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Macroeconomics 8th edition is out. Compared to the first edition (1997), I am struck by two things. The architecture has not changed. But the degree to which what was exotic then is, at least for the time being, the new normal.
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Three remarks about the coronavirus and China. Conventional monetary or fiscal policy will not do much for China. Those policies affect demand but the problem is supply. If workers do not go to work, and firms run out of parts, higher demand will not help.
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1. The next few days will likely see an avalanche of analyses of the economic effects of the corona virus. Here are a few points, building on a previous thread. Basic point: Anti virus measures aim at the core of economic organization, the division of labor.
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25 years ago, Michael Kremer and I wrote a paper on ``Disorganization'', arguing that the collapse in output in Central and Eastern Europe was largely due to disruptions of supply chains. This seems fairly relevant today. bit.ly/3cofhFq
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My two cents on the virus today. Two vital sets of measures.
Keep the flow of infections down so the health system is not overwhelmed. Do whatever it takes.
Prepare fiscal measures, including transfers and backstops to banks. Do whatever it takes.
This is more or less it.
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A 11-piece thread on Italy, the ECB, and the need to avoid another euro crisis. Start with the basics, the first two points being the most important.
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The Italian government is behaving extremely responsibly—more so than many. It is putting health considerations and the control of the epidemic ahead of short term economic considerations---exactly as it should.
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The last thing the world needs at this juncture is another euro crisis. The ECB should and can avoid it.
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The world is de facto at war (against the virus, rather than against each other---this is the good news...) With this in mind: US Federal deficits as a ratio to GDP: 1942: -12%, 1943: -26%, 1944: -21%, 1945: -20%. Let's not be squeamish.
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People have been told to hanker down for a few weeks, until the infection is under control. After this, they are led to believe, we shall emerge from isolation, and things will slowly return to normal. I am not so sure; this report, bit.ly/2Uf7hhr reinforces my worries.
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Italian debt is sustainable.
But to make sure, the Italian government, euro-members, the ESM, and the ECB all have to do what they need to do. Please do it.
More flesh and arguments in bit.ly/2IWouan (unintended irony: look at the bitly address...)
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Must read. Many great contributions. If you do not have the time to read the 200 pages, read the great intro by Beatrice Weber di Mauro and Richard Baldwin. twitter.com/BaldwinRE/stat…
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Euro crisis on hold.
Next:
Capital outflows and sudden stops in emerging market countries.
Plumbing failures in the financial system.
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The motto for fiscal policy these days is “Whatever it takes”, This is indeed the right motto. But what does it mean? And can we really afford it? Or will we wake up in a few months with a hangover, asking “What on earth did we do?” My views: bit.ly/39tlvRD.
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My Princeton webinar on fiscal policy. What it should do, what are the challenges, whether there will be too much debt, both in rich and poor economies, the need for coordination, and the role of international institutions. All this in 45 minutes. 😀 youtu.be/9jSyhtYq_ME
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Monetisation: Do not panic. ( A Vox EU piece with Jean Pisani Ferry) bit.ly/2xno5vg
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Much of the progress in macro in the last 40 years came from the assumption of ergodicity. It lies behind the use of VARs and other time series tools. It lies behind the solution to dynamic optimization problems. These may have a hard time dealing with the current data...
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On the swoosh recovery. My guess is that, conditional on covid not getting worse (big if), there will be an initial fast recovery as many businesses simply reopen. But this will be another "mission accomplished" moment. Don't be fooled. The rest of the climb will be a slog.
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RIP Alberto Alesina, my student, my friend. Passion for life. Passion for work (we often disagreed, but we both learned from each other), creativity, and very hard work. Big loss.
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When the virus struck, the priority was to protect fragile firms and workers. As the lockdown ends, the focus must change from protection to reallocation. How it should done is the topic of a piece by Jean Pisani Ferry, Thomas Philippon and me. bit.ly/3dIiHCY
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Enormously impressed by the webinar by Raj Chetty today
bcf.princeton.edu/event-director…
An amazing combination of how to put big data together, test hypotheses, and draw highly relevant policy conclusions. This is 21st century economic research. I feel old, but excited. Watch it.
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A potentially important paper rb.gy/h4uxie
(at a great Brookings conference yesterday rb.gy/qzwlhd
Basic message: Even starting from the very worrisome position the US is today, the use of masks and moderate testing might keep us out of the woods.
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In the name of covid, a naked attack by the administration on foreign students and universities. (and, with lower educational exports, a likely major hit to the trade balance, dear to the President. ) Maybe I take too personally, but it stinks and hurts. bit.ly/2Z3OJEu
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Quick reactions to the French economic plan released today.
The three legs, climate, competitivite (helping firms), cohesion (helping people) make good sense. The amount committed, 100 b euros on top of what has already been spent is substantial. But (there is always a but...)
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I finished the 8th ed of ``Macroeconomics'' before covid came. I have now written a covid chapter. It is largely self contained and may be of interest to teachers, students, and interested observers. Comments and suggestions welcome. bit.ly/2GZB375
Robert Solow Professor of economics emeritus, MIT
Fred Bergsten Senior Fellow, Peterson Institute for International Economics