Monday, May 07, 2012

The macro Overton window

The "Overton window" is basically the range of positions on a certain question that are considered reasonable. In macroeconomic policy discussions in the United States, certain positions are, for whatever reason, outside the Overton window - Marxist ideas, mercantilist ideas, the gold standard, etc. Whatever your position is in an argument, you want it to be in the middle of the Overton window instead of at the edge. You do not want to be seen as someone who is on the borderline between serious and kook. 

In the debate over the causes of, and proper responses to, the current recession, the Overton window matters. If one edge of the window corresponds to Old Keynesianism and the other edge corresponds to the policy status quo, it's likely that what will end up happening will be something in between those two extremes, e.g. more quantitative easing. But if the rightmost edge of the window corresponds to the idea that demand shocks don't affect output at all, then what will end up happening will probably look more like the status quo.

Hence it makes practical sense for economists who favor less countercyclical policy to try to yank the Overton window toward the right, even if their objective analyses admit the possibility that Keynesians might be right. Or even if conservative economists don't do this intentionally, it certainly helps their cause when someone does it.

For example of arguments that shift the Overton window rightward, here is Garrett Jones suggesting that we pay attention to RBC models:
One of the major schools of thought in macroeconomics rarely makes it into mainstream discussions: Real Business Cycle Theory...[A]s long as big ideas come in waves, as long as energy supplies depend on the vagaries of global politics, and as long as politicians enact policies that weaken confidence in the health of a nation's economic institutions, RBC will matter. 
Notice that the "technology shock" that Jones hints is responsible for our current recession is just the supposed leftist policies of the Obama administration.

For another example, here's John Cochrane:

A logical possibility of course is that drawn-out recessions following financial crises...reflect particularly ham-handed policies followed by governments after financial crises.  Financial crises are followed by  bailouts, propping up zombie banks, stimulus, heavy regulation, generous unemployment and disability benefits, mortgage interventions, debt crises and high distortionary taxation (European "Austerity" consists largely of taxes that say "don't start a business here") and so on...It is certainly possible that these, rather than "financial crisis" are the cause of slow recovery, and thus that slow recovery is a self-inflicted wound rather than an inevitable fate.   
The similar policy mix in the Great Depression is now accused by a strand of scholarship as the prime cause of that depression's extraordinary length, not valiant but sadly insufficient fixes. (For example, see Lee Ohanian; for some more popular summaries see Jim Powell or Amity Shlaes.)
Amity Shlaes? Really?

Note that both Jones and Cochrane make almost explicit reference to the Overton window. Jones says RBC "rarely makes it into mainstream discussions," while Cochrane says "It's certainly possible" that Obama is behind the slow recovery. They aren't claiming that this extreme view is true. They merely wanted it included in the discussion. They want the Overton window to include it.

Is the idea - that Obama's policies have caused our slow recovery - plausible? Well, I guess so, in a generalized, I'm-open-minded-and-willing-to-consider-any-proposition sort of way. But by that standard, quite a lot of things are plausible that no one is talking about nowadays. If you're going to argue that aggregate demand doesn't affect output, you're going to have a very difficult time explaining the initial steep plunge of GDP in 2008-9, before Obama had had a chance to do anything (and you're going to have a very hard time explaining what happened to the price level during that time).


  1. If you're going to argue that aggregate demand doesn't affect output, you're going to have a very difficult time explaining the initial steep plunge of GDP in 2008-9

    Not if you eschew fresh-water macro, and salt-water macro, for holy-water macro -- to wit, the Tantum Ergo:

    Et antiquum documentum
    Novo cedat ritui
    Praestet fides supplementum
    Sensuum defectui.

    Let old teaching yield to the new ritual, let faith provide what is needed by the failing senses.

  2. In a previous post ("Neither real...") you and others said that RBC wasn't taken seriously in academic research any more. This seems too optimistic given recent endorsements by Tyler Cowen and others. But even if it isn't taken seriously, apparently it is still credible enough to be used for this sort of rhetorical ploy.

    Really people who espouse RBC and similar fantasies should be publicly treated like astrologers or phrenologists. Nothing less will limit the harm they do -- even that may not work. And note that the harm is not just to public policy, but also to economics as a discipline.

    (I note that Simon Wren Lewis says in an April 22nd post "If anyone is reading this who is not familiar with macroeconomics, you might guess that [RBC] theory is some very marginal and long forgotten macroeconomic idea. You would be very wrong. RBC models were dominant in the 1980s, and many macroeconomists still model business cycles this way. I have even seen textbooks where the only account of the business cycle is a basic RBC model." I have no independent knowledge but am reluctant to dismiss Wren Lewis' claim.)

    A somewhat broader point: The RBC stories about how the markets are anticipating Obama's future bad policies remind me of the arguments for austerity based on attracting the confidence fairy. All arguments like these depend on rational expectations.

    I've never liked rational expectations, but I'm starting to think they are an essential prop for a lot of the bad thinking in economics. They are aggressively anti-empirical and seem to lend themselves to generating desired conclusions.

    Economics needs a set of disciplinary norms that prevents this kind of end-run around serious research.

  3. MMTers and Austrians are like particles and antiparticles. if only we could stuff them (along with some other sects) into a 10 Bn supercollider and accellerate them to 2/3 the speed of light. wed learn nothing, but itd be fun.

  4. Really, I just wanted to talk about Michelle Alexopoulos's cool papers! I thought she deserved more attention for coming up with a creative identification strategy for technology shocks....

  5. Anonymous3:13 AM

    When you're promoting the Big Lie , as the Chicago Boys are , and always have been , the Overton Window is wide open already. You can say literally anything , no matter how ridiculous , and your teammates will back you up. That's what Uncle Miltie meant by "Free to Choose".

    You're playing right into their hands by engaging them in debate.

  6. Anonymous10:27 AM

    I think that Bourdieu's anthropological work, "Outline of a Theory of Practice", offers a much better explanation as to how the range of acceptable discourse is controlled by the elites and tribal elders. The Financial Times Gillian Tett is a big fan of his work, as she discusses in 'Fools Gold'. For some more discussion as to how this impacts the financial debate, see, 'Our Half of the Deal' at If you have the right economic viewpoint, the elders will reward you. When is the last time that a Congressional Budget leader and a major hedge fund donor got together and bought you a booze up at an exclusive Washington restaurant?

  7. I wonder to what extent the recent work by DeLong and Summers on self-financing stimulus fits within the Overton window. The efforts to expand it more to the Right also might shut it more from the Left. Is the size of the Overton window a conserved quantity?

  8. Noah, but you may also be tilting the window by suggesting that technology schocks do not matter (and I agree with Garett Jones that Michelle's papers are interesting). Now maybe you do not like the labor market-clearing assumptions of the traditional RBC models, maybe you want to deviate from rational expectations and add biases. But there is a great deal of work that shows that waves of innovation affect productivity growth, the labor market, interest rates, and so on. They may help explain why the recovery after the 2001 recession was "jobless", or why the housing bubble began as the dot com bubble was ending. Or, to put it more abstract, are demand and supply shocks independent exogenous events or is there an interplay between the two that keeps generating irregular oscilations?

  9. "Is the idea - that Obama's policies have caused our slow recovery - plausible? "

    Isn't this Obama's re-election strategy? That his policies prevented us from falling off a cliff and getting us into a position to actually have a recovery, versus the other side's ideas that are effectively economic suicide?

    1. MaxUtility3:50 PM

      The claim is that Obama's policies made the recovery slower than it would have been if he'd just let the market work its magic. Obama's claim is that his policies enabled a slow recovery as opposed to a massive depression. The fact that "slow" appears in both statements does not mean equivalence.

    2. "The claim is that Obama's policies made the recovery slower than it would have been if he'd just let the market work its magic. Obama's claim is that his policies enabled a slow recovery as opposed to a massive depression. The fact that "slow" appears in both statements does not mean equivalence."

      this claim, of course, being made by people who have spent the last several years being wrong, repeatedly, with no shame. You know, the ones who praised European austerity

    3. Anonymous4:06 PM

      The assumptions made make a substantial contribution to the projected outcomes.

      How much of the market magic theory of recovery is reasonable? Projection of steady state growth or explosive growth is tenuous at best. Think about "irrational exuberance".

      What is the importance of the starting point for the recovery? Assuming that the market works it magic, where did it start from? What are the risks?

      What is the net effect of starting from a much lower point - rapid growth from a zero point back to where you were when stimulus stopped the fall still represents a period of worse expectations over the short and long term.

      What can we reasonably expect over the long term - rapid growth without bounds or just a short burst of growth followed by a prolonged period of stagnation, possibly at even a lower point by not preventing the fall?

      Are the policies proposed good for society or just a few - the discussion on inequality does seem timely and relevant in this context.

      It would seem that the Austerian course of action does NOT provide a decent risk/return ratio for society due to uncertainty (discounting the overly optimistic forecasts of the Austerians arising from Moral Hazard and rigid belief systems - Krugman's "Confidence Fairy") and from the standpoint of economic research. So why is the discussion continuing?

      Something is happening in the political/economic discourse from the right, but it is not about sound reasoning, but rather about self-interest and belief systems.

      In this context, contrary reasoned/technical political/economic arguments will fall on deaf ears. Do not expect any shame in the discourse - what is good for those interests overrides reason due to emotional/cognitive distortion. Look for "Taking a position and fashioning a rationale to fit the conclusion". Overgeneralized, mentally filtered, shallow, accusatory, and bipolar argumentation, all based on emotions will be the menu of the day.

  10. This is my latest post, Money velocity versus the Keynesian multiplier, where I try to explain the difference for laypersons who are willing to listen.

  11. Morgan

    Just because Scott Sumner is unreasonably patient enough to let your angry, often insulting, and badly-reasoned comments remain on his posts doesn't mean everyone has to.

    1. Fear not...comments by Morgan Warstler will now be booted. I feel kinda bad about doing this, because I think the guy might be schizophrenic, but he was just injecting too much spam into the comments... :-/

    2. Don't worry. If he is, it's not like you are going to help him by letting him comment here. Also, he's not noticeably more - well, insane - than many blog commenters.

  12. The Depression/World War II analogies offer an interesting picture of the left side of the macro Overton window. Many such as Krugman argue that it was the extremely high deficit spending during World War II which lifted the US out of the Great Depression. While certainly not everyone agrees with this, this view is within the Overton window.

    However, there were two parts to the US economic mobilization, and the spending was only one of the two. The other part is the War Production Board. The War Production Board was a huge act of central planning to marshal the nations' resources towards war. It completely reallocated resources to this end. And arguably this reallocation had as much to do with creating the prosperous postwar economy as did the spending.

    This is why it is not a contradiction to say that the 30s unemployment was structural, and at the same time say that the government was able to improve the unemployment picture. To the extent that 30s unemployment was structural, it was the central planning which upended the structure and created a better fit between workers and the economy.

    While these two parts of the economic intervention during the War, the planning and the spending, certainly both contributed to the economic recovery, it is only the spending which exists in the Overton window. The central planning of the WPB certainly is not. Polite economists don't talk about central planning at all.

    1. Actually, if you look at the figures, FDR started a massive economic expansion, starting in 1933. What happened was (a) this was from a horrible base, after three years of a right-wing economic holocaust, and (b) FDR had a right-wing relapse in 1937, and triggered a recession.

    2. Perhaps, but this does not detract from my point, which is that central planning was at least as important as spending for the recovery, but that central planning is outside the Overton window now, while the spending is not.

    3. You raise excellent questions. WWII did not just produce an enormous fiscal stimulus, it also brought about a radical correction in income distribution, sometimes referred to as the Great Compression. Although extremes of income distribution are often mentioned in popular accounts of the genesis of both the Great Depression and our present malaise, economists seem to elide the role of income distribution in macro performance.

      Planning and institutional reforms did not begin with the War Production Board. Hoover's response included the revival of institutions from WWI economic planning and control, including the Reconstruction Finance Corporation (RFC). Problems in agriculture, which then employed a very large fraction of the work force, had been the object of reform and planning efforts since the problems emerged in the 1920s, as the WWI commodity price boom receded. The second incarnation of the Agricultural Adjustment Act (AAA) was one of the most astoundingly successful efforts at industrial policy in world history; yields per acre for a wide variety of crops began rising steadily in 1935 and continued to rise well into the Green Revolution of the 1960s. Economists generally dismiss the AAA out of hand as irrelevant.

      And, of course, the 1930s witnessed the inauguration of an era of regulatory financial repression. Repeal and deregulation of those measures might have had something to do with the present debacle. But, again, macroeconomists, apparently, have gone out of their way, to know next to nothing about the financial sector.