Yglesias and Smith on Lucas

Here’s Matt Yglesias discussing Robert Lucas:

Changing one’s mind is a great sign of discipline and rigorous thinking. But as Noah Smith says, it’s telling and remarkable that a leading practitioner in the field would twice flip-flop on the nature of the business cycle over the course of his career. First [Lucas] thinks all business cycles have the same cause and the causes are monetary. Then he’s persuaded by Kydland & Prescott that actually all business cycles are driven by real factors. But then a whole new event occurs that he thinks can’t be explained in the Kydland/Prescott framework and that causes him to revise his longstanding view that all business cycles are the same. And that has the secondary consequence of causing him to return to his initial view that the Great Depression wasn’t caused by real factors either.

Unless I’m mistaken, this statement is inaccurate.  Lucas never abandoned his belief that the Great Depression was triggered by a negative monetary shock.  He has shifted his views on the postwar recessions, and now believes that real shocks are the dominant factor in these smaller slumps.

The Noah Smith post that Yglesias links to quotes Lucas as saying the following:

If the Depression continues, in some respects, to defy explanation by existing economic analysis (as I believe it does), perhaps it is gradually succumbing under the Law of Large Numbers.

The “in some respects” phrase refers to the slow recovery.  Lucas believes that the sharp fall in NGDP contributed to both the Great Contraction of 1929-32 and the contraction of 2008-09.  He also believes that monetary factors alone cannot explain why the two recoveries took so long.  I’ve argued that supply-side factors played a role in slowing the recovery of 1933-41, and I am pretty sure that Lucas agrees with that view.  So I don’t see any significant changes in his views on the Great Depression.



19 Responses to “Yglesias and Smith on Lucas”

  1. Gravatar of Jon Jon
    1. December 2012 at 11:11

    I have found it is better to leave Yglesias unread.

  2. Gravatar of Major_Freedom Major_Freedom
    1. December 2012 at 11:18

    Non-Keynesians have to flip flop, because it makes it easier to “refute” them.

  3. Gravatar of ssumner ssumner
    1. December 2012 at 11:27

    Jon, Yglesias is one of the top 5 econ bloggers in the world.

  4. Gravatar of William William
    1. December 2012 at 11:42

    Yglesias is one of the top 5 econ bloggers in the world.

    Yglesias has some very good posts, but you have to overlook a lot of shooting from the hip, casting aspersions on certain conservatives economists, and this post in order to believe that claim.

  5. Gravatar of jerry jerry
    1. December 2012 at 12:43

    Scott sry who r the other 4 ?? Thanks

  6. Gravatar of Becky Hargrove Becky Hargrove
    1. December 2012 at 13:30

    re: your linked post. It’s not easy to talk about prices in healthcare, but if we don’t we could eventually get lower prices and quality, in a sort of default devaluation with both limited participants and beneficiaries. Talking about prices now gives healthcare providers a chance to see what they can actually do about revaluations and volunteer provision settings, rather than the worst case scenario where healthcare just continues to put everything else out of equilibrium.

  7. Gravatar of Jon Jon
    1. December 2012 at 14:16

    Yglesias has some very good posts, but you have to overlook a lot of shooting from the hip, casting aspersions on certain conservatives economists, and this post in order to believe that claim.

    William, I’m with Becky in not seeing your gripe with that post. My quibble is that he doesn’t touch the obvious, if demand for services isn’t unusually high why is the equilibrium price higher. One answer is that we’re a richer country–so service wages are higher, but hat doesn’t split this space well. Prices are higher here than other countries with similar incomes.

    No, the issue is that the medical profession is a cartel. It colludes to restrict the production of medical services and divide up markets–primarily by restricting the number and geographical distribution of medical school slots and residencies while holding waivers to standard employment regulations that basically allow it to haze prospective doctors into abandoning the field.

    He also neglects to mention that Medicare spends as much covering people over 65 as it would cost other countries to cover the entire population. So, no Medicare isn’t particularly good at bargaining costs down.

  8. Gravatar of William William
    1. December 2012 at 14:32

    Becky Hargrove and Jon,

    This post is not on topic so I should be as brief as possible while noting that I disagree vehemently with the idea that health care is expensive because prices are high. I will only note that it would certainly be considered an extraordinary claim for any other market. When people suggest dealing with a post-hurricane gas shortage by regulating prices, economists expect a shortage of gasoline and queueing. When Hugo Chavez’s government claims that it can reduce prices to consumers by “cutting out the middleman”, i.e. the profit-taking capitalist, economists are skeptical. If Yglesias is correct that reducing health-care expenditure is merely a matter of decreeing lower prices, then it is certainly an exceptional case.

  9. Gravatar of dtoh dtoh
    1. December 2012 at 14:52

    Becky, Jon,

    Regarding medical care,

    1. The comparison that Yglesias cites is for the U.S. so don’t extrapolate and assume that it applies to foreign countries, which often have lower costs because of lower quantity and quality.

    2. Physicians’ fees only make up 20% of health care spending so the medical school cartel has a limited impact on pricing.

    3. Yglesias is wrong. What’s going on with Medicare is price discrimination. If everyone got Medicare prices, supply would dry up. It’s just like the airlines. If they charged all passengers the cheapest fare, they would all go out of business and there would be no airline service.

    4. You need to remember that medical care supply reacts very slowly to changes in pricing. Existing doctors, technicians, nurses, dental hygienists, hospital janitors, etc are not all going to change jobs if you cut their wages, and pharmas and devices manufacturers are not going to terminate development projects they have been working on for 10 years, but you will see the effect down the road.

    5. We do spend too much on medical care in the U.S., but the reason we do so is because we are so over-insured. We need to get rid the existing insurance schemes and replace them so that we have only catastrophic insurance and subsidies for the poor.

  10. Gravatar of Becky Hargrove Becky Hargrove
    1. December 2012 at 15:47

    dtoh, William,
    Admittedly I wasn’t clear enough, I simply applauded Yglesias for his willingness to have the discussion. And dtoh, I agree that insurance is not the answer…I can’t even talk about potential healthcare solutions from an insurance or Medicare perspective and I don’t really want providers to cut their wages. What I would like to see is for the burdens to be lifted on the system that tries to incorporate lower income along with everyone else. Providers have a number of ways in which this could be approached. One is a greater expansion of volunteer days for necessary care of all kinds. Another approach could be teaching locals in rural areas and other underserved areas (for healthcare) how to provide basic forms of healthcare for one another so as to limit unnecessary hospital stays. Both of these are possibilities that can keep wages intact and lessen the burden on hospitals as well.

  11. Gravatar of Charlie Charlie
    1. December 2012 at 19:09


    I agree with you. Here’s the quote:

    “As I have written elsewhere, I now believe that the evidence on post-war recessions (up to but not including the one we are now in) overwhelmingly supports the dominant importance of real shocks. But I remain convinced of the importance of financial shocks in the 1930s and the years after 2008.”

    The all business cycles are alike quote is from a paper summarizing post-war recessions. The whole interview is good.


  12. Gravatar of Greg Ransom Greg Ransom
    1. December 2012 at 20:31

    Scott — you are interrupting the blogging on economics game with facts & common sense.

    No fair.

  13. Gravatar of Noah Smith Noah Smith
    1. December 2012 at 21:32

    What Lucas seems to have changed his mind about the second time was whether or not the Depression was sui generis, or a recurring phenomenon.

  14. Gravatar of wufwugy wufwugy
    1. December 2012 at 21:50

    Yglesias is a fantastic blogger. He presents a wide variety of complex issues in easy-to-understand ways. His and Scott’s are the only I click daily, and I’m merely liberal layman

  15. Gravatar of Bob Murphy Bob Murphy
    2. December 2012 at 00:11

    Yglesias must be very wary of Krugman then, whose views on fiscal vs. monetary solutions have changed so drastically over the years.

  16. Gravatar of Saturos Saturos
    2. December 2012 at 02:37

    Scott, did you end up checking out the new Hetzel article or what? (I know you’re busy, but it’s worth reading) I linked to it before, here it is again: http://www.richmondfed.org/publications/research/economic_quarterly/2012/q2/hetzel.cfm

    And how did it all go???

  17. Gravatar of ssumner ssumner
    2. December 2012 at 06:30

    Noah, If you have evidence to support that claim I’d love to see it.

    Saturos, Yes, excellent paper. I had nice conversations with Jonathan Haidt, Bjorn Lomborg and Luigi Zingales. About 30-35 people showed up, but there were so many people there that I met only a small fraction of those who showed up.

  18. Gravatar of Saturos Saturos
    2. December 2012 at 07:48

    Tyler Cowen on the Eurozone: http://www.nytimes.com/2012/12/02/business/euro-zone-keeps-playing-a-dangerous-game.html?_r=0

    Scott, so, not even a handshake with the central bankers? Was the food good, then, at least?

  19. Gravatar of Jon Jon
    2. December 2012 at 09:53

    2. Physicians’ fees only make up 20% of health care spending so the medical school cartel has a limited impact on pricing.

    Actually the big driver is outpatient care. That doctors hold a monopoly on prescriptions and care–eg nurse practitioners must be supervised, is the problem itself and that market power comes from restricting the supply of doctors one element of which is the licensure system.

    Second, care is higher quality (better outcomes) in most other countries except for select areas such as imagining. But, imaging doesn’t cost us much.


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