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If anyone wants proof that individual contributions can actually make a difference, they can look at Ben Bernanke. He literally changed the course of history.

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Yep.

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Wasn’t Bernanke responsible for causing the crisis in the first place by keeping policy too tight? Or do you disagree with Sumner on that?

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Oh that's definitely wrong.

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So you disagree with Sumner? It would be great to get a broader post on Market Monetarism some time. By too tight I mean in 2008 and after.

"Sumner ascribes the severe depth and breadth of the GFC to monetary policy that, judging from the path of NGDP, was too tight in the months leading up to Lehman’s failure and was eased insufficiently aggressively in responding to the subsequent economic meltdown." (from https://www.ncbi.nlm.nih.gov/pmc/articles/PMC9406273/)

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Sure, I could do that. It is true that more and earlier QE would have been better, but Bernanke was pretty institutionally constrained, and it's pretty amazing he was able to do as much as he did.

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Oh afterward, sure the _Fed_ performed abysmally (though better than the ECB!) but how much more abysmally it would have performed w/o Bernanake is unknowable.

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Do not get me started on the ECB please.

I would like your perspective on this though. I assumed you would agree that much of the initial financial crisis was also driven by money being overly tight which then led to the widespread bank failures?

E.g. https://twitter.com/KAErdmann/status/1552031332204589057

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I'm glad there isn't a "dislike" option for that comment above yours or I woulda pressed it!

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Want to elaborate on that?

To be clear, I’m not arguing that the Fed caused all the problems of 2008 (poor phrasing) but that I find the argument that it turned a small recession into a full blown financial crisis to be quite persuasive.

Low interest rates by themselves say very little about whether monetary policy tight or loose.

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my apology if that didn't go across well. My reaction was to the poor phrasing part of your comment. I am not persuaded by the argument that the Fed was responsible for all those assets that the banks held became "troubled assets." One reason those assets became troubled assets is that the value of the collateral backing those assets plunged. That collateral was the value of houses. There are many other issues (e.g., liquidity) that constituted the crisis then. Can't say that the Fed did it all. The Fed may not have acted in a timely way, but there is likely to have been considerable information asymmetry from the Fed's perspective. Don't forget that investment banks were not under the Fed's regulatory umbrella then.

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He kept policy too loose 2003-2005 and then overcompensated for this, while ignoring what was happening in the balance sheets of the banks he was meant to be regulating and also ignoring the international component (where Asia, Brazil the GIC and other large exporters were manipulating their currencies and buying a lot of dollars and treasuries, taking advantage of the American locomotive, but creating a flood of dollars and compressing credit spreads)

He is not a hero, though I admit he and Paulson did a good job of restoring confidence in the banking system in 2008 (via TARP and backstopping BoA, Citi, Goldman, MS, etc) which stopped the panic and allowed the economy to recover.

Other than that, I don’t think his monetary policy before or after the GFC was particularly wise (QE went on way too long and probably contributed to the European crisis 2011 and onwards,

In part through a weak dollar)

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I used to bank at Washington Mutual. Which did not receive a bailout--despite having a stronger balance sheet than Citibank, which did. Or Chase, which also got bailout cash, and used it snap up WM on the cheap. The Federal Reserve enabling the Big Four to become even bigger at their smaller competitor's expense was perhaps the greatest expression of economic "power" in my lifetime, and made the Savings & Loan hornswoggle look like petty larceny.

"Power" as it pertains to the Fed is perhaps better explained as just good old Crony Capitalism

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And too big to fail is still a thing

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The financial system should have been bailed out, not individual institutions. There should have been a wholesale turnover in the ownership of financial institutions.

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But there wasn't. Because the Fed is *not* some fair-minded, democratic institution directly under the control of any branch of our government; as is the case in pretty much every other industrial democracy. As our Central Bank, it is necessary. But it's conduct in the heat of Great Recession only saw a serious deepening of financial services Oligopoly.

Even it's raising rates to 5% was a unilateral decision, designed to cool the wage-spiral part of inflation *by creating yet another recession that would've put perhaps millions out of work.* And the financial and political press simply nodded their heads at the supposed godlike and infallible wisdom of such a policy. Which has now utterly ballooned interest payments on the federal debt to $860bn/year. And neither political party questions the will of the Almighty Fed; instead squabbling about deficit spending which *neither* has any genuine intention of seriously addressing.

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You are blaming Bernanke for the federal deficit that pulled in short term capital. Given bad fiscal policy the Fed was OK up until 2008.

And the Fed should not be regulating banks' risk taking. That _ought to be_ an independent agency to reduce the possibility of the Fed allowing financial institutions' risk taking to influence monetary policy.

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No- I am not talking about the fiscal deficit but rather the US trade deficit and the expanding surpluses and currency manipulation in Europe, Asia, Latam and GIC that created excessive demand for bonds. I can’t really blame Bernanke for other countries actions, only for not paying particular attention to what was happening internationally (where a large pool of dollars sloshing around needed homes, so to speak). The fiscal deficit on its own wasn’t big enough to cause the scale of the problem, IMO. Obviously , it has only gotten bigger ever since then.

And of course the Fed was responsible for bank supervision leading up to the GFC, no matter what alternative arrangement we may have preferred.

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Hank Paulson created the greatest hedge fund ever. Momma got paid, big time. But sure I’ll give Ben some props....but really it was Hank.

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I guess it is _possible_ that without Bernanke Fed policy would have been even worse, with even less monetary stimulus and even greater undershooting of the inflation target. I don't know enough about the internal politics of the 2008- Fed to credit Bernanke with a finger in the dyke role.

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Paul Krugman's writings from the '06-'10 period stand up pretty well, I think. And a lot of what other economists were getting wrong, they were getting wrong because they seemed to have experienced a Great Forgetting.

https://archive.nytimes.com/krugman.blogs.nytimes.com/2009/01/27/a-dark-age-of-macroeconomics-wonkish/

They were making stuff up to explain the crisis that would conform to their prejudices, when there were already quite good economic tools to analyze the problem; they just disliked the implications of those tools. He of course had the advantage of having _very_ closely analyzed Japan's dip into the liquidity trap, a decade earlier.

https://archive.nytimes.com/krugman.blogs.nytimes.com/2011/10/09/is-lmentary/

He also had some great posts explaining Hyman Minsky, and one on how the requirements on certain index funds that they couldn't continue holding certain types of bonds after the credit ratings on those bonds were downgraded created a multiple-equilibria situation, with a backward bending demand curve. (Basically as the price of the bond falls, you'd think demand for it would rise -- except that at some point the lower price indicates that the rating has dropped, at which point suddenly demand gets WAY less, as index funds that are required to only hold, say, single A or higher, offload it. In fact they might start dumping it as it even gets close to the line, to try to front-run each other. So over some range, the demand curve goes the wrong way, and you can end up with two distinct equilibria. And one fund manager panicking about the possibility that there _might_ be a downgrade and sell-off, can _cause_ the sell-off, and then the ratings agencies see that there's no appetite for that class of bond, so the downgrade follows, and who's to say whether the downgrade would've arrived regardless, or was actually _caused_ by the panicky sell-off?)

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Too bad he became such an insufferable tool.

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Krugman was among the best, but even he kept getting distracted by talking about fiscal policy. The "Great Forgetting" was of Friedman Swartz.

This is not to say that with many prices below marginal cost and long term interest rates (eventually, with too much delay) low, that expenditures guided by NPV considerations and corresponding deficits should not have been much higher. But fiscal policy ought to be the dependent macroeconomic variable.

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I’ve to read this a few times to understand all of it. From a layman’s perspective, macroeconomics has always been very tricky and I remember reading Steven Levitt explain why he focusses on microeconomics instead in Freakonomics. Ideologically and professionally, I’m more inclined towards small scale experimentation and feedback loops leading to incremental improvements instead of big bold bets.

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Very good overview, though constraining your parameters to the field limits perhaps limits its relevance (when, as you say, the field doesn’t matter much😊).

In my naive view, macro is useful when it can make predictions and/or when it can help us understand what did happen or what might happen (in response to an exogenous event or a policy change, all else being equal). It is pretty useless at predictions but can be useful ex-post as an explainer (problem is next time is likely different).

I took a few courses from Minsky and his take on cyclical investing behavior was useful during the financial crisis. Can it make predictions (no- very hard to tell when Ponzi finance gets so large as to threaten stability, though it does teach us to look for warning signs). And what was his solution to boom/bust? Government regulation (forgetting that politicians love booms).

In our current economic predicament I have found the old IS/LM framework to be pretty useful. Certainly I am amazed how many people focus on Fed policy and ignore our very stimulative fiscal policy while wondering why the economy keeps chugging along. Or one could look at Cochrane’s recent work if one wants something a little less embarrassingly simple and outdated.

As for “inequality”, to me the answer is simple. Capital causes inequality. I grew up in the 1970s. Things were more “equal” in that even professional/upper middle class people were fairly poor- few possessions, few vacations (and few vacation days), not a lot of luxury consumption. Corporate managers weren’t very good at being stewards of capital, nor maximizing returns, and competition was somewhat restrained.

Deregulation, globalization, the asset price and financing boom caused by disinflation and lower rates (and then, QE) increased the returns on risk capital. I remember being in a corporate treasury department in the late 80’s and evaluating projects using an IRR cutoff of 15 percent when interest rates were probably 7 percent. Then 15 or 20 years later interest rates are 2 percent but the target return for projects is 20 percent. I may not be a fan of the CAPM, but that is crazy (and also requires more leverage). Part of it is the punishment from shareholders and the market for being too sloppy with your capital and over investing or making bad investments was quite severe. You are sailing with the tide (QE, low inflation)- don’t overload the boat. Trim the sails (cut costs, offshore production) and let things run, unless you are an entrepreneur with a brand new product.

The focus on “inequality” today seems a little misplaced. As a child of the 70’s it seems to me that while the upper quintile has done exceedingly well since then, the middle 60 percent also have much more comfortable lives, more consumption and more leisure time than they did in the 1970s (and their houses and cars are a lot better). We should care more about the quality of life of people rather than relative incomes. The top of the pyramid has wealth driven by capital, which the bottom 80 percent lacks, but innovation and growth caused by capitalism has made everyone’s lives richer and more comfortable. I wouldn’t go back to the 1970s “equality”.

I also think we should also ask who exactly is in the bottom 20 percent when comparing them to the top 20 percent and analyzing inequality. . If 5 percent of the population is functionally illiterate in English, unskilled, has only a grade school education and hails from corrupt countries with high crime rates, some of the inequality in that bottom quintile isn’t the fault of macro. Similarly, if another good chunk are dysfunctional or criminal and have suffered from bad parenting and ineffective schooling , that is not a macro problem. Others in the bottom 20 percent are transitioning to or from higher quintiles - they may be young and just starting out or elderly and poor.

Looking at how people are living, why they might be living that way, and how we can elevate them to a better life, rather than how they compare to some tycoon is, I think, a better way to address inequality.

I do think we need to find better ways to tax capital. Raising capital gains taxes, replacing the inheritance tax with a capital gains tax on all financial assets at death (excluding the median price of one primary residence and excluding closely held small businesses and farms run by the owners), eliminating the charitable deduction for appreciated but untaxed assets transferred to foundations or endowments (deductions should only be received for funds that have already been taxed for income or capital gains, getting back only the relevant tax paid, and deductions should only happen when the funds are actually spent on charity rather than merely transferred to a

foundation account). Warren Buffett will stop complaining he is taxed less than his PA, at least.

We could also eliminate the corporate income tax and replace it with a tax on their gross domestic revenues (with deductions for domestic expenses and wages). Tech companies using tax havens would not be able to deduct royalties paid to foreign tax havens. We could incent investment by allowing write offs for domestic investments.

On the immigration front, the US has to stop waving in poorly educated illiterates on the basis of who can walk here. There are plenty of people around the world with high school educations and some English who would like to come here- why should it be easier for a Mexican or Honduran rather than an Argentinian, Nigerian, Filipino, Vietnamese, Pole? Drawing a limited and controlled number of immigrants from around the world will also reduce the risk of creating a Spanish-speaking monoculture in working class employment (which exists in many industries today, making it difficult for a non-Spanish speaker to be hired).

We need to improve parenting and education (above my pay grade) and make it easier for those who are educated and working to have children (and rather than paying someone to drop out or high school and have children- pay them for schooling and work instead).

We need to create a framework for companies to invest in apprenticeships and training for domestic workers, and H1Bs should not be granted to any company that isn’t doing this.

On the charity front, we should find a way to incent the construction of apartment buildings and housing developments where the investor/landlord pledges to accept a housing voucher (or cash rent equivalent to the voucher value) for 30 years. After 30 years it can revert to a market-priced asset (incents upkeep).

The investor can get an immediate write off for the capital they put into construction and then get annual charitable write offs for the rent subsidies (difference between market rent and voucher). Wouldn’t this be better than rich people donating to universities or dark money NGOs? Yes- sort of a take on the old “section 8” housing scams.

Anyway- have strayed far off topic. Thanks for the overview of the field.

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I liked your point about Quality of Life as a significant economic indicator. By the standards of Republican Rome, even the poorest American today lives like a patrician: hot & cold running water, refrigeration, central heating, personal libraries, etc.

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"If you think academic macroeconomics should be replaced with media narratives like this, you’re essentially giving up. It’s a nihilistic conclusion that macroeconomic research is pointless."

Made my day! 😂

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It strikes me that Acemoglu and Johnson didn't make the best case for persuasion as a source of power, especially when they concluded that "quite a bit of this process is random."

With overwhelming resources, one can not only spread and command attention to your theories to a far greater extent than others (via media), come up with compelling narratives and rationales (via think tanks) and shape the research that confirms your theories (via academia). That is power.

Even the "nice story (with) a ring of truth to it" is rarely random. It's probably been focus grouped, poll tested and revised many times to get it ready to win hearts and minds.

I will grant, through, that a nice story with intuitive appeal has a power of its own. I just finished reading Empire of Pain about the Sacklers and learned that the launch of oxycontin was enabled by the assertion that since it was made to be time-released and absorbed slowly, it wouldn't be addictive. Sounds plausible, but it was disastrously wrong. Meanwhile the bureaucrats at the FDA bought it, some left to work on it and we know only too well how this story ended.

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Another persuasive argument for more liberal access to painkillers was the assertion that pain slowed healing after injury or surgical trauma. I don't know if that tidbit was backed up by evidence or just a plausible story.

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Definitely plausible; and probably also empirically verifiable. My field was primarily inflammatory pain management, and it's pretty much axiomatic that an un- or inadequately treated primary lesion--like a pinched spinal nerve--will over time produce secondary and even tertiary pain patterns.

The marketing fallacy is that opiate analgesics successfully reduce or eliminate pain. They don't; they only mask it.

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Jared Bernstein is the CEA chair, before him was Cecilia Rouse, now Brookings president. I believe that Tedeschi was chief economist, i.e., the top non-political.

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Ah, whoops! Thanks for catching that.

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But to your point non-economist Brian Deese was Biden’s 1st director of the NEC.

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Your statement about the use of the term "technology" is on the mark. That's how a residual became the center of RBC models ("technology shocks" wink-wink) and how research on growth veered into explaining "technological change" on the assumed pretext of "how technological change happens." You could say something similar about "human capital" or even the misuse of the term "capital" for anything that seemed more durable than a banana. However, on statistical testing and rejecting, Noah, you seem a bit cavalier. I would suggest that you visit the American Statistical Association's website for its statement on statistical significance and what that means. It seems to me that even the method of "rejecting" a theory is not a settled science.

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It seems to me that on a fundamental level, it’s useful to divide the factors of production into the fixed things (land), the things that each person has a fixed amount of (labor), and the things that can be changed (capital). It especially helps motivate the theoretical debate about capitalism, Marxism, and Georgism. But it does then make it into a really difficult empirical question to identify which things are capital and which are land or labor.

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I think the day I gave up on macroeconomics was when I had the realization (blindingly obvious in hindsight) that any academic who actually did gain some understanding of how the economy worked would immediately quit and found a hedge fund. For that reason I'm not sure academic macro can ever work as a discipline, simply due to the fact that the market values rare economic insight far higher than universities are willing to pay.

Although that specific problem seems unique to economics, the main problem you identify here is not at all unique to macro. Everything said here is highly plausible to me because it shows up in the exact same ways in public health research. Epidemiology papers are nothing but an endless stream of underdetermined mathematical models, all of which purport to explain the same thing yet all of which calculate completely different values for basic variables. This doesn't bother anyone and the models are simply never tested against reality. They go straight from "random model I just made up says do X" to "therefore, governments must do X". This indicates strongly that the problem isn't something economists can fix by just making better models. The incentives and culture here are fundamentally bad and lead to this kind of mathematical obfuscation.

And of course social studies as a whole has the exact same problem!

So it may be worth turning the question around, and asking .... well, which fields DO produce real knowledge? Maybe it's quicker to make a list of those worth preserving than try to come up with lists of individual fields and ask them to reform. Ultimately macro-economics doesn't need grant funding. Google was happy to fund auction theorists (not that they needed many, the basic theory is so straightforward it was explained in basic training there). Banks, trading funds, oil companies etc all hire economists under different names. Why should the taxpayer do the same?

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As a non-economist, the biggest failure is the ignorance of Occam's Razor. Why look for the simplest solution when you can come up with lots of different models that eventually are proven wrong (Noah offers some in this post). Look at the latest inflation report that has everyone in a tizzy. Two key components are energy and rental housing. Energy costs are pretty much set by OPEC and even though the US is self-sufficient these days, domestic oil prices rise in accordance with OPEC (and totally resistant to US policy decisions). Rental housing increases are subject to a lack of supply which is either local zoning issues or the cost of capital in the case of financing new building. It is only this latter point that can be controlled at the national level by the Fed. Zoning (including NIMBY) is strictly local.

Lots of other examples can be cited in defense of Occam's approach. BTW, this is in the running for Post of the Year award!!!

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Recent example in this article, where they called an analyst radical because he was simply looking at what was actually going on, but his conclusions didn't line up with what the models say.

https://www.bloomberg.com/news/newsletters/2024-04-08/us-inflation-is-actually-being-driven-by-higher-interest-rates-jpmorgan-says

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You're saying that the Fed raising rates to curb inflation, is actually *increasing* inflation by increasing the nation's rents/mortgages?

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Yes. The hard part is determining is the size of the contribution relative to total inflation.

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It sort of makes sense if you focus narrowly on housing, without considering that someone spending more on housing is likely spending less on something else as a result.

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Krugman sold out his credibility by shilling for the Democrat party due to his T.D.S. Imagine being so out of touch with the working class that you tell them their double digit grocery inflation is a figment of their imagination while they struggle to feed their kids at McDonalds.

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Working class people work at McDonald's, they don't eat at it.

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I'm guilty of this as well, honestly. I've actually tried showing graphs and charts about all the positive economic trends when friends back from my hometown talk about how everyone in Ohio is struggling and they're having trouble affording groceries. To my shock, it does not work.

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Inflation is an mxn-dimensional vector that varies per postal code. Where m are postal codes, and n are all the things people would want to buy.

To project this down onto a scalar and then be surprised we don't quite get the results we wants shows the limitations in current macroenomists thinking.

This is why you may be fine, but in Ohio they may not be.

Measuring a different inflation rate for every state would already be a huge improvement.

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The U.S. would be an economically better place if the sub-federal organizational unit weren't states but MSAs or CSAs, because these represent the most coherent economic geographies.

Even within states, there are disparities between metropolitan areas (big cities and their suburbs) and micropolitan ones (lightly populated areas that didn't attach themselves to metropolitan areas; CSAs reflect exurbanization attachment).

There are wide disparities between New York City, whose economy spills into New Jersey, Connecticut and Pennsylvania, versus Upstate, Southern Tier and Great Lakes New York State. The state of New Jersey's economy is either in the orbits of New York City or Philadelphia.

Texas's economy looks different if you live in the Dallas Metroplex, Houston, Austin, the "Border Belt/Texico" (San Antonio, Corpus Christi, Rio Grande Valley and El Paso), versus a mid-tier metro like Lubbock or the Permian Basin, and the vast rural areas in between.

California's population and economy is dominated by the Bay Area and Southern California, but there are vastly different costs of living and economies when you get to Central Coastal California (roughly Santa Cruz and the Monterey Bay to coastal Ventura County), the southern Central Valley (Fresno to Bakersfield), the northern Central Valley (Stockton to Merced, all of which are becoming exurbs of the Bay Area and Sacramento); Sacramento (the seat of three levels of government, and simultaneously urban, suburban, exurban and rural); the North Coast; the Sierras; the Mojave Desert, etc.

An MSA and CSA inflation rate would be the most accurate, since it accounts for the relative fortunes/misfortunes within states.

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Nah, he didn't go Dem populist enough; by failing to call out the role of oligopic (sp?) multinationals like Unilever and Proctor & Gamble that began early in the pandemic raising their prices considerably above their increased operating costs. I read somewhere that some economists in Europe estimated the corporate greed was fueling ~50% of EU inflationary pressure.

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"The" working class implies that this cohort is a disindividuated mass who are all of one mind, and their job is their identity.

Keep this in mind: If you define working class as a person without a college degree, this share of the population overall is going down because of the rise of college educational attainment. In the U.S., the modal working class person is not White. Depending on the state, the modal working class person is a Black woman or Latina, most likely a mother.

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Then calling them angry racists ...

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As a mathematician I have always felt uneasy with (macro)economics because it's so underdetermined.

Perhaps an interesting question is: "What do we actually know about macroeconomics?" What are the established facts? The things all macroeconomists agree on. Sure, societies change, situations change. But money is still money. So a few things we do know.

What 'works' in macroeconomics?

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Economists definitely don't agree on what money is.

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That’s a very worthy question. Two basic things I could think of:

GDP is a pretty good, though rough and imperfect, measure of well being.

Macroeconomic policy does seem to reduce the volatility of economic cycles, as recessions were much more frequent in the past.

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As a poor illiterate imbecile who, like Tedeschi, has a mere Master's in public policy, I'd just like to say one thing:

Nothing about my above sentence was sarcastic or facetious at all. I'm dumb as all hell and shouldn't be allowed near open flames or objects sharper than a butterknife without adult supervision, much less an advisory body to the President of the United States.

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I think Ernie has done a great job, and his selection is emblematic of the fact that academic credentials are becoming less and less crucial...

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Biophysical Economics? Ecological Economics? Connecting production to the biosphere?

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I have been reading this post multiple times and have to share my uneasiness with the harshness of your critique - power is a very real force. As many other social and political variables, it eludes direct quantification and thus is difficult to directly include in models. That is why it has been neglected for so long. Power -vague or not - ultimately describes what shapes the design of the economy - be it regulation, laws or trade. It should be the key variable to study. There are plenty of excellent economists that describe its impact: see ‘Trade Wars are Class Wars’ by Klein and Pettis, ‘Capital’ and ‘Capital and Ideology’ by Piketty, the works of Zucman and Saez, back to Raghuram Rajan or ending with Thomas Philippon’s work on the influence of antitrust regulation and changes in political party financing. Or even your post on the first china shock and the second to come - all power games. No need for ‘mea culpas’ ….just keep studying and analysing.

I might have a different view than pure academia, having been in the IT industry close enough to be directly exposed to antitrust suits and still serving on the board of regulated entities. Most of the choices made can ultimately be attributed to …power. However it manifests itself.

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In my opinion, Alan Greenspan single-handedly destroyed much of the reputation the profession had painstakingly built up since the Great Depression.

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