A home for economists who believe macroeconomics can be both coherent and stabilization-policy relevant
The GEM website is a home for economists who believe that mainstream macroeconomics cannot usefully explain the costly instability that periodically rocks modern economies.
In particular, consensus thinking failed to guide policymakers' efforts to deal with the enormous welfare costs of the 2007-09 Great Recession – especially six million involuntarily lost jobs.
That failure is not surprising. Forced unemployment is beyond the reach of coherent market-centric theory that today dominates macro research.
The GEM Project offers an alternative approach that intuitively explains instability while maintaining both coherence and stabilization-relevance. In its central innovation, the Project generalizes rational exchange from the marketplace to the large-firm workplace, crucially microfounding meaningful wage rigidities – the key to policy-useful modeling.
Generalization of price-mediated exchange is offered as the next big idea in macroeconomics. We invite economists dissatisfied with the stabilization-policy limitations of mainstream theory to join us in constructing a better model.
The interactive GEM website provides a variety of ways to contribute:
Part two of the macroeconomics of forced job loss, promised last week, has been postponed. The reason is a neighborhood 4th-of-July party, at which the buzz was about ill-considered tariffs and whether they would lead to another Great Recession. (A repeat of 2008-09 is always the big fear.) One neighbor, a supplier to auto companies, caught everybody’s attention by reporting that his second-quarter orders, after a robust beginning of the year, had dropped sharply and that he has begun laying-off employees.
Of course, nobody should be surprised that prospects are changing in tariff-affected industries. But the party-goers’ worries were more general, rooted in Donald Trump’s limited grasp of the nature of globally integrated, just-in-time production and apparent innocence of the immense cost of reversing established supply chains. The combination of ignorance on how modern economies work and an unshakable faith in personal intuition is stirring fears that this President could stumble into another hugely costly Great Recession.
Analytic framework. Unlike mainstream macro theory which is badly hampered by its market centricity, the GEM Project provides an analytic framework that captures the essential macrodynamics of extreme instability, most recently on display a decade ago. This space-constrained post will focus on four features of that framework.
First, and most familiar to readers of the GEM Blog, is microfounded meaningful wage rigidity that uniquely motivates causality from adverse nominal demand disturbances to involuntary job loss and proportionally-sized contractions in employment, output, and income. As a result, the GEM Project puts the management of aggregate demand firmly at the center of any effective response to macro instability. The degree to which Trump’s trade war induces economic contraction (from very small dips to calamitous depression) depends on its impact on total spending.
Second, the Project separates adverse nominal demand fluctuations into two types. Stationary demand disturbances (SDD) reflect the contained, temporary weakening of total spending associated with garden-variety recessions. Nonstationary demand disturbances (NND) are the unchecked spending collapses associated with acute...