Below is a complete transcript of blog entries in the order they were originally posted.
Economics has been going through some big changes over the last year. It may never be the same. As a result of the pandemic, policy makers seem to have stumbled upon a secret weapon for dealing with business-cycle downturns that will set a precedent going forward: Large, unconditional cash transfers to low- and moderate-income households.
The Biden administration is embracing the new economics, which is casting aside the profession’s longstanding priorities of containing inflation, limiting the buildup of public debt and avoiding the creation of disincentives to work at all costs. But some are worried the emerging paradigm will backfire in a big way.
Read More: The Covid Trauma Has Changed Economics—Maybe Forever
Join us on at 10 a.m. New York time for a live Q&A with John Jay College associate professor J.W. Mason as we explore this new economics and its potential ramifications. Send your questions for J.W. to
J.W. Mason is an associate professor of economics at John Jay College of Criminal Justice -- part of the City University of New York -- and a fellow at the Roosevelt Institute. His research focuses on the history and political economy of money and credit, including the evolution of household debt, public-sector balance sheets, and the changing role of financial markets in business investment. He also works on history of economic thought, particularly the development of macroeconomics over the 20th century.
Opinions expressed by J.W. Mason is his own.
Anny Kuo TOPLive Editor
Good morning J.W., and many thanks for joining us today to talk about the evolution of economics during the pandemic. I’m Ben Holland, an economics editor at Bloomberg News in Washington.
Ben Holland Economy Editor
Let’s start with a broad question. We’re calling it “the new economics” -- how would you describe the main tenets of the shift that we’re seeing underway in economic policy making?
Ben Holland Economy Editor
There are two broad areas where we are seeing a big change from the consensus of the past 30 years. The first is around the goals of policy, the second is around the tools.
In terms of the goals, the textbook story has been that the goal of macroeconomic policy is to smooth out fluctuations. This means, first, that we are focused on short-term deviations from the trend, and second, that overshooting the trend is at least as big a problem as falling short. But today, there is a recognition that demand shortfalls are a much bigger problem than overheating, and that they aren’t limited to the short term. The economy may need stimulus on an ongoing basis. There’s also a recognition that demand has farther-reaching effects than we used to think — on productivity growth, on income distribution, and so on.
On the tools side, there’s been a reassessment of the role of the central bank in macroeconomic policy. Back in the 1990s and 2000s, there was an almost religious faith in the power of central banks — the correct monetary policy rule was supposed to be able to essentially eliminate the business cycle. Over the past dozen years, we’ve learned that central banks are, if anything, even more powerful than we thought when it comes to asset prices and interest rates, but their power over the real economy is more limited. So there’s much more interest in fiscal policy and other tools.
J. W. Mason Associate Professor, John Jay College
What would you point to as some of the biggest factors in recent months or years that have been driving this shift?
Ben Holland Economy Editor
There have been two big teaching moments in macroeconomics over the past decade or so — the 2007-2009 recession and its aftermath, and the pandemic. The lesson of 2009 is mainly negative — the stimulus was too small, and the result of that was many years of depressed growth and high unemployment. The lesson of the past year, on the other hand, is that it is perfectly possible for government to spend enough to cancel out the effect of even the largest shock, if there’s a political will to do so. One other lesson from both crises is that fears of government debt have been greatly oversold. Both after 2007 and today, we’ve seen enormous increases in debt-GDP ratios in the US and other rich countries, with none of the negative consequences that was supposed to bring.
J. W. Mason Associate Professor, John Jay College
I like the way you put it to me when we were discussing this story: The three big traditional concerns of economic policy making over the last 40 years -- avoiding inflation, the buildup of government debt and creation of work disincentives -- all would have prevented the robust type of fiscal response to the pandemic that we’ve seen, had they not been cast aside.
All three are still being invoked in debates about what to do next -- especially the question of work disincentives, with the expiration of expanded unemployment insurance benefits looming in September (and even earlier in several states). But so far, policy makers clearly just have not found any of those concerns particularly compelling in designing the economic policy response to the pandemic.
Matthew Boesler Fed Reporter, New York
Yes, it seems like a big divide right now is how we feel about the possibility that things like more generous UI are raising wages relative to what they would otherwise be. We can debate how much this is true empirically -- I don’t think it’s clear-cut.
But the real division is whether, to the extent it’s happening, it’s a good or bad thing. To people with the more traditional mindset, labor markets that are tight enough to generate accelerating wage growth are just unambiguously a bad thing -- a problem to be solved. But what is interesting now is how many people -- including, it seems, leading economic policy makers in the administration -- who see strengthening the bargaining position of labor as a good thing, as something we should be aiming for. That’s a real change from recent administrations, it seems to me.
J. W. Mason Associate Professor, John Jay College
J.W., you mentioned the way the business cycle has been managed in the recent past -- how big a role has this played in shaping the distribution of income and wealth? As opposed to other, perhaps more “structural” factors like -- for example -- changes in the tax regime?
And reminder, if you have any questions for J.W., send them to .
Ben Holland Economy Editor
The traditional answer would be that it is all structural — that the business cycle has nothing to do with distribution. But I think there’s a strong case that in fact, chronically weak demand over the past 20 years has played a big role in rising inequality.
If you look at wage growth over the cycle, it’s clear that it is much faster in booms than in recessions and in the slow, jobless recoveries that have followed the past couple of recessions. This is especially true at the bottom end — when the labor market is weak, low-wage workers fall further behind, and when the labor market is strong, they catch up. Similarly, the gap between wages and employment for Black and white Americans gets wider in downturns and narrows when the labor market tightens.
J. W. Mason Associate Professor, John Jay College
So I would say -- and I think Jay Powell might agree -- that systematically erring on the side of too little stimulus, too much fear of inflation, has been a big contributor to rising inequality.
J. W. Mason Associate Professor, John Jay College
In the past, the kind of changes in the distribution of income and wealth, like the ones you mention with regard to labor, have tended to go together with major changes in economic thinking -- as in the 1930s or the 1980s, say.
What are the prospects for a shift on that scale in the coming years?
Ben Holland Economy Editor
Before we move on to the next question, I just wanted to add that what’s really amazing from my perspective as someone who covers the Fed is the extent to which this logic has permeated the monetary policy conversation over the last two years.
It’s so central to how the Fed says it will be conducting policy going forward that now that you actually have, for example, Wall Street forecasters trying to make forecasts for variables like the Black unemployment rate -- something they’ve never done before because they haven’t had to think about it.
It just goes to show the unique power of the Fed -- whose interest-rate decisions have trillions of dollars riding on them in financial markets -- to focus attention on things like this.
Matthew Boesler Fed Reporter, New York
I think looking at Black employment as a gauge of labor market conditions makes a lot of sense. If you want to see how close we are to full employment in a meaningful way, you should focus on the workers who are most disadvantaged, who are likely to be last hired and first fired. I have a report on exactly this coming out form the Roosevelt Institute soon.
J. W. Mason Associate Professor, John Jay College
Back to your question on changes in distribution of income and wealth:
In some ways we are already seeing the shift. If you look at the language being used by Biden and his economic policy team, it’s a real shift from what we are used to. There is a recognition that just maintaining the pre-pandemic status quo is not good enough, and a recognition that things like inequality are macroeconomic questions. And they have really moved away from the obsession with public debt that dominated macro policy discussions for so long.
It is an open question, though, how much this shift will get translated into academic economics and lead to a more developed body of theory as with the Keynesian revolution in the 1930s.
J. W. Mason Associate Professor, John Jay College
There is a real problem that the kind of macroeconomic theory that has dominated academic economics for the past generation is, in my opinion, completely unsuited to the kinds of questions we are struggling with now.
If you approach economic theory as a tool for answering the question “what monetary policy rule will allow the representative consumer to allocate their spending over an infinite lifetime to achieve maximum utility,” that’s just not going to be very helpful. So we have to hope that younger generation of economists will be willing to make a pretty sharp break with the kind of theory that is being taught today.
J. W. Mason Associate Professor, John Jay College
J.W., you’ve described how the new approach is apparent in the Biden administration’s program. But lasting change often takes a cross-party consensus -- I’m thinking of the way that top-end income taxes, for example, were high under administrations from both parties in the post-war decades, and relatively low under both parties in the 90s and 00s. Do you see any signs of a change in economic thinking within the GOP?
Ben Holland Economy Editor
That’s a tricky one -- it’s hard to say what kind of economic theory today’s GOP believes in. Certainly concerns over public debt seem purely opportunistic. But the CARES Act, which is a big marker for the shift we are talking about, was passed in a bipartisan way.
I think it’s more likely, tho, that if a Democratic administration is successful by aggressively pursuing full employment and expanding public spending, if that turns out to be politically popular -- which I think it will -- then Republicans will adopt some of the same ideas. I don’t think there’s any reason to expect it to be bipartisan from the start.
J. W. Mason Associate Professor, John Jay College
Amid all the changes, one thing that appears to have held steady is the widespread agreement that the Fed can and should handle any inflation problem that may arise -- and of course there’s a lot of angst about inflation in the financial world right now.
Where do you see the debate about inflation management going over the next few years?
Ben Holland Economy Editor
That’s one area where the conversation has not moved as far from the old consensus, but there is the beginning of a shift.
Suppose we see prices of semiconductors rising, or health care, or college tuition -- is raising the cost of new housing construction a sensible response to that?
J. W. Mason Associate Professor, John Jay College
Conventional monetary policy does work, at least in a downward direction, but it is a very crude instrument -- basically, you respond to rising costs anywhere in the economy by depressing demand in a handful of interest sensitive sectors, mainly residential construction. And at the same time, you raise the cost of debt service throughout the economy.
I think people are realizing this is not sensible. To the extent we are looking at supply constraints, we should be encouraging investment, not discouraging it. And if we do want to push down spending, we can do so in ways that don’t cause financial distress for all kinds of debtors. I think that is going to be a bigger concern going forward.
J. W. Mason Associate Professor, John Jay College
And even setting some of these more practical concerns aside for a second, it seems like a big factor at work here over the last 14 months or so -- as we’ve been discussing today -- has been concerns about equity. A distinguishing feature of the new template for responding to booms -- if the pandemic response can be described as such -- has been the distributional impact, with low- and moderate-income households having been largely shielded from financial calamity, at least in aggregate.
Will the same logic eventually be applied to our response to dealing with booms (the “crude instrument” you highlighted) as we move through the next few years? Will people still find it acceptable to contain inflation by limiting the level of employment in the economy? I think that is going to be a really interesting part of this conversation going forward.
Matthew Boesler Fed Reporter, New York
There are two separate questions here. One is how much we can let demand grow. I think there are good reasons to think that limit is much higher than the standard measure of potential output implies, both because more growth is possible, and because running the economy hot has broader benefits, including raising incomes at the bottom. The second question is, if we do need to rein in demand, what tools do we want to use for that?
J. W. Mason Associate Professor, John Jay College
The implication is that the role of the Fed and other central banks might ultimately be quite different under this new paradigm from what it’s been in the recent past.
Where do you think they will end up?
Ben Holland Economy Editor
I think one fundamental thing that is happening is that the roles of the central bank and the budget authority are being swapped, in a sense. The traditional division was that the central bank was responsible for the overall level of demand in the economy, while the federal budget should be managed so as to stabilize the debt-GDP ratio.
Today, as in some previous periods, we are seeing primary responsibility for aggregate demand move to the budget authorities. That frees the Fed, in a sense, to focus on stabilizing the debt by keeping interest rates low.
J. W. Mason Associate Professor, John Jay College
The other thing I would say is that there is a recognition that we need more active credit policy. It’s not enough to get overall demand right; we need to do more to channel investment to socially useful activities. One big lesson of the housing boom is that private financial markets are not as good at this as many people used to assume.
Especially given the economic reallocations needed to deal with climate change, it’s likely the Fed will have to play a more active role supporting lending to some sectors and discouraging lending to others.
J. W. Mason Associate Professor, John Jay College
Just to follow up on that -- I would highly recommend that those who haven’t check out J.W.’s paper with Arjun Jayadev that looks into some of these issues: “The post-1980 debt disinflation: an exercise in historical accounting.” It was certainly an eye-opener for me.
Matthew Boesler Fed Reporter, New York
I would just stress that this is a unique opportunity to rethink economic policy and we are very fortunate that the people in power right now seem to be willing to do that. I think the people who are locked in the old way of thinking see inflation around every corner; the people who think tight labor markets are a danger to be avoided are doing the country a real disservice.
J. W. Mason Associate Professor, John Jay College
I’d like to finish up with a couple of wider questions about the new economics and how it might apply beyond the U.S.
First, is it a concern that much of what we’re talking about is more relevant to wealthy economies than developing ones?
And second, a lot of attention has been paid to Modern Monetary Theory as part of this debate. How would you describe the place of MMT in the new economics?
Ben Holland Economy Editor
It’s certainly true that smaller, poorer economies are more constrained than large, rich ones. But I think we sometimes exaggerate the constraints even there. I think that, for instance, Brazil’s very high interest rates are a choice being made there. I don’t think they are objectively necessary.
In general, I think the way to open up space for middle-income countries is a degree of de-linking from international financial markets. I think there is a very strong case for capital controls as a tool to create space for pursuing domestic policy goals.
J. W. Mason Associate Professor, John Jay College
MMT is a tricky one. From where I am sitting, it is more a conversation -- a group of people, than a coherent body of thought. There are some very smart people writing under that label, and a lot of their policy conclusions are ones I share. But with respect to my MMT friends, I don’t think it really constitutes a new body of theory.
J. W. Mason Associate Professor, John Jay College
One thing we haven’t had a chance to touch on is the idea of a more activist government approach to labor-market intervention through, for example, a formal job guarantee program -- which MMT sees as a key element of the type of stabilization policy it envisions and really forms a core part of its macroeconomic framework. But we’ll have to leave that discussion for another time.
Matthew Boesler Fed Reporter, New York
Before we wrap, a question from a client:
What kind of measures, punitive or otherwise, do you think policy makers are likely to take to prevent the further offshoring of labor?
Ben Holland Economy Editor
Personally I think it makes more sense to focus on maintaining tight labor markets and high overall employment levels than to try to preserve specific categories of jobs. As the old saying goes, you don’t fill a flat tire through the hole.
In a context of overall strong employment, there will be less pressure to keep specific kinds of employment in the U.S. A lot of concern about offshoring comes from a context of more or less permanent semi-stagnation that we’ve come to accept as normal. In a sustained boom, these concerns may seem less urgent. This is a specific example of a broader phenomenon: All kinds of economic problems are easier to manage in a boom.
J. W. Mason Associate Professor, John Jay College
J.W., thanks so much for joining us to discuss these important changes.
For readers interested in delving deeper into this topic, I highly recommend J.W.’s blog, which can be found at:
http://jwmason.org/the-slack-wire/
Once again, your company has been much appreciated -- and we look forward to more of these conversations in what looks likely to be an intriguing era for economics!
And if you haven’t yet read Matt’s story on the New Economics, you can find it here.
Ben Holland Economy Editor
New Economics Q&A With John Jay's Mason: TOPLive Transcript - Bloomberg
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