always, is more complicated. Game companies are often wary of meddling economists trying to conduct experiments that suck the fun out of their virtual worlds. And some academics scoff at the notion that there’s anything to learn from universes filled with warlocks and starfleets. Game companies and economists may need each other. Now if only they could learn to share the controller.” Plumer 2012“Professor Bloomfield believes that the utility of existing game environments for addressing economics questions is relatively limited, and that rather than focusing on studies of existing large multiplayer games, economists should build and study their own game environments…. As more complex institutions began to evolve or as more complex virtual worlds were constructed by researchers, more complicated institutions, such as central banks, and more complicated phenomena, such as inflation, unemployment, and monetary policy, might be studied. Though such studies wouldn’t be possible until researchers (and players) understand simpler economies, and have created more basic institutions (like firms, contracts, and capital markets), they would allow the hypotheses of different groups of macroeconomists to be tested, which could hopefully help resolve some of the deep disagreements in that field. The simpler economies and their basic institutions would also be valuable in their own right, however, particularly for people studying developing economies, corruption, regulation and public goods.” Notes from a conversation with Robert Bloomfield on April 4, 2014
46	“In today’s high-tech age, one naturally assumes that US President Barack Obama’s economic team and its international counterparts are using sophisticated quantitative computer models to guide us out of the current economic crisis. They are not. The best models they have are of two types, both with fatal flaws. Type one is econometric: empirical statistical models that are fitted to past data. These successfully forecast a few quarters ahead as long as things stay more or less the same, but fail in the face of great change. Type two goes by the name of ‘dynamic stochastic general equilibrium’. These models assume a perfect world, and by their very nature rule out crises of the type we are experiencing now. As a result, economic policy-makers are basing their decisions on common sense, and on anecdotal analogies to previous crises such as Japan’s ‘lost decade’ or the Great Depression (see Nature 457, 957; 2009). The leaders of the world are flying the economy by the seat of their pants. This is hard for most non-economists to believe. Aren’t people on Wall Street using fancy mathematical models? Yes, but for a completely different purpose: modelling the potential profit and risk of individual trades. There is no attempt to assemble the pieces and understand the behaviour of the whole economic system. There is a better way: agent-based models. An agent-based model is a computerized simulation of a number of decision-makers (agents) and institutions, which interact through prescribed rules. The agents can be as diverse as needed — from consumers to policy-makers and Wall Street professionals — and the institutional structure can include everything from banks to the government. Such models do not rely on the assumption that the economy will move towards a predetermined equilibrium state, as other models do. Instead, at any given time, each agent acts according to its current situation, the state of the world around it and the rules governing its behaviour. An individual consumer, for example, might decide whether to save or spend based on the rate of inflation, his or her current optimism about the future, and behavioural rules deduced from psychology experiments. The computer keeps track of the many agent interactions, to see what happens over time. Agent-based simulations can handle a far wider range of nonlinear behaviour than conventional equilibrium models. Policy-makers can thus simulate an artificial economy under different policy scenarios and quantitatively explore their consequences.” Farmer and Foley 2009
47	“INET seeks to change the assumptions that underlie academic research on monetary policy to be more reflective of political and economic realities. Academic economists tend to work with models of financial markets that assume a level of structure and predictability that practitioners do not perceive to be realistic. Models based on these assumptions can be problematic when, for example, they don’t recognize the need for limits on leverage. Getting economists to assume less certainty could have major implications for improving the system of financial regulation. INET supports less orthodox methodological approaches to studying economics. For instance, they have funded research on the behavioral psychology of hedge fund and private equity managers, to help eventually develop a better understanding of risky behaviors in financial markets. INET also tries to encourage more independent thinking. A large portion of all academic macroeconomists are or have been at some point in their careers affiliated with the Federal Reserve system. As a result, there is a tendency not to be too critical of the Federal Reserve’s decisions. INET’s efforts to encourage critical, multi-disciplinary, and independent discourse include: Encouraging debate at conferences by putting people with opposing views (e.g. critics and supporters of the Federal Reserve) on the same panels. Funding researchers with a wide range of political perspectives. Engaging with international economists, who tend to be more receptive to alternative approaches. Inviting experts from other fields (e.g. anthropology, political science, and journalism) to private forums that are typically dominated by financial macroeconomists. Connecting traditional macroeconomists with people who have more experience of the practical realities of financial markets.” Notes from a conversation with Robert Johnson on February 18, 2014

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