Zombie ideas walk again

by John Quiggin on February 4, 2010

A glutton for punishment, I’ve decided the Zombie Economics book manuscript I submitted a month ago (mostly online here) is in urgent need of more zombies. I’ve been struck, even in that short space of time by the extent to which, with undeniable “green shoots” now appearing, the zombie ideas I’ve written about are clawing their way through the softening soil and walking among us again. The most amazing example is that of the Great Moderation – surely you would think no one could believe in this anymore, but they do.

So, I’m planning to add a bit to each chapter, pointing to examples of these ideas being revived. I’d appreciate good examples for the rest: Trickle Down, Micro-based Macro the Efficient Markets Hypothesis and Privatisation (of course, the Queensland government gives an example v close to home).

With unemployment still above 10 per cent in the US, budget deficits in the trillions, and bankruptcy and foreclosure taking place on a massive scale, you might think that the idea of the Great Moderation would be, not just dead, but buried once and for all. You would be wrong.

This zombie idea was never really killed and it is already climbing out of the grave. In a blog post entitled ‘Does the Great Recession really mean the end of the Great Moderation?’ Coibion and Gorodnichnenko answer this question with a resounding ‘No’ present a series of graphs on the variability of real GDP growth to support the conclusion that ‘we are experiencing a particularly severe business cycle that nonetheless pales in comparison to the volatility experienced in the 1970s.’?Such a claim looks convincing if you look only at the absolute variability of GDP. But that variability reflects the combined impact of a massive fiscal stimulus from the public sector

Not only have the components of GDP fluctuated wildly, but so have all sorts of other macroeconomic variables. Brad DeLong points out that the variance of the employment/population ratio has shown the biggest spike since at least the Korean War.

More fundamentally, the idea that we are still in a ‘Great Moderation’ in which stability is the result of good policy fails the laugh test. The story used to be that the ‘good public policy’ that gave us stability consisted of the judicious adjustment of interest rates in line with a Taylor rule based on inflation rates and output growth. The response to the Global Financial Crisis started out that way, but the policymakers rapidly threw the rulebook out the window. Interest rates were cut all the way to zero. Then huge amounts of liquidity were pumped into banks and Wall Street firms through ‘quantitative easing’ and opening of the discount window. Then there was the trillion dollar bailout of late 2008, and the massive fiscal stimulus package of 2009.

Many words could be used to describe these responses, but ‘judicious’ and ‘moderate’ would not be among them. It could plausibly said that, massive as they were, the responses were still inadequate. But that just goes to point up the magnitude of the crisis.

Why then would anyone make such a claim? The answer can be sought in the internal dynamics of the economics profession. The Great Moderation vanished in 2008 and 2009, but the academic industry built to analyze it did not. Research projects based on explaining, measuring and projecting the Great Moderation, were not abandoned, and the careers based on those projects could not be diverted quickly into other ends.

Coibion and Gorodnichnenko are proponents of the view that the Great Moderation was the product of good public policy. They are the authors of a forthcoming paper in the American Economic Review making precisely this case. The paper is theoretically elegant and uses some impressive econometrics, reflecting the years of work that go into the production of such a piece (the article is based on a 2008 working paper and uses data from 1969 to 2002. But, if the Great Moderation is indeed over, such a paper becomes an exercise in economic history, and the ‘good policy’ explanation is clearly false.

Unsurprisingly, then, Coibion and Gorodnichnenko are attracted to the opposite view. A crisis that had destroyed whole national economies, bankrupted economies, doubled the US unemployment rate and threatened to bring down the entire financial system becomes, in their telling of the story, a ‘transitory volatility blip in 2009’.

We will be hearing a lot more of this kind of thing in the future. But, if we are to avoid repeating the mistakes of the last couple of decades, we must first recognise them for what they are. The Great Moderation is a dead idea, and it should be buried once and for all.



Billikin 02.04.10 at 1:35 pm

It’s hard to kill the undead.


Barry 02.04.10 at 1:49 pm

“It is hard to kill the undead” – particularly when the elites and their econowh*res support the undead ideas.

In the end, the only thing which will reform econowh*redom is the death of the old professors, and the rise of grad students who are used to the new situation.


Vance Maverick 02.04.10 at 4:02 pm

JQ, do you think the “Great Moderation” is valid as a description of a phase that is now in the past? Or should that question be reopened?


Ken Houghton 02.04.10 at 4:40 pm

“The Great Labor Defenstration”? “The Great (Grand?) Capital-is-Everything Illusion”?


Thorfinn 02.04.10 at 5:05 pm

The point of the “Great Moderation” isn’t that GDP will never again vary. It’s that the covariance of the economy in response to shocks should be lower; in part due to better monetary policy, and in larger part due to better inventory management.

We had, at the same time, an energy shock as bad as the one in the ’70s, and a banking crisis as bad as the one in the ’30s. A shock of this magnitude would have resulting in much worse catastrophe just a few decades ago. Maybe the shock was induced itself by the calm macroeconomic conditions (but then why wasn’t there a shock in equally placid Australia or Canada?); but that’s a claim that needs to be made.


Martin Bento 02.04.10 at 6:47 pm

I’ve pointed this out before, but I think it bears repeating: did anyone in the 1980’s say they were setting out to create a period of lower but more stable growth than in the preceding postwar period. I don’t recall this and very much doubt it. The claim of trickle-down and such was always that they produce higher growth. Perhaps, even, at some cost in “creative destruction”. Two decades later, it was clear that, as a project for higher growth, the Reaganite policies had failed, but – hey – volatility had been lower! That must have been the goal all along!


Martin Bento 02.04.10 at 6:52 pm

Part of why I think this is important is that it is an example of how liberals tend to accept conservative framings as good faith representations of the situation and then argue against conservative policies within those parameters. So we’re debating whether there has been a Great Moderation, rather than whether such a thing would even be worth the cost if it existed. Just as liberals foolishly spent decades apologizing for judicial activism in response to disingenuous conservative attacks on judicial activism. Now that the conservatives are in a position to do some activism, the established liberal positions back them up. The conservatives were not wrong that judicial activism is dangerous to democracy; they were dishonest in pretending they objected to this.


john c. halasz 02.04.10 at 7:17 pm

“(but then why wasn’t there a shock in equally placid Australia or Canada?)”

Raw materials exporters participating in the global commodities boom, which quickly restarted with the massive liquidity pumping?


Leinad 02.05.10 at 5:49 am

Plus, Australian fiscal and monetary authorities went countercyclical early and often.

Also, the Australian banking sector is a highly protected, complacent, little patch that didn’t feel any need to ‘innovate’ when it was getting so fat off fees.


Concerned Economist 02.05.10 at 5:56 am


I’m not sure the “Great Moderation” is such a good target for your book. Actually I would take issue with virtually every assertion made in the book but this one is particularly problematic.

The great moderation can’t really be a “zombie idea” since it isn’t really an idea at all. At its heart, it is an empirical matter. How you choose to examine or interpret the data is perhaps something that you could contest but the data itself, and the simple plots that Olivier and Yuri are showing don’t seem to be things that “fail the laugh test.” These are simply part of the factual record. For your part, either you have the courage to confront the data or you don’t. Looking at the plots in the blog and looking at the plots in DeLong’s post (both of which are rather simple presentations of the data) one is not struck so much by how the current recession dramatically changes the pattern. Speaking for myself only, the main thing that jumps out is how suddenly the period of lower volatility arrives in the mid 80’s. DeLong would seem to agree for the issue of GDP but points out that the pattern is not really present in the employment data – again another simple empirical observation. DeLong is not dismissing their findings out of hand (as you seem to be advocating). Instead he is taking their findings seriously. He knows that his world-view has to fit the facts. You may not *like* their observations but they are simply that – observations.

Of course you can contest the explanations for the pattern – good policy, the larger service share of the economy, the increasing reliance on imports for manufacturing goods, blind luck (a possibility which Coibion and Goridnichenko readily admit), etc. but this isn’t what you are saying. You are saying that you simply don’t believe that there was or is a great moderation. I hope you are not suggesting that plotting the data is “repeating the mistakes of the last couple of decades.” In fact, I would encourage you to download the data, plot it and form your own opinion before accusing the authors, the profession, and the journal editors of malfeasance.


John Quiggin 02.05.10 at 7:40 am

@Concerned Economist, I’ve taken your advice and posted the graph from Brad DeLong on which I relied. Readers can judge for themselves whether “the current recession dramatically changes the pattern”. As I point out in the post, and in the data, the idea that the economy can be remarkably stable when major components of GDP are fluctuating wildly makes no sense.

On the more general point, the claim that a pattern in the data represents a significant, indeed Great, change in the behavior of the economy is an idea and one that can be right or wrong.

More generally, your comments here and in previous threads seem to suggest that economics doesn’t need to change in any significant way in response to a massive crisis that was not only not foreseen but widely claimed to be impossible in view of the Great Moderation, EMH and so on. This indicates the kind of investment in existing ways of doing things about which I am complaining.

Coming to your final para, I’m not accusing anyone of malfeasance, just of having, and defending, an interest in keeping alive ideas I think should bedead and buried.


dsquared 02.05.10 at 11:01 am

I think that a lot of the commentary about what investment bankers might or might not do if anyone interferes with or taxes their bonuses has a substantial element of “trickle down” economics to it.


Concerned Economist 02.05.10 at 3:37 pm

Professor Quiggin,

With all due respect I think you have proved my point for me.

Look over what you have done in your post. You began by suggesting that the claim by Coibion and Goridnichenko was wrong on its face. Without much support you simply assert that “[t]he Great Moderation is a dead idea” and that the reason such claims are made at all reflects the “internal dynamics of the economics profession” rather than actual patterns in the data.

In response to my suggestion that you actually confront the data, you plot a data series other than the one Coibion and Goridnichenko discuss. Moreover, the data set you display is chosen to intentionally present a one-sided view of the issue. Coibion and Goridnichenko say that they see a noteworthy pattern in a certain data set X (X is the volatility of detrended GDP). Your response is to say that they are mistakenly clinging to a dead idea and you show that they are wrong by plotting results from *a different data set* Y. That is, rather than dispassionately examining the data, you try to change the subject. A scholarly scientific response would begin by examining the data underlying the claim itself. Instead, you want to badger your audience into simply accepting that the great moderation claim is false and that the researchers’ motives are impure.

You also suggest that the reason I am questioning your assertions is attributed to some unstated belief on my part that “economics doesn’t need to change in any significant way” and that I am invested in “existing ways of doing things” rather than being open to change. Let me put your fears to rest: I have no stakes in whether the great moderation is real or just a fluke (I happen to believe that it is more due to chance than anything else); I also am actively involved in pushing macroeconomics beyond existing theories and approaches. In any case, even if I thought everything was settled in macroeconomics and that nothing needed to change, it wouldn’t change the facts. Coibion and Goridnichenko’s claim is either true in the data or it isn’t. Scientific inquiry is about truth-seeking not about scoring points in a debate. A tempered scientific response would begin by engaging the facts directly rather than trying to call into question the credibility of the researchers. To me your response is like the reaction a lawyer or a politician has when they find that the facts conflict with a position they want to maintain. Delong’s blog post is a good example to follow in the future. He begins with the claim itself and openly admits that there is a case to be made for the great moderation if you look at the GDP data. He goes on to disagree on the larger issue by pointing out that the pattern doesn’t show up in all data series. He doesn’t use invective and innuendo to end the discussion which seems to be what you want to do.

At this point I think there is sufficient evidence to conclude that someone is indeed trying to mislead their audience for the purpose of protecting a publication. It’s not Coibion and Goridnichenko however.


dsquared 02.05.10 at 4:55 pm

Isn’t the C&G paper just a pretty absurd example of the peso problem? I mean:

In our view, the answer is that the current recession will not mark the end of the Great Moderation. Instead, we are experiencing a particularly severe business cycle that nonetheless pales in comparison to the volatility experienced in the 1970s.

Ahhh great, we don’t have any of that nasty “volatility” any more, just the odd “particularly severe business cycle”, which can be made to drop out of our volatility measurement pretty quickly with geometric weights.

The entire case against the “Great moderation” was that what had actually been achieved was to temporarily postpone the business cycle by creating a series of asset bubbles (underpinned by the big Chinese savings glut imbalance), reducing the “normal” volatility at the expense of increasing the likelihood of a “tail” event. C&G’s methodology is more or less perfectly designed to miss such a phenomenon, so it’s not surprising that this is what it actually does.

Nobody cares about “volatility” per se – they care about recessions. Detrended standard deviations of GDP growth is a really really bad way of measuring whether there is a “Great Moderation” going on or not, when it’s perfectly easy to tabulate the frequency and severity of recessions and measure the phenomenon of interest directly.


Daniel 02.05.10 at 5:00 pm

I’m also not sure at all about Concerned Economist’s critique at 13. Surely if C&G have identified a real phenomenon, it should be present in nearly every macro aggregate? If there’s one particular metric that still shows a Great Moderation and a bunch of others that don’t, it’s entirely apropos to look at a different dataset – it’s the most obvious and sensible cross-check to carry out. The only way in which it would be legitimate to argue from “they have discovered a noteworthy pattern in a particular dataset” to “therefore they are right to say that the Great Moderation is still alive” and for using a different dataset to be such an egregious thing to do to merit bolding, would be if it was universally accepted that quarterly geometric-weighted standard deviation of GDP growth was the One True Measure of macro volatility and for reasons given above, it isn’t.


Kieran Healy 02.05.10 at 5:06 pm

Your response is to say that they are mistakenly clinging to a dead idea and you show that they are wrong by plotting results from a different data set Y. That is, rather than dispassionately examining the data, you try to change the subject.

There’s nothing much wrong (indeed, it’s best practice) to look for evidence that a relationship or effect found in the analysis of one dataset can also be observed in other data sources.


Concerned Economist 02.05.10 at 7:17 pm

@Daniel, @Kieran,

I completely agree with both of your posts. I am not saying that it is inappropriate to look at other data — quite the opposite: look at as much data as possible. There is no “One True Measure” of macro volatility. It is completely reasonable to “cross-check” and ask whether the pattern survives in some data sets / samples but not others. Absolutely – kick every tire, cut the data every which way you see fit. Just don’t rig the game so that you habitually exlude results which conflict with preconcieved notions of how the world should be.

Also, Daniel, while I agree that if one metric shows the great moderation and a “bunch of others” don’t then you might doubt the result, I think the pattern shows up in most of the other disaggregated output measures (that is if you look at investment types, consumption types, etc. you still see the decline in volatility though I have to admit I’m not sure of this since this is not my area). If this is true, it’s probably that there are a bunch of series that show the moderation and a few that don’t. Judging from DeLong’s pictures, employment measures seem to tell a different story for instance.


John Quiggin 02.05.10 at 7:35 pm

But there are some obvious requirements for a measure of macro volatility. If a crisis like the one we’ve just seen, with huge reductions in employment and massive volatility in components of GDP such as private investment, appears as ‘a transitory blip’, it’s obviously a bad measure.

There’s a further big problem shown by the graphs in Brad DeLong’s page, which I mentioned in the chapter. Most of the graphs seem to show a long-term decline in volatility since the 1950s, interrupted temporarily in the 1970s and early 1980s, as argued by Blanchard and Simon. But, again, this implies that they can’t be matching anything of interest. That’s why no-one much accepted the Blanchard-Simon interpretation of the data, as against the main story where the Moderation began in 1985.


dsquared 02.05.10 at 7:46 pm

I like this concept of “low volatility, interrupted by occasional periods of high volatility”. I think I will call it “volatility”.


Peter Twieg 02.06.10 at 3:03 pm

There’s been a professional pushback against micro-based macro? Really? By who? The financial crisis managed to prove that macroeconomic phenomena aren’t based on the actions of individual economic agents? Don’t think even Krugman has gone this far.


John C Beatty 02.06.10 at 3:19 pm

A modest suggestion: reword “Many words could be used to describe these responses, but ‘judicious’ and ‘moderate’ would not be among them” to read

“Many words could be used to describe these responses — and have been — but ‘judicious’ and ‘moderate’ are not among them.”

I’m a computer scientist, not an economist, but I’ve read four (good) books thus far on our ongoing economic disaster, and I don’t believe “judicious” or “moderate” appeared in any of them…


RW 02.06.10 at 7:51 pm

@dsquared, low volatility punctuated by high volatility equals volatility? I dunno, need to think about that; sounds like a chicken-egg kind of thingie.

But perhaps we should substitute the word “fluctuation” since (re)defining volatility appears to attract undue attention from the living dead.


Roland Buck 02.07.10 at 9:38 am

It’s very hard to get somebody to understand something when their academic reputation depends on their not understanding it.

For example, look at the problems Fama has in understanding what a bubble is.


Ken Houghton 02.07.10 at 9:41 pm

dsquared – But you’re discussing Vega. (The best-known “Greek” that is actually Latin.)


Sean Broadley 02.08.10 at 10:56 am

Twieg “… macroeconomic phenomena aren’t based on the actions of individual economic agents?”

So what if they are?

Macroeconomic phenomena are based on the actions of quantum particles. That doesn’t make quantum-based macro a useful or productive approach to science. And if the only way you could get any interesting results out of your attempt to make quantum-based macro-economics work is by making overly-simplistic assumptions about both macroeconomics and quantum theory, then quantum-based macro would be actively harmful.

Reductionism in science is based not only on the simplistic claim that phenomena at level A are aggregates of phenomena at level B. But also on the claim that useful things can be learned about the laws that apply at level A by study of the laws that apply at level B.


Dave Flores 02.08.10 at 12:02 pm

Reminds me of something that happened to me in college. I was taking an intro to archaeology class (for my Social Sciences distribution requirement) and settled on the subject of the adoption of agriculture for my final paper. I read a book that argued that population pressure necessitated the adoption of agriculture. It was, the author insisted, a way of increasing the “carrying capacity” of a parcel of land, necessitated by the increased need for food by a more dense hominid population. Sounded great. So started writing furiously (don’t recall precisely, but the paper was probably due the next day). Then I picked up another book that had a graph of hominid population densities for the past million years or so and was shocked to discover that the data did not support such a hypothesis. The best archaeological evidence suggested that hominid populations stayed flat until after the adoption of agriculture. Man, was I flustered… and mightily alarmed. It seemed I was defending a pretty theory for which there was zero evidence. But it was too late to turn back at this point. So what did I do? Well, I made a note at the end of the magnificently argued paper, explaining that though the data don’t yet support the theory’s conclusion, no doubt future archaeological investigation will. And I resigned myself to not getting an A.

So I understand the position that these economists find themselves in… I empathize… but I will say one thing that distinguishes what I did from what they (and so many other anti-Keynesians) are doing these days: I admitted that the data did not support my theory. It’s the intellectually honest thing to do. Yet on TV and in written commentary we far too often see arguments that seem to cherry pick their metrics, or the date ranges for their data.


Unsympathetic 02.08.10 at 2:06 pm


“A shock of this magnitude would have resulting in much worse catastrophe “

Wrong, 100 times wrong.

A shock of this magnitude in the 1970’s would have resulted in bankruptcies of more financial institutions – but much less shock to the overall system. More rich white guys would have experienced a “catastrophe” – but the system as a whole would experience LESS unemployment, not more. We can’t gain any jobs until the bad debt is purged.. through bankruptcy.

Ken Houghton:

dsquared is not discussing vega. He is saying that volatility itself is low sometimes, and high other times. That is the essential characteristic of volatility.. it changes.


AlanDownunder 02.09.10 at 11:34 pm

Sean addressed a very common variety of zombie quite well. I’d only add, for Peter’s benefit that a googling of “emergent Krugman” turns up an instructive Wikipedia entry.

The doggedly ascientific nature of the “science” of economics remains a wonder to behold. More power to you, John.


James 02.10.10 at 12:00 am

For the record, the unemployment rate is not above 10%, nor was it above 10% when you posted this blog post. As of February 4, the latest published official unemployment rate number was 10.0%, spot on. Don’t confuse the greater than symbol with the greater than or equal to symbol.


John Quiggin 02.10.10 at 7:32 am

@29, Thanks for this correction – I had 10.1 per cent in mind for some reason. I’ll need to avoid a time-dated claim when I put this in the book.

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