How economics has evolved since the crisis

Episode Summary

Executive Summary: The episode argues that post-crisis economics has become more empirical and more humble, especially in areas where data and natural experiments can test old assumptions. It highlights major rethinking on inequality, stagnation, labor markets, fiscal policy, monetary policy, and RCTs, while emphasizing that macro remains hard and theory must complement evidence.

Main Topics: Economics after the financial crisis (Priority: 5/5): The discussion frames the last decade as one of greater humility in economics, with economists asking better questions and relying more on empiricism rather than assuming settled answers. Inequality and redistribution (Priority: 5/5): Inequality moved from a fringe issue to a central topic, driven by better data, the work of Piketty/Saez/Zucman, and public pressure after the recession and Occupy. Productivity and stagnation (Priority: 5/5): The episode contrasts supply-side stagnation and secular stagnation, focusing on uncertainty over why productivity and growth have slowed and whether the issue is structural or cyclical. Labor markets and the limits of supply-demand theory (Priority: 5/5): Examples like immigration and minimum wage studies suggest standard labor supply/demand models fit labor markets poorly, motivating a search for better frameworks. Fiscal and monetary policy shifts (Priority: 4/5): Fiscal stimulus gained credibility after the crisis, while unconventional monetary policy (QE, ETF purchases) produced mixed or weak results, prompting debate over central bank effectiveness. Empirical revolution and randomized trials (Priority: 4/5): The rise of RCTs, reduced-form evidence, and empirical identification has improved policy analysis, but critics warn it can bias researchers toward only small, testable interventions. Measurement, welfare, and uncounted value (Priority: 4/5): The conversation notes that GDP and standard measures miss leisure, digital consumption, crime reduction, and health changes, complicating claims about stagnation and living standards.

Key Arguments: Economists have become more humble after the crisis because many previously confident macro claims failed to hold up. Inequality became a major field because researchers improved the data and the recession made distributional issues more visible. The old presumed tradeoff between inequality reduction and growth is less convincing because the economy is already far from a clean free-market optimum. Regional and demographic inequality research is useful, but translating findings into policy is hard because institutions and political will are weak. Productivity slowdown may reflect many factors simultaneously: demographics, regulation, monopolies, financialization, and undermeasured leisure. The supply-demand model is too simple for labor markets because immigration and minimum wage evidence point in opposite directions about elasticity. Fiscal stimulus appears to work better than pre-crisis orthodoxies admitted, while austerity in deep downturns looks harmful. Conventional and unconventional monetary policy have not delivered clear, robust results, especially in Japan, where deflation persisted despite aggressive easing. RCTs are valuable for causal inference, but they can narrow attention to interventions that are easy to test rather than big structural reforms. The best economics combines empirical work and structural theory, since local evidence alone cannot tell policymakers where models break down.

Data Points: Time since financial crisis: roughly 10 years - Used to frame the period over which economists have revised their thinking. Labor-force decline for men: 7 decades - Described as a long-running downward trend in male labor force participation. Minimum-wage example: $5 to $7.50 - Illustrative wage increase cited when discussing empirical studies of employment effects. Alternative minimum wage scenario: $5,000 - Used as an extreme example to show that local empirical results cannot be extrapolated indefinitely. Immigration effect on wages and employment: very small - Summary of multiple studies on the labor market effects of immigration. Public attention to secular stagnation: 80% of people who hear it think of productivity stagnation - Speaker estimate of how the term is commonly misunderstood. Initial RCT-related book publication: 2010 or 2011 - Referenced for Esther Duflo and Abhijit Banerjee’s popularization of randomized trials. Labor-force participation decline among women in the U.S.: since roughly the late 1990s - Trend mentioned in the discussion of participation rates. EFect of high-income/educated work hours: working more and more - Contrasted with lower-income, less-educated workers working less over time. Unconventional monetary policy result in Japan: deflation returned after about 1 year of inflation - Used to question the effectiveness of QE-style policies.

Pivotal Quotes: "It's time series econometrics for shit happens." — Noah Smith: Explaining why macroeconomic data are hard to identify and why humility is warranted. "The economy is already so far from that perfect free market optimum in so many ways that interventions that we do to, for example, reduce inequality may not make the economy worse off, may actually make it better off." — Noah Smith: Arguing that the usual tradeoff between redistribution and growth may be overstated. "Any interesting model will not have a clear dividing line between supply and demand." — Noah Smith: Summarizing why standard Econ 101 supply-demand thinking breaks down in labor markets and other dynamic settings.

Implications: Economists are better at identifying the right questions, but policy still depends on theory, institutions, and political will. Expect more empiricism, more debate over measurement, and continued uncertainty in macro.