King Krugs' Court

Ok ok, I wrote a Krugman reaction piece. I hate writing Krugman reaction pieces, although I've done it once or twice before, because it's just so… cliche.  You see, Paul Krugman is the (disputed but) undeniable King of the Econ Blogosphere, aka the Econosphere. For starters, he's the only nobel prize winner who gives a shit about the internet.  He also writes for the New York Times, and has an aptitude for headline writing that's almost uncanny for a professional economist.  Most importantly, he's opinionated and… searching for the right word… let's go with "pugnacious." His pieces either evoke hurrahs from supporters, or anger from critics. The former doesn't generate much interesting content (you can state agreement in under 140 characters, including a link) but the latter is responsible for an embarrassingly large percentage of all posts published to the amorphous mass that is the Econosphere.


5 Pocket Models of the Macroeconomy

Economists, like all academics, spend most of their time becoming experts on very specific topics. One economist might specialize in the effects of micro-incentives in third-world countries, another might focus on the applications of game theory to the organ donor market, and a third may spend years pondering the causes of a particular historical economic event. When asked about their area of expertise, they give highly detailed, properly qualified, and usually accurate answers. However, when time is short and the question is novel, as when a policymakers need to respond to new and therefore unique macroeconomic event, economists tend to rely on a handful of basic models that most undergraduates learn in Econ 101.

The particular model varies by economist. For example, Paul Krugman proudly proclaims the IS-LM to be his favorite mistress.  In his book A Term at the Fed, economist Lawrence Meyer says that he relied on the concept of the NAIRU to guide his recommendations as a Federal Reserve Board governor from 1996 to 2002.  However, because his contemporaries on the FOMC, the committee that raises and lowers US interest rates, used different concepts and models to form their opinions, they often came to different conclusions. I suspect that an accurate map of economic ideology could be drawn simply by looking at which "pocket model" economists reference when answering questions on the fly.

As the "About" section of this blog proudly proclaims, I'm a quack without a flock, which means that I use a quirky pocket model of my own creation, although its basic principles aren't too far off of the mainstream macro track. I call it "The Spaghetti Model." They say that "it takes a theory to beat a theory" and I also often think that "it takes beating a theory to make a theory," so before making pasta, I'll explain why I don't like using the other common pocket models. I'll cover four:

  1. Classical Principles  
  2. Keynesian AS-AD (Aggregate Supply-Aggregate Demand) 
  3. Neoclassical AS-AD (Aggregate Supply-Aggregate Demand) 
  4. IS-LM (Investment-Savings-Liquidity-Money)
The DSGE is not on the list, primarily because the DSGE is not a pocket model, and secondarily because another post on this blog and also the theory tab tangle with it directly. In the interest of time I've also neglected Austrian and Post Keynesian models, which are respectively right and left of the mainstream and rarely used by policymakers in power.