When I decided to read Tyler Cowen’s new book on the airplane to China, I pretty much knew I was going to arrive in Beijing convinced that I was autistic. Here are some reasons:
1. Any time I read some psychology I think they’re talking about me.
2. I recently heard an autistic guy on NPR who was a wizard with numbers. His description of the autistic personality reminded me a bit of myself.
3. I had heard Tyler talk about his book, and knew that he had a favorable view of what he called “the autistic cognitive profile.”
4. Autistic people like to make lists of things.
I’m not going to try to explain Tyler’s view of autism, as I would get it all mangled up. But for those not familiar with his perspective I should at least mention that he is not talking about autism as a mental illness, but rather a certain way of thinking, which may be partly genetic.
Part 1. The 12 year old macroeconomist
When I was young I didn’t have much of a social life, preferring things and ideas to people. One of my nerdy activities was collecting coins. Even worse, it wasn’t the slightly respectable collecting of type coins. No, I aimed at collecting lots of identical coins that merely varied by date and mint mark. I inferred from Tyler’s book that this behavior fits the autistic profile. And like those autistic guys with a photographic memory for numbers, forty years later I can still remember the “rare dates” that were much more expensive that other more common coins; 1908, 1921, 1931, 1938, 1958, etc. Do you see a pattern? That’s right; when I was 12 years old I had basically memorized the entire history of US business cycles. Of course I didn’t know that I knew this, as 12 year olds have only a vague idea of what business cycles are.
Now let’s suppose that as a 12 year old I wandered into a macroeconomics seminar, full of people like Bernanke and Krugman and lots of other brilliant economists. I saw the graph of business cycles and recognized the pattern. (Autistic folks are good at recognizing patterns.) I decided to raise my hand and propose a theory—maybe the recessions were caused by the rarity of coins. Pennies were especially rare throughout the early 1930s, maybe that caused the Great Depression. I suppose most of the economists would chuckle at me, and gently try to explain that coins supply is endogenous, merely reflecting the proportion of the base that the public chooses to carry as pocket change.
But then Paul Krugman might say; “wait a minute, this boy’s theory may seem silly, but is it any sillier than Friedman and Schwartz’s view that the Great Depression was caused by a big drop in M1 and M2? After all, the Fed doesn’t directly control those aggregates either. Rather they directly control the base, and the movements in the aggregates can be thought of as endogenous once the base is set. Suppose M2 velocity is stable. Then to figure out the impact of changes in the base on M2, we first have to figure out its impact on NGDP. Suppose the Fed doubles the base, but all the extra money is hoarded. In that case the policy will not increase NGDP at all, nor will M2 increase.
Exactly the same argument could be made for coins. Since they are used for transactions, coin demand is probably closely related to NGDP. When NGDP falls, there is no “need” for extra coins. And since coins are very durable, if the stock demand doesn’t increase, or even falls slightly, then the flow demand for new coins will be very small. Hence the rarity of coins made in 1931. Indeed in 1933 some types of coins weren’t made at all. Friedman and Schwartz essentially argued that if Fed policy had been expansionary enough to insure M2 kept rising at a low but steady rate then NGDP wouldn’t have fallen. Why couldn’t the same be said for coins? If the Fed had injected enough money to keep the demand for new coins rising at a fairly steady rate, then presumably the total transactions in the economy would have also kept rising at a fairly steady rate. Hence no Great Depression. The cause of the Great Depression was too few pennies being made at the Philadelphia mint.
If you think this speculation is far-fetched, go read the piece Krugman wrote in the NYR of Books right after Milton Friedman died. Krugman argues that Friedman and Schwartz’s whole argument relies on the assumption that the Fed had the ability to prevent a fall in M2, simply by printing more base money. He then argues that the Japanese case suggests otherwise; that further monetary injections might have simply been hoarded as ERs. And then early this year he made this argument again, this time citing the fact that massive base injections by the Fed had mostly been hoarded as ERs. I can’t be sure, but I think Krugman might agree with this 12 year old boy’s argument. Not agree that he was right; but agree that it was a plausible argument, just as plausible as the one made by Friedman and Schwartz. Indeed in a sense it is the same argument. You find an aggregate that is correlated with NGDP, and then you argue that the Fed just needs to expand the base enough to keep that aggregate growing at a steady, non-inflationary rate. It doesn’t have to be money at all; it could be postage stamps. (Yes, I collected them too—pitiful.)
BTW, I think Krugman is wrong; I think the Fed did have the ability to keep demand for pennies rising at a fairly steady rate. But I think Krugman and I would agree on one thing. If they did have that ability, then one could argue that the reduction of penny production caused the Great Depression.
Part 2. We see right through your silly “framing effects.”
Once I got to Chicago I found out that I wasn’t that good at the technical side of economics, but I had pretty good intuition. I don’t have much problem with most “story problems” such as the one on opportunity cost that recently stumped about 80% of economists at a recent AEA convention. I also think I do a pretty good job in looking past what are called “framing effects,” or aspects of a question that lead one astray. A good example of framing effects was provided in my recent supply and demand post, where I pointed out that people tend to associate ‘consumption’ with ‘demand,’ and ‘production’ with ‘supply,’ even though the terms ‘production’ and ‘consumption’ both refer to quantity.
Tyler Cowen pointed out that autistic people often seem to act more like a rational “economic man” than the non-autistic. They are less swayed by framing effects and also less swayed by emotions such as envy and revenge, which can be counterproductive. I always thought it was obvious that it was better to get a 5% real wage increase, when all your colleagues got 10%, then to get a mere 4% real wage increase when all your colleagues got 2%. But as I got older I realized most people don’t look at things that way. The world is not full of characters like “Spock” on Star Trek. Revenge doesn’t hold great appeal for me. Envy? I hardly know what it is.
Another area where I found that I differed from others is investment strategy. When the Asian markets crashed in 1997-98, I lost a lot of money in my 401k. So what did I do? The only thing that seemed logical, I sold all of my non-Asian stocks and went 100% into Asia. After all, I thought, Asian stocks were now “cheap.” Over time, however, I found that many people don’t look at the world that way. They might be momentum traders, assuming something that has crashed will keep crashing, or they might take the Asian crash as a personal affront, and sell their Asian stocks in disgust. Or they might simply lose their appetite for risk. (But why not lose that appetite when things are most risky, i.e. when stocks are high?) So when it comes to economics I try to be like Mr. Spock–ruthlessly logical. Of course I don’t always succeed. For instance although I have a high deductible, there is no earthly reason for me to insure my car at all—it is a waste of money.
So let me finally get to the point. I believe that the financial crisis of 2008 was the mother of all frame jobs. The commercial bankers were framed, when it was really the central bankers that created the severe recession. Paul Krugman is also good at seeing through framing effects, or at least he used to be. Here he criticizes William Greider’s argument that real factors led to high unemployment:
It is possible for economies to suffer from an overall inadequacy of demand–recessions do happen. However, such slumps are essentially monetary–they come about because people try in the aggregate to hold more cash than there actually is in circulation. (That insight is the essence of Keynesian economics.) And they can usually be cured by issuing more money–full stop, end of story. An overall excess of production capacity (compared to what?) has nothing at all to do with it.
Over the past few months I have rolled out one quotation after another, trying to show that if one believes the logic of modern macroeconomics, the implications are clear. Fed policy was effectively highly contractionary, and a more expansionary policy could have prevented the sharp fall in NGDP. And there is no evidence that the fall in RGDP is anything more than what one would expect from this sort of monetary policy failure. Here are a few more quotations:
1. It is dangerous always to associate the easing or the tightening of monetary policy with a fall or a rise in short-term nominal interest rates. (Mishkin, p. 606)
2. Other asset prices besides those on short-term debt instruments contain important information about the stance of monetary policy because they are important elements in various monetary policy transmission mechanisms. (Mishkin p. 606)
3. Monetary policy can be highly effective in reviving a weak economy even if short term rates are already near zero. (Mishkin p. 606)
And here’s one from Milton Friedman:
Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
. . .
After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.
Put all these together, and the implications are clear; monetary policy is the key to the crash of 2008. But of course the framing effects made this hard to see, so we relied on fiscal stimulus. John Cochrane expressed my thoughts perfectly:
Some economists tell me, “Yes, all our models, data, and analysis and experience for the last 40 years say fiscal stimulus doesn’t work, but don’t you really believe it anyway?” This is an astonishing attitude. How can a scientist “believe” something different than what he or she spends a career writing and teaching? At a minimum policy-makers shouldn’t put much weight on such “beliefs,” since they explicitly don’t represent expert scientific inquiry.
So why am I not making any headway? Because the post-Lehman crash was a very powerful framing device. It’s a great story. Tyler Cowen points out that stories influence how we see the world:
Most people are programmed to think in terms of stories and they have an especially good memory for stories. (p. 126)
But Tyler also sees the danger this poses for the non-autistic:
The media is good at portraying heroes and villains and conspiracies, while it is bad at giving people an understanding of abstract or unseen social and economic forces. (p. 135.)
In the last two weeks of September 2008 even I was obsessed with the banking crisis, and all the competing proposals for reform. It is hard to see past that event, to keep one’s eye on the ball. It takes a single-minded focus on a few key points; monetary policy determines NGDP, and NGDP shortfalls cause demand-side recessions. How hard is it? Well consider that since I started studying economics in 1973 I don’t recall a single recession that was viewed as being caused by the sort of garden-variety shortfall in NGDP that could have been avoided with a suitable monetary policy. It was always “different this time.” Sure the framing effects were particularly powerful in 2008, but they are always there.
I am not arguing that the autistic approach to macro always comes up with the right answer. The new classical approach seems autistic to me, but it relied on an oversimplified model where wages and prices were set at market-clearing levels. There are fiscal models of the price level that treat cash as just another financial asset, whereas I would argue that its special liquidity characteristics and the network effects of a single currency make it more like paper gold than a Treasury bond. So I can see how someone reading this would think I am making a similar mistake. They might say “yes monetary expansion can prevent recessions from ordinary drops in aggregate demand, but can do nothing against a real shock like a major world-wide banking crisis.” In other words “by all means ignore the framing effects, but first make sure you have the right model.”
A good autistic macroeconomist cannot just rely on logic. He or she must also be a historian, have a sense of which assumptions are plausible. In my view the Great Depression provides a beautiful confirmation of the autistic view of the 2008 crash. What could be more autistic than George Warren’s insistence in 1933 that all we had to do to get prices and output rising rapidly would be to raise the price of gold. You say the banking industry is virtually shutdown? None of that should matter—just raise the dollar price of gold. And he was right.
PS. I wasn’t able to convey the complexity of Tyler Cowen’s views here. Unfortunately, I tended to rely on some of your prejudices about the autistic; that they are emotionless, like Mr. Spock. Tyler explodes many of these stereotypes in his new book. And for all you PC police, the humor was directed at myself. I was convinced by Tyler’s argument that society needs to change the way it thinks about the autistic. It has happened before—recall that homosexuality was once viewed as a mental illness. BTW, I highly recommend Tyler’s book—it’s full of fascinating insights. He finally explained to me why I was so bored in school, despite my love of learning. All I recall from school is staring at the clock waiting for it to hit 3:20, and waiting for summer vacation. When I read proposals for a 12-month school year all I can think of is the book 1984. And I am an educator.