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:
I don’t know Betsy Stevenson, beyond the fact that her relatively young career has been impressive. She served as chief economist of Barack Obama’s Department of Labor, from which she was promoted to a member of the White House’s Council of Economic Advisors. She’s now a professor of public policy and economics at the University of Michigan and co-host of a podcast “Think Like an Economist.” Her role in this post is to illustrate the continued power, ambition, and wrong-headed Friction-Augmented General Market Equilibrium (FGME) instincts of second-generation NK macro theorists. That has become a central theme of this Blog.
The policy issue under consideration is inflation. Will it continue to rise? Is the current jump an aberration? Can the Fed properly continue its focus on economic growth that is driving down unemployment? In order to adequately answer those questions, an adequate evidence-consistent model of inflation is needed. Professor Stevenson, typical of second-generation New Keynesians, does not have such a model. Any macroeconomist who constructs her view of stabilization-relevant behavior on FGME theory lacks a useful grasp of aggregate price movement.
In a recent interview in the New York Times, Stevenson confidently makes the mainstream case:
“So I think what you’re describing is the difference between ongoing inflation that’s driven by expectations for ongoing inflation, right? That’s sort of that— we had to break the back of that. Because what was happening is everybody expected inflation, so they’re building that into contracts. People are saying, hey, if you’re going to be paying me in a year, you’ve got to be paying me 10% more, because I see 10% inflation on the horizon. Workers are demanding that they’re going to get raises that keep them up with inflation, and it just becomes this self-sustaining prophecy. That because people expect it, they build it in, and they make it come to fruition.”
In a nutshell, Stevenson's well-worn stabilization-policy argument is: You Just Need to Believe Inflation Is...