There was one post on Saturday, “Tobin Was Right (Implicitly Wonkish):”
Right now, when not trying to do something about the political horror unfolding, I’m revising macro chapters and also preparing for several European speeches, including this one on macroeconomic lessons from recent experience. And I found myself returning to a theme I’ve touched on a few times over the years: it seems to me, all too often, that both economists and economic policymakers might actually have done a better job responding to the crisis if they has been using an old-fashioned theoretical toolkit, say what smart Keynesians believed circa 1970.
Lately I’ve found myself sort of putting a face on my hypothesis: I like to imagine how we would have responded if we were taking advice from a character I think of as “imaginary James Tobin.” And along the way I’ve found myself rereading some writings of actual James Tobin from the time; and it has been a revelation.
Let me focus in particular on Tobin’s 1972 presidential address to the American Economic Association, “Inflation and unemployment” (sorry, I don’t see an ungated version.) I remember how that address was seen among my fellow grad students a few later: it was seen as Tobin’s last stand, a desperate rearguard action in the debate with Milton Friedman over the natural rate hypothesis. And everyone knew that Friedman won that debate, vindicated by stagflation.
Except if you read Tobin again now, he’s the one who looks vindicated. He argues that the long-run Phillips curve probably isn’t vertical at low inflation, perhaps because of downward nominal wage rigidity combined with churn so that some labor markets are at that lower bound while others aren’t — exactly the frameworkDaly and Hobijn (who do cite Tobin) have applied recently. (Akerlof and Perry also made similar points in the 1990s.) And he offers an acute empirical observation to justify his position: the need to avoid
the empirically questionable implication of the usual natural rate hypothesis that unemployment rates only slightly higher than the critical rate will trigger ever-accelerating deflation. Phillips curves seem to be pretty flat at high rates of unemployment. During the great contraction of 1930-33, wage rates were slow to give way even in the face of massive unemployment and substantial deflation in consumer prices. Finally in 1932 and 1933 money wage rates fell more sharply, in response to prolonged unemployment, layoffs, shutdowns, and to threats and fears of more of the same.
Sure enough, the return of mass unemployment after 2008 didn’t produce much in the way of wage decline, except, finally, after years of Depression-level unemployment in Greece.
When talking about the things an earlier generation got more right than all too many modern macroeconomists, I usually focus on the demand side — on how IS-LM-type reasoning could and should have given people a pretty good read on monetary and fiscal policy. But on the aggregate supply side, too, the oldies were goodies.