Reader Steven Kopits makes an astounding claim about macroeconomists (including me, and Jim Hamilton, et al.):
…macroeconomists see demographics as outside their domain. Consequently, there’s a tendency to try to force the rules-of-thumb and economic models from the 1980s – 2000s on the current environment. That’s why John Williams says he’s surprised unemployment could go so low. If he had worked through the Japan numbers (happy to send you the spreadsheets), he’d see very clearly what’s happening. And that’s true for Jim or Menzie or Ken Rogoff or Jeff Frankel. Spend two days and work through the exercise. It would change the understanding of the macro environment.
As I remarked, I somehow remember Larry Summers talking about this topic of demographics in relation to secular stagnation at a prominent venue (I was in the audience, I do believe), and having taught in my Spring 2015 macro policy course a paper examining the impact of demographic transitions, particularly on monetary policy. Why, yes – and here is the abstract to Eggertson and Mehrotra (2014). (For the math impaired, the paper is dated over five years ago.)
In this paper we propose a simple overlapping generations New Keynesian model in which
a permanent (or very persistent) slump is possible without any self-correcting force to full
employment. The trigger for the slump is a deleveraging shock which can create an oversupply of savings. Other forces that work in the same direction and can both create or exacerbate the problem include a drop in population growth, an increase in income inequality and a fall in the relative price of investment. High savings, in turn, may require a permanently negative real interest rate. In contrast to earlier work on deleveraging, our model does not feature a strong self-correcting force back to full employment in the long-run, absent policy actions. Successful policy actions include, among others, an increase in the inflation target and an increase in government spending. We also establish conditions under which an income redistribution can increase demand. Policies such as committing to keep nominal interest rates low or temporary government spending, however, are less powerful than in models with temporary slumps. Our model sheds light on the long persistence of the Japanese crisis, the Great Depression, and the slow recovery out of the Great Recession.
Why is it that people who have only a passing knowledge of macroeconomics seem altogether too willing to show their ignorance of wide swaths of the literature?
A version of the Eggertsson-Mehrotra paper is now published in the January 2019 American Economic Journal: Macroeconomics (published by the American Economics Association).