David Warsh writes;
"Summers hinted at how his thinking had changed when he told an audience at a meeting of the Institute for New Economic Thinking at Bretton Woods, N.H., in March 2011,
I would have to say that the vast edifice in both its new Keynesian variety and its new classical variety of attempting to place micro foundations under macroeconomics was not something that informed the policy making process in any important way.
Instead, Summers said, Walter Bagehot, Hyman Minsky, and, especially Charles Kindleberger had been among his guides to “the crisis we just went through.”
MY Questions:
1. Does Larry Summers mean to say that the 1st year Macro Curriculum is worthless in helping the Fed and the Board of Governors to form counter-cyclical policy? In this case, should there be more non-Ph.Ds in Economics sitting in at the Fed's main meetings? For example, the President of the Atlanta Fed is a very impressive man who does not have a Ph.D. in Economics.
2. "informed the policy making process" is a funny phrase. There is a factual issue of whether Core Macro was used in this process versus the more important issue of whether it should be used.
3. Many economists view Kydland and Prescott's Rules vs. Discretion as a critical paper (having already garnered over 7800 citations) in modern economics as it demonstrates the central importance of credibility in macro "games". Does Dr. Summers really dismiss this paper as well as providing no "blueprint" for selecting policies? A cynic might conjecture that Professor Summers is well aware that the policy fun in devising policy goes way down if the government commits to clear rules. Discretion conveys more power to the key decision makers. Is Professor Summers willing and able to confront a simple political economy model of decision making?
4. It appears to me (and I recognize that I'm a failed UChicago macro economist) that the Fed's active policies starting in 2008 has been all about building hard to quantify "confidence" as it attempted to signal to the world's markets that it was the lender of last resort. This suggests to me that Ben Bernanke had a model in his mind of how confidence is built up and how to minimize the chance of bank runs, fire-sales and asset depreciation leading to a further chain of bankruptcies. Does Dr. Summers not embrace the Bernanke and Gertler credit channel worldview? Would Professor Summers embrace this paper by D and D as being relevant for studying the challenge of 2008 and onward?
Diamond, Douglas W., and Philip H. Dybvig. "Bank runs, deposit insurance, and liquidity." The journal of political economy (1983): 401-419.
Economists since Hicks and Keynes have invested many hours of our scarce time in building up the human capital to explain and predict human behavior. Is Professor Summers saying that the subset of scholars who were studying macro have been collectively wasting their lives? Has he recommended that the macro sequence be cancelled at Harvard Econ?
Finally, where does Dr. Summers stand on modern growth theory? If the economy returns to its "steady state" growth, then won't the 2008 negative hit vanish from our collective memory?