siiiiick bro Interesting article. It seems to go down to a fundamental question on the workings of economics. If I understand it correctly, his argument is that hysteresis being the norm implies a different way of thinking about economics, one based on change instead of constants. I hadn't thought about economics that way before.
As you're probably aware, many grad school physics and mathematics drop-outs go to Wall Street to model economics with differential equations in an effort to predict the future markets. If they're worth their salt, they've got a "hysteresis" term in their formulation, which is somewhat ironic, modeling what is potentially chaos; by its very nature unpredictable. I'm surprised to hear from the article that the inclusion of this term isn't the norm, at least for big banks. You could fashion inputs from an ongoing survey along the lines of "how do you perceive the market?", quantifying market optimism/pessimism and disagreements in perception. Love it when an economist puts things in terms familiar to physics.
So he is stating that economic policy should not aim to maintain economic performance at a certain ideal point, and that past attempts to do so have in fact hindered our economic performance? So what is the alternative then? To simply follow the boom and bust cycle with minimal regulatory action?
Summers argued against a September rate hike. He actually has expressed interest in the Fed targeting nominal GDP, rather than inflation so they could be free to reduce effective rates even more. Summers seems to be saying that the action we take needs to be much greater.
Boy, I misread that. I have no idea what I'm talking about here.
The rationalists mostly refer to "structural unemployment" and "cyclical unemployment" where cyclical unemployment is what comes and goes with recessions and seasons while structural unemployment means "that job is gone, bro." From a "hysteresis" standpoint, structural unemployment is those jobs that take a long damn time to come back in any form because they involve retraining at a bare minimum.
I have to think there is a political element of this hysteresis as well. These monetary policies are being practiced in representative democracies, and the bubbles and busts are a big part of political sales in the election cycles that follow. It might be that Keynesian exercises reward politicians that practice disharmonious fiscal policy. When your bank account charges negative interest rates and cash becomes suspect, are people going to elect the guy calling for more of that? If the Obama administration was working with a Democratic legislature these last seven years it's likely that our monetary policies and fiscal policies might have been more harmonious, and Summers would never had felt the need to write this. Just like Communism, 'new Keynesian macroeconomics' might look best on paper.
One way of looking at this might be that monetary policy leaves a mark, one of which is probably the types of fiscal policy that are tolerated for some time after. Maybe another way to look at it it this: There's all kinds of complications to fixing a lack of liquidity with liquidity. Human beings adapt.
Another way to think about it is that when finance has grown something like 5 times larger relative to the economy than it was before the Reagan/Thatcher revolution, but that its essential function to the economy remains static, then maybe finance people like Mr. Summers are nothing more than a drag on the economy. Maybe we need a new way to think about the role of people like Summers and his ilk. All this talk seems like rationalizing the trillions of dollars of wealth that the banking sector has stolen from the middle class over the last few decades. Yes, the economy is sick. That's where our main agreements end. We shouldn't let people like Larry Summers, who are some of the main architects of what's wrong with the economy, lecture us now on how to fix it.