Ptolemaic Woes: Hall’s Modern Recessions

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Some especially unhappy research leads off our series on New Keynesian (NK) theorists, occupying the mainstream in modern macroeconomics, becoming debilitatingly Ptolemaic. The term refers to their emphasis on the defending the consensus general-market-equilibrium model class at the expense of stabilization-relevancy. In mainstream thinking, which cannot accommodate meaningful wage rigidity (MWR) and the rational suppression on labor-price recontracting, recessions be sufficiently mild so as not to provoke involuntary job loss. How the little-recession requirement burdens macroeconomists is illustrated by Robert Hall, the respected NK theorist who specializes in macro labor issues. In the article in question, he directly confronts the inherent small-recession implication of consensus modeling. His straightforward approach is avoided by most NK scholars, who favor obfuscation. Two cheers for Bob Hall.

Prior to the 2008-09 extreme instability, Hall wrote a series of papers that separated U.S. recessions into two chronological classes. He asserted a metamorphosis, largely unspecified, of cyclical downturns into their “modern” form some time after the challenging 1981-82 contraction. From Hall (2005a): “In the modern U.S. economy, recessions do not begin with a burst of layoffs. Unemployment rises because jobs are hard to find, not because an unusual number of people are thrown into unemployment.” He argued that in “modern” recessions familiar search/match/bargain theory, with its focus on the voluntary unemployment that occurs while looking for “hard-to-find” jobs, provides adequate explanation of actual labor cyclicality. Hall boldly concluded that, once embedded in the micro-coherent, market-centric general-equilibrium framework, S/M/B modeling would be sufficiently robust to support operational stabilization theorems.

Our capacity to assess the “modern-recessions” hypothesis was made more robust with the expansion of the sample size from two to three. The table, reprinted from the eBook’s Chapter 1, shows that the 2007-09 recession (by definition part of Hall’s modern class of business cycles) was severe, with its outsized labor-market deterioration dominated by job losers. The six-million involuntarily lost jobs accounted for more than three-quarters of the increase in total unemployment, pushing up the job-loss incidence by 13 percentage points. People who were, in Hall’s words, “thrown into unemployment” were the overwhelming cause of the devastating jump in joblessness. The evidence is conclusive.

The 2007-09 cyclical contraction reduces the analytic value of the modern-recessions hypothesis to little more than illustrating the Ptolemaic-eagerness of mainstream theorists to claim some policy relevance for their stabilization-challenged general-market-equilibrium model class. NK theorists, especially in their gatekeeping activities, must face up to the reality that macrodynamic instability can be both severe, generating huge welfare costs that must engage stabilization authorities, and incompatible with coherent market-centric modeling. It is time for mainstream macroeconomists to start thinking outside the consensus box in which all rational exchange is restricted to the marketplace.

The GEM Project’s two-venue general-equilibrium model class provides a coherent monetary theory of production that is broadly consistent with the available evidence. Generalized-exchange modeling uniquely motivates recognizably-sized fluctuations in job loss, employment, output, wage income, and profits, resuscitating the three-part early Keynesian macrodynamics. First, stochastic real or nominal shocks periodically occur in highly-specialized economies. Second, originating shocks are propagated by nominal demand disturbances and their associated multipliers that combine with MWR to produce most of the subsequent welfare loss. Third, amelioration of instability costs justifies stabilization authorities’ discretionary interventions in total spending. Even before the Great Recession, GEM theorists were deeply skeptical of the recurring argument, most frequently asserted in the so-called Great Moderation, that macro instability has been somehow fundamentally tamed. Mainstream macroeconomists, building models wholly within a market-centric framework that coherently accommodates neither involuntary job loss nor recessions that generate recognizably-sized welfare loss, are understandably vulnerable to misinterpreting periods of relative stability as the structural shift needed to usher in the sort persistent moderation required by consensus thinking.


Monthly Peak-to-Trough Change in:
Recession   Unemployment Rate   Job Losers(000)

1969-70         +2.4 points                    +1,230
1973-75          +3.8 points                   +2,599
1980               +1.5 points                    +1,315
1981-82         +3.6 points                   +3,433
1990-91         +1.3 points                    +1,373
2001               +1.2 points                    +1,423

2007-09      +4.8 points                   +5,807

Blog Type: New Keynesians Paris, France

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