Regular Economics

Barro has a piece in the WSJ which appears to be part of a series of critical opinon pieces on Keynesian economics. It's better than the last one.



I like the idea of emphasizing "regular economics" vs. Keynesian economics. The 1970s revolution that Lucas started was principally a drive to make macroeconomics regular, by using tools developed in other fields in economics to make sense out of macroeconomic problems. This was initially hard for Keynesians to swallow, but it did not take long for them to catch on, and by the 1980s they were doing the same thing.



Modern Keynesian coordination failure models (not so popular today) and New Keynesian models (very popular) are in fact regular economics - most of the time. Everything is explicit, you can see how it works, and you can quantify things, such as the effects of government policies. Then, we can go about evaluating these models. Why is this assumption there and not another one? Is this parameter measured correctly? How well do these models fit the data?



Much blogosphere Keynesian economics is not regular economics, though. What is driving much of this are the misleading notions that come from some undergraduate textbook macro - the free lunches that Barro is complaining about. Arguments are typically couched in terms of "deficient aggregate demand," by which an irregular Keynesian means "output is below trend." Not all of the blogosphere is like this though. Paul Krugman, who often engages in irregular Keynesian economics, can on occasion be regular, in which case you can actually take it apart and see how it works.



Now, since Barro is regular, you can also take his arguments apart and see what makes them tick. For example, Barro states the following:

Ironically, the administration created one informative data point by dramatically raising unemployment insurance eligibility to 99 weeks in 2009—a much bigger expansion than in previous recessions. Interestingly, the fraction of the unemployed who are long term (more than 26 weeks) has jumped since 2009—to over 44% today, whereas the previous peak had been only 26% during the 1982-83 recession. This pattern suggests that the dramatically longer unemployment-insurance eligibility period adversely affected the labor market. All we need now to get reliable estimates are a hundred more of these experiments.

We know that unemployment insurance (UI) has incentive effects. Any serious model of unemployment will deliver the result that an increase in UI benefits - working through a reduction in search effort by the unemployed, or a tendency of the unemployed to become more picky about the jobs they will accept - will imply a higher unemployment rate and longer average duration of unemployment spells. The key question is how large the effect is. We might also be interested in how the size of benefits matters relative to the duration of benefits, for example.



Barro is too careful to stick his neck out, but he certainly seems to be indicating that he thinks the effect could help in a significant way in explaining what we are observing in the data - i.e. he thinks the effect is large. He also indicates that we should have to see more data to sort this out, but I don't think that is true. We actually have a lot of cross-country data for countries with very different UI systems, for example, and some previous experience with the extension of benefits in the US. Indeed, I would be surprised if there were not many published papers that address the question directly. Anyone know?



P.S. Here is some work on this, arguing the effect is small. The source of the citation also makes the point that it is important to look at the recent data.