Friday, August 28, 2015

What did Lucas and Sargent mean?

In their response to Benjamin Friedman's comment on their provocative paper, titled "After Keynesian Macroeconomics," (1978) Lucas and Sargent wrote this:
In his concluding paragraph, Friedman objects to our "rhetorical profile," an objection which several others also expressed at the Conference. To illustrate his point, he cites our reference to "wildly incorrect" predictions of Keynesian macroeconometric models, to "the spectacular failure of the Keynesian models in the 1970s," or their "econometric failure on a grand scale." These phrases were intended to refer to a specific and well-documented historical event. In 1970, the leading econometric models predicted that an inflation of 4 percent on a sustained basis would be associated with unemployment rates less than 4 percent. This prediction was not one which was teased from the models by unsympathetic critics; on the contrary, it was placed by the authors of these models and by many other economists at the center of a policy recommendation to the effect that such an expansionary policy be deliberately pursued
Source:  After the Phillips Curve (pp. 81-82, emphasis added)
Unfortunately, Lucas and Sargent didn't feel the need to spell out exactly what "historical event" they were talking about, and perhaps it was too "well-documented" to require citations to any actual documents.  But what may have been common knowledge among academic economists in 1978 is lost to the rest of us.

So: does anybody know what 1970 "historical event" Lucas and Sargent were alluding to?  And if it is "well-documented," can someone point me in the direction of this documentation?


  1. Why don't you ask them directly? They are still alive, aren't they?

    1. Good point! Actually, I suspect Lucas, at least, has had quite enough of people trying to drag him back into the controversies of the '70's. I thought I'd try "asking the Internet" first. (Second, really, after Googling, of course.)

  2. They answer your question on the bottom of p. 56 and top of p. 57.

    1. Thanks for posting!

      I hope there's more to it than that.

      Here are the sentences I gather you have in mind: "For example, the models of the late 1960s predicted a sustained unemployment rate in the United States of 4 percent as consistent with a 4 percent annual rate of inflation. Many economists at that time urged a deliberate policy of inflation on the basis of this prediction."

      That's a pretty broad, general statement.

      In the comment-reply, the language they use seems (to me anyway) to imply that they have something more specific in mind, some particular event that occurred in 1970 and which particular economists said particular things. If that's right -- and it's possible that I'm misunderstanding -- I'd be interested in knowing more about the particulars.

      In any case, that what they write in pp. 56-57 is less specific than what they write in the comment-reply, so I don't think it can answer my question.

    2. You left out the next 3 sentences. You quoted only sentences on p. 56. Notice that I recommended that you look at pp. 56-57.

    3. I'm not seeing what those sentences add.

      They are: "Certainly the erratic 'fits and starts' character of actual U.S. policy in the 1970s cannot be attributed to recommendations based on Keynesian models, but the inflationary bias on average of monetary and fiscal policy in this period should, according to all of these models, have produced the lowest average unemployment rates for any decade since the 1940s. In fact, as we know, they produced the highest unemployment since the 1930s. This was econometric failure on a grand scale."

      While it's a vivid exposition of Lucas & Sargent's interpretation of the early and mid-seventies, it's not exactly a citation to a "specific and well-documented historical event." My impression, based on that language and their reference to a single year (1970) rather than "the late 1960s", was that they had something more specific in mind -- say, a conference or hearing at which the policy recommendations to which they refer were put forth, or even the publication of an influential paper. Something about which one might ask the traditional journalists' questions: who, what, when, where, and why?

      Now, it's possible that they had nothing more specific in mind than their general impressions of how Keynesian models worked and what economists told policy-makers about them. But I'm reluctant to jump to that conclusion.

      I'm hoping that someone, sooner or later, will come along and say something like, "Oh yes, they were talking about that famous memo that the Federal Reserve staff sent Arthur Burns in October of 1970; everybody knew about that!" Or something.

  3. james forder "macroeconomics and the phillips curve" debunks lucas and sargent

    just came out this year

    1. I think "debunked" would be going a bit far, but I am aware of Forder's work, and it's one of the reasons I wish Lucas & Sargent had been more explicit.

  4. Ahem, 'Macroeconomics and the Phillips curve *myth*', but thank you. I hope I have pretty well debunked the story that some foolish belief in the stability of the Phillips curve was understood to imply that policy should be inflationary. I looked at that in all its components, and all the angles I could find. Each component turned out to be flatly false - nothing in it at all. More on this at I was not particularly aiming at Lucas and Sargent since by the time of their paper, the myth was already about. Theirs is an early statement, and a particularly aggressively-worded one, but not otherwise special. Still, what they said is, as far as I am concerned, pretty well a fiction.

    There is a Robert J Gordon paper from 1970 which suggests low rates of inflation are associated with lower rates of unemployment than come with price stability. But that was not because, as the Phillips myth has it, that expectations could somehow permanently be wrong. That is a paper from 1970, so I would guess it is what they had in mind as justifying their claim. The usual story, of course is one about how it was in the 1960s that policy went all wrong - *before* Friedman's 1968 Presidential Address (supposedly) put everyone right (that is mythical as well - chapter 4 section 1 of my book).

    Their failure to give any specific citation is rather typical of the literature. If you look for statements of they myth - statements along the lines of 'everyone believed the Phillips curve was stable and this led to inflationist policy' and that sort of thing - you will find it a very very long search before anything from the 1960s is cited. You will find plenty of people who site sources in the 1980s, and plenty who cites sources in the 1990s. The whole myth is something that people started reporting after about 1976 and later discussions, if they cite anything, cite those post-1976 assertions of the myth. (Many examples in ch 7 of my book). Perhaps the one exception to that is that Samuelson and Solow (AER 1960) are cited as propounding the stability of the Phillips curve. Well, they don't do that. More interestingly still, no one from the 1960s both thought they did do that, and accepted the point from them. So the part of the story that says roughly 'Samuelson and Solow got Phillips curve inflationism started' is *itself* something that only starts to be said in the 1970s as they myth begins to emerge.

  5. I see James Forder is here in person, so I won't link to him.

    Lucas and Sargent referred to forecasts made in 1970 not to a macroeconomic events in 1970. The event they had in mind was the stagflation of 1974-5 with extremely high inflation and high unemployment.

    There is something else, Lucas and Sargent must have known that all prominent Keynesian economists agreed that sustained high inflation would not lead to sustained low unemployment. For example Tobin said so in 1971 (in a conference where he discussed Lucas's presentation)

    (it's a non searchable scanned document so I can only snip a jpg or quote by hand "an adherant of the natural rate hypothesis would challenge the "long-run" economic trade-off curves ... . Pragmatists could dodge the challenge, accepting the principle but arguing that a tradeoff exists in as long a run as regularity of structure permits either econometric estimation or practical policy making". This is not a view refuted by evidence from the 70s.

    He also wrote in 1971 "We certainly can't be confident that a conference three or four years from now will not record further pessimistic revisions in our estimates". Needless to say, his lack of confidence was well founded. This is a very leading old Keynesian in 1971 (which isn't exactly 1970 but close).