Bedtime stories for macroeconomists

by Russ Roberts on April 5, 2013

in State of Macro, The Crisis, Uncategorized

A lousy, disappointing jobs report–88,000 jobs added in March. It’s easy to explain. Here are a few stories for bedtime:

Story #1: Once upon a time there was a wicked leader who let the economy slide into chaos because he was against regulation and let the rich make a lot of money. A new leader came along and kept the economy from going over the edge into a deeper abyss. Through judicious fiscal policy (though he wanted to do more, really. Really he did but the bad politicians on the other side kept him from doing what he wanted to do) and creative monetary intervention, he was able to somehow salvage a very bad situation. ┬áBut┬ábecause the banks had been sick, it took a long time for the land to recover its previous mojo. Patience. It’s just a matter of time.

Story#2: Once upon a time there was an economy that had a bad recession. There were a lot of reasons including irresponsible monetary interventions by the man who was once considered a great genius but it turns out he was more like the Wizard of Oz but with dials and levers that actually messed things up rather than creating a lot of random noises and flashes of light. But hey, sometimes there’s a recession. The real problems started when the government tried to do to much too quickly to end the recession–printing money but at the same time encouraging banks to keep the money at the Fed in the form of excess reserves, fiscal policy that was poorly designed, temporary, and ineffective, and lots of other crazy interventions like trying to reform the health care system in the middle of a nasty recession– a reform that raises the cost of hiring workers in uncertain ways.

Story #3: You want a macroeconomics story? Those are for children. Get in the adult world where animal spirits, confidence fairies, and speculation are replaced by the cold, reliable facts of incentives. Try some micro. It’s for adults–more like curling up with a scotch instead of a hot cup of cocoa. Here is Ed Leamer’s micro story. A sick sector or two is really driving the changes around us. Or listen to Casey Mulligan’s story–too much money to be made by staying home these days and not working at all. They’re two different stories but it doesn’t matter. That whole macro fiscal/monetary thing is just a smokescreen to keep economists employed by the government and showing up on news shows.

So which is the best story? I have a favorite or two among the three, but I have to confess–when it comes to bedtime stories, everybody has a favorite, a story that when repeated over and over again, like Goodnight, Moon, say, lulls one to sleep through its familiarity and ability to dispel the nighttime fears that accompany the darkness hovering outside. Yes, some stories are better than others, but it is oh so hard to convince someone whose favorite story is Winnie the Pooh that they are in fact listening to the wrong story. How could you possibly prove your case?

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