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:
This post concludes the GEM Blog’s four-part overview of the public policy on how to prevent future Great Recessions. The consensus quickly emerged in the aftermath of the 2008-09 extreme instability. First, the three pillars of Washington’s curious thinking on the critical issue were summarized. Second, the GEM Project’s analysis of acute instability was briefly outlined, providing a roadmap for effective stabilization-policy design. The third featured some detail on the flawed content of the emergent policy.
What follows is the final piece of the story. It examines the role of Ptolemaic model-building by mainstream macro theorists in the failure to put in place measures that would actually help prevent future Great Recessions. It is divided into two interrelated parts. The first explains why the macro academy was complicit in Washington’s reliance on an ineffective strategy, i.e., the centerpiece of which was increased large-bank regulation in the attempt to prevent macro shocks that propagate into extreme instability. The second looks at the Achilles heel of mainstream market-centric macroeconomics, i.e., its inherent inability to rationally suppress wage recontracting and thereby microfound the central stabilization role of managing aggregate demand. In particular, it examines macro theorists’ failure to vigorously oppose Congressional interventions that have weakened the demand-management tools that actually worked to tame the 2008-09 extreme instability.
GEM modeling is informed by the separability of episodes of acute instability, including broad 2008-09 market failure, into an originating macro disruptions and their propagation by contracting total spending. That separation implies that there are two broad, not mutually exclusive, stabilization strategies available to policymakers: (i) prevent future shocks via some powerful regulatory reconfiguration and (ii) prevent propagation of disruptions that do occur by effectively intervening in total nominal spending.
In the stabilization program cobbled together after the Great Recession, policymakers and mainstream macro theorists chose to concentrate on the regulatory strategy and to largely limit their attention to the existing federally regulated banking system. Their near total focus on the...