Arnold Kling

Lucas vs. Tobin

Arnold Kling, Great Questions of Economics
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The late Nobel prize-winner James Tobin once quipped, "It takes a lot of Harberger triangles to fill an Okun gap." What he meant was that the economic losses due to supply-side inefficiencies were small relative to the losses caused by high unemployment during recession.

This month, another Nobel prize-winner, Robert Lucas, claims to refute that claim.

The potential gains from improved stabilization polices are on the order of hundredths of a percent of consumption, perhaps two orders of magnitude smaller than the potential benefits of available "supply-side" fiscal reforms.

The difference between Tobin's view and Lucas's view boils down to this: Lucas views macroeconomic performance in terms of deviations around a trend. Thus, for every recession, there is an equal-and-opposite boom. Stabilization policy would reduce the magnitude of booms as well as recessions.

For Tobin, in contrast, the economy is either at full employment or in recession, There is no such thing as a boom that offsets a recession. The output lost in a recession is never recovered.

Lucas's reputation in the profession ranges from grudging admiration at the low end to adoration at the high end. I am an outlier in this regard. I see Lucas as a contemptible con artist who has done more harm than good. I believe that he has made a career out of deliberately mispresenting macroeconomics. The profession is worse off for his presence, with his supporters wallowing in ignorance and his opponents wasting time fending off his fallacies. The calculations based on deviations around trend are a typical example.

Update: Again, bear in mind that he would not have a Noble Prize if my opinion were at all typical.

Discussion Question. If lost output were not lost permanently, but were always made up in a subsequent boom, would macroeconomics ever have been considered a significant subject for study?

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