Month: June 2025

Is it professionally worthwhile–not just as a form of light intellectual entertainment–for a modern economist to read articles and books written long ago? Do old article contain within them the possibility of live insights for modern economists? Matthew McCaffrey, Joseph T. Salerno, and Carmen-Elena Dorobat make the case for an affirmative answer in “The History of Economic Thought as a Living Laboratory” Cambridge Journal of Economics, March 2025, pp. 235-253). They write:

We argue that the history of thought can be conceived as a living laboratory of economic theorising. It is living in that it is a vital and valuable part of economics rather than a dead branch of it. It is a laboratory in that it functions as a proving ground in which theories from many different times and contexts can be examined, compared, critiqued, combined and developed. In other words, history of thought can be conceived as a method of doing economics rather than an isolated or niche field within it. …

For example, Axel Leijonhufvud similarly conceived of economics as a vast decision tree with many branches, each of which can be traced back to earlier choices by economists in a sequence potentially centuries long (Leijonhufvud, 2006). This is consistent with our own approach in that it views modern economics (the topmost branches of the tree) as embodying and reflecting a rich, living history of past choices and paths not taken (the lower branches or bits of tree trunk). Our approach expands some elements of the tree metaphor. In particular, our view is that HET [history of economic thought] is the tree itself rather than one of its dead branches or forgotten roots: there is no arbitrary point at which a branch becomes historical and therefore separate from the rest. Even the most recent branches exist synchronously with older ones. The decision tree of economics is dynamic, and old or seemingly withered branches can grow healthily again even after years of neglect.

The authors trace the “laboratory” metaphor back to Frank A. Fetter (1863-1949), who wrote:

Something of worth to present thought is, therefore, often to be gained by a restudy of past opinions, even though the first result may seem to be merely to expose their error. Showing that a thing cannot be done in a way that looks promising is often a service of laboratory research second only in value to showing how it can be done. The history of economic thought is the experimental laboratory of economics, or as near to that enviable agency of the physical sciences as social students are able to come.

They quote from Joseph Schumpeter’s (1883-1950) magisterial History of Economic Analyis, published posthumously in 1954:

[O]ur minds are apt to derive new inspiration from the study of the history of science. Some do so more than others, but there are probably few that do not derive from it any benefit at all. A man’s mind must be indeed sluggish if, standing back from the work of his time and beholding the wide mountain ranges of past thought, he does not experience a widening of his own horizon… But, besides inspiration every one of us may glean lessons from the history of his science that are useful, even though sometimes discouraging. We learn about both the futility and the fertility of controversies; about detours, wasted efforts, and blind alleys; about spells of arrested growth, about our dependence on chance, about how not to do things, about leeways to make up for. We learn to understand why we are as far as we actually are and also why we are not further. And we learn what succeeds and how and why.

Mark Blaug (1927-2011) took the laboratory metaphor a step further in the final pages of his Economic Theory in Retrospect, using it to emphasise the need for humility in economics, and for acknowledging the inescapable influence of the history of ideas:

One justification for the study of the history of economics, but of course only one, is that it provides a more extensive ‘laboratory’ in which to acquire methodological humility about the actual accomplishments of economics. Furthermore, it is a laboratory that every economist carries with him, whether he is aware of it or not. When someone claims to explain the determination of wages without bringing in marginal productivity, or to measure capital in its own physical units, or to demonstrate the benefits of the Invisible Hand by purely objective [i.e., without resorting to subjective value judgments] criteria, the average economist reacts almost instinctively but it is an instinct acquired by the lingering echoes of the history of the subject.

As McCaffrey, Salerno, and Dorobat argue: “In this version, the laboratory functions as a way of keeping economists grounded and avoiding mistaken claims of originality or inflated assertions of significance. It is also noteworthy that Blaug describes the history of thought as a ‘more extensive’ laboratory, implying the existence of a less extensive version. That version most likely refers to contemporary theorising without the benefit of history. In other words, Blaug too is suggesting that the history of ideas provides a richer and more expansive range of knowledge and ‘tools’ for economists to use. It is a crucial part of the economic record that gives us far more material to work with when determining the successes and failures of economic theory.”

I’ve read more history of economic thought than a number of modern economists; indeed, back in graduate school I even ploughed through Schumpeter’s thoroughly intimidating 1000-plus pages of the History of Economic Analysis. My own revealed choices suggest that I find it worthwhile to read the work of dead economists. But of course, my own preferences are not dispositive.

On one side, it seems to me that in questions of economics, inspiration can come from many sources. For some, inspiration arrives in the act of writing down and spelling out a mathematical model. For others, it arrives in the form of observations about the world that don’t seem well-explained by standard theory. For others, it arrives a part of the effort to answer a real-world policy question. Among the many potential sources of inspiration, it’s not hard to imagine that for some people, reading the efforts of earlier economists trying to come to grips with an issue might touch off a spark of insight.

But time is the consummate scarce resource. If an economist is looking for inspiration and insight, is it more likely to be discovered by spending the marginal hour reading articles by dead economists or by live ones? The answer probably depends on an idiosyncratic mix of reader and topic. But there is an intermediate choice, which is to be willing, now and again, to dip into the writings by those who specialize in history of economic thought. Their work offers a pre-chewed and partially digested version of past writings, which in more than a few cases has pushed me to dig deeper.

One of my friends used to say that “I’ll think about history of economic thought when I’m doomed to repeat it.” In that spirit, I’ll point out that many modern policy nostrums have actually been the subject of considerable debate. The arguments and evidence on how price controls work, or don’t, goes back centuries, as do the arguments about the effects of tariffs. Arguments about specific applications of price controls, like rent control, or about specific applications of tariffs, like favoring cerain domestic industries for purposes of national economic development, go back decades. If, say, rent control was a useful and obvious method of providing affordable housing across a large metro area or a country, one might expect to find lots of examples in the history of economic thought explaining how well it worked, and why. For me, history of economic thought often is useful in teaching humility, because it’s often true that very smart people have thought deeply about similar questions in the past. There’s a centuries-old saying to the effect: “If I see further, it’s because I stand on the shoulders of giants.” A neglect of the history of thought is an apparent belief that it saves time not to stand on the shoulders of giants.

As an editor, I’ll offer one other thought: If you haven’t actually read the article or book by a dead economist, be very cautious about repeating a quotation that you saw or heard someplace. A random quotation might seem like just a bit of color to enliven dreary prose, but if the quotation does not actually capture the original argument, then for those who have read the original, it marks you as unreliable.

Tyler Cowen serves as interlocutor in “Austan Goolsbee on Central Banking as a Data Dog: The data-driven Fed President on why human judgment still matters in monetary policy” (“Conversations with Tyler,” June 25, 2025, video, audio, and transcript). As Cowen notes, Goolsbee “had a long-standing teaching post at the University of Chicago, served in the Obama administration, and now is president of the Chicago Fed.”

On whether he is a “hawk” or a “dove” in monetary policy matters:

I was a data guy, as you know, in the field of economics. Soon as I got there [to the Chicago Fed], there’s all this pressure from the press and from others: “Are you a dove? Are you a hawk?” I used to say, “Look, I’m not one of the birds. I’m in the data dogs.” The first rule of the data dogs is, there’s a time for walking and a time for sniffing, and knowing the difference between those. I would say that discipline of academic economics — getting into the data — is super useful. …

[B]efore you can conclude anything, you’ve got to get a taste of, is this a supply shock or is this a demand shock? In a way, a lot of the machinery of central banking and macro analysis, let’s call it, is oriented around demand. I’m not disputing that, in the past, that has been the source of the most frequent business cycle variations, but I’ve tried to caution everybody in weird moments, like when you’re getting major developments on the supply side — whether they’re labor supply, or supply chain, or productivity growth, or a number of things that are hitting the supply side. Maybe all bets might not be off, but the training sample LLM version of being a central banker is going to be prone to hallucination problems because it’s going to give you things that are wrong because supply shocks might be driving inflation, not demand.

On high housing prices:

[O]ur district in Chicago is heart of the Midwest — most of Wisconsin, Iowa, Illinois, Indiana, Michigan. I’m out talking to business people. I’m talking to individuals, and overwhelmingly, what you hear is despair — I would even call it despair — about the cost of housing. That housing — they can’t move. This is not just in cities where you could argue a lot of it maybe has to do with building codes and zoning. We went out to the Iowa Farm Bureau, and in rural Iowa, I asked them, “What’s the biggest problem?” They said, “Attracting workers.” I said, “Why is it so hard to attract workers?” They said, “Because they can’t afford to buy housing.”

I’ve spent a long time trying to think that through. It’s not wrong that it’s just more extreme. … If you take the 12 years before COVID, house price inflation was 3.5 percent or 4 percent a year, and goods price inflation was actually deflation of around 1 percent a year. The relative price of housing has been rising 4 percent, 5 percent per year for a decade and a half. It doesn’t take a PhD by any means to recognize that something compounding at 5 percent a year is going to add up to a big number. …

I don’t fully understand why the relative price of housing has been trending upward like this. I find it hard to explain. I have a paper, you might’ve seen, with Chad Syverson, that’s about negative productivity growth in the construction industry over long periods of time, which is itself a puzzle. Maybe that’s part of it. Some component of it may be regulatory in nature, but as I say, you see it in rural areas, too, where the land use regulation is not as prevalent. I think that’s a real puzzle.

On the econ nerd joy of attending meetings of the Federal Open Market Committee:

[W]hen we go to the FOMC meeting, I love hearing what the other presidents and the governors have to say. I said with no irony, “I consider the FOMC to be the world’s greatest deliberative body at this point.” No offense to the US Senate or to anyone else, it’s an amazing group. If you’re an econ nerd, you go into that room, and it is just about the coolest thing there is on this planet. The shades come down. There’s a giant table, and they go around the table …

On the prospects for AI technologies:

[A] lot of the grandest dreams for AI and rapid adoption, I think, are premised on extrapolating a growth rate. To the extent that some of the improvement in AI is not coming from improvements of AI theory or new algorithms, but instead from bigger and bigger data sets and more and more computing power, data sets and computing power have diminishing returns that will kick in pretty quickly. So, it would behoove us to remember that there was a time 15 years ago when self-driving cars were improving so rapidly that people were predicting that within five years, there would not be a single professional driver in the United States.

Then, basically, what happened is, the rate of improvement didn’t go negative; it didn’t go to zero. It just slowed way down. Now, we’re having some self-driving taxis in different cities, but we’re nowhere near what, 15 years ago, there was a group of real advocates who said, by 15 years from now, people are going to be like, “Dad, what do you mean people used to drive their own car? How dumb were people?” We’re still a long, long way from that.

Consider this international trade conundrum: Say that a US-based multinational provides technology and managerial know-how to a firm in Europe. The firm uses these inputs to produce goods, which are then exported back to the US economy. As a result, the European economy has a trade surplus in goods vis-a-vis the US economy. However, a US firm gets all the profits. Is this good or bad for the US economy?

I won’t try to weigh and balance all the tradeoffs here, but something not too far from this example is happening in real life. Lorenz Emter, Michael Fidora, Fausto Pastoris, Martin Schmitz and Tobias Schuler present the patterns in “US trade policies and the activity of US multinational enterprises in the euro area” (ECB Economic Bulletin, Issue 4/2025).

The authors present this figure showing the “current account balance” between the US and the EU, the broad-based measure of trade flows that includes not just exports and imports of goods (which is called the “merchandise trade balance”), but also trade in services and flows of payments as a result of foreign direct investment.

The bars reaching up show trade in goods. As you can see, the euro area runs a trade surplus in goods with the US economy. The blue bar shows the share of the goods surplus due to US multinationals producing in the European Union. The bars reaching down show the areas where the US has a trade surplus with the euro area. The red bar shows the US surplus in trade of services, and the green bar shows the US surplus that is payments resulting from foreign direct investment. (For context: Seven countries in the European Union are not part of the euro area: Bulgaria, the Czech Republic, Denmark, Hungary, Poland, Romania, and Sweden.  Euro-area GDP is roughly 90% of EU GDP.) Overall, the ECB authors write:

ECB estimates suggest that almost 30% of the euro area goods surplus with the United States in 2024 involved trade by euro area affiliates of US MNEs, while these companies accounted for around 90% of the euro area deficit in services trade.

Overall, the current account balance suggests that trade between the US and the euro area is near-balance, as shown by the black line. If the imposes substantial tariffs against imports from the EU, then it presumably will reduce imports of goods from the euro-area countries–including the imports of goods from US multinationals. In addition, less production by US multinationals in the euro area means that sales of US-based services to those multinationals is likely to drop substantially as well, and payments to US-based firms as a result of their past investments in euro-area operations will fall.

Again, I will not try here to weigh and balance all these tradeoffs. But I do want to emphasize several points: 1) Using only the merchandise trade balance can be a deeply misleading way to look at trade between two regions because it leaves out the other parts of the current account balance. 2) The tradeoffs from imposing tariffs on the European Union (and elsewhere, for that matter) have some complexity to them. 3) The US-based firms that use their technological and managerial expertise to produce in other countries around the world, both to sell in foreign markets as well as in the US market, are some of America’s most productive and successful firms–indeed, they are the US firms most-envied by high-income countries around the world.

(Hat tip to Edward Conard’s Macro Roundup, which is always full of intriguing graphs and figures from a wide array of sources.)

Twice each year, the Federal Reserve is required to report to Congress, a process which involves both testimony from Fed Chair Jerome Powell and also the publication of the Monetary Policy Report, which comprises a broad statement of how the Fed is perceiving the US economy. The most recent report has a section on the movement of employment and earnings since 2019, the year before the pandemic hit.

For employment, the Fed report focuses on the employment-to-population ratio. A benefit of this approach is that categorizing those who do not have jobs as “unemployed” or “not looking for work” will always have a gray area between the two. The employment-to-population ratio sidesteps that issue.

For example, here’s are shifts in the employment-to-population ratio by age. During the pandemic, the employment-to-population ratio of the age 55+ group dropped by the least. but now, employment-to-population for the other age groups has rebounded to slightly above pre-pandemic levels, while remaining low for the 55+ group. A likely explanation here is that the pandemic causes a certain number of older folks to retire–and they just stayed retired.

Here’s a breakdown by sex and education level. The solid lines show men and women with “some college or more” education; the dashed lines show “high school or less” education. During the pandemic, employment-to-population dropped more for those with less education. At present, employment-to-population for women of all education levels has rebounded more strongly than for men.

For wages, the general pattern is that during the pandemic, those with lower wages and education way lower increases in wages, but they continued to see raises. However, those in higher wage groups and with higher education saw actual negative wage growth. But quite recently, wage increases for those with higher wage and education levels has now moved slightly ahead of other groups. two figures on the left-hand side of the panel illustrated these patterns, with corresponding patterns by race and sex on the right.

Does all of these mean that the Fed is ready to start reducing interest rates? To answer this question, you can gaze into the crystal ball that is the Monetary Policy Report youself. But in a different part of the report, the Fed discusses the recent path of inflation:

After declining modestly last year, consumer price inflation continued to ease during the first four months of this year, although at a bumpy pace and with some early signs that higher tariffs on U.S. goods imports are pushing up prices for some consumer goods. The 12-month change in the price index for personal consumption expenditures (PCE) was 2.1 percent in April, down from 2.6 percent at the end of last year (figure 1). Meanwhile, inflation for core PCE prices—which exclude often-volatile food and energy prices and are generally considered a better guide for future inflation—has also eased further this year but remains somewhat elevated, with the 12-month change receding from 2.9 percent in December to 2.5 percent in April. 

The Fed has for some years now focused on “core PCE” inflation as the key measure that it watches. By that standard, inflation has not yet fallen to the Fed’s goal of 2%.

Finally, I was also struck by a graph from the report on debt of households and nonfinancial firms. For households, total debt-to-GDP was trending up during the 1980s and 1990s from about 0.5 to 0.7. During the housing boom of the early 2000s, the household debt-to-GDP peaked at nearly 1.0. But since then, the ratio has sagged back down to about 0.7, where it was in the late 1990s.

For nonfinancial businesses, it appears that debt-to-GDP was hovering in the range of about 0.5 to 0.7 from the mid-1980s up through the mid-2000s. This debt-to-GDP ratio then appeared to be rising from the Great Recession through the pandemic, but has now sagged back to about 0.7. In short, most of the US economy does not appear to be in a debt-and-credit boom of the sort that can cause big problems when that boom turns to bust. The exception, of course, is the strongly growing debt of the US government.

There is a widespread consensus that the policy goals for any central bank should be set through the legislative and political process. But should there be one goal or several? Should the goals be fixed or changing? Should the legislative and political process both set the goals and also tell the central bank how to implement those goals?

Starting in the mid-1980s, the central bank of New Zealand was the first country to adopt what became known as “inflation targeting.” In this approach to monetary policy, the legislative and political process determines that the central bank has a single goal: control of inflation. In the case of New Zealand, the goal was an inflation rate of 0-2% annually. Having set that goal, the legislative and political process then gives the central bank the independence to pursue that goal, free of political meddling. Canada followed New Zealand on the inflation targeting path, and then dozens of other countries around the world did so as well, including the European Cetnral Bank. But Oliver Sikes focuses on the original New Zealand experience in “How one Kiwi tamed inflation” (Works in Progress, June 12, 2025). He emphasizes that although economists would later provide justifications for inflation targeting, the original policy resulted as a political response to evident failures of other approaches.

In the mid- and late 1970s, countries around the world experienced a surge of inflation. New Zealand, as an oil importer, was especially affected by the OPEC-induced rises in oil prices; in addition, New Zealand lost preferential access for its exports to the UK market when Britain joined what what then called the European Economic Community (now evolved into the European Union).

At this time, the central bank of New Zealand, called the Reserve Bank, was essentially under political control. The usual pattern was that politicians called for the Reserve Bank to fight inflation, but then when the bank tried to do so, it would be overruled.

In general, the economy of New Zealand at this time had considerable government intervention. As Sikes writes:

The government controlled large portions of many industries, including banking, insurance, and utilities, and the agricultural sector was supported by generous subsidies, price guarantees, and low-interest loans. Imports of goods were also tightly controlled – Kiwis needed government approval to subscribe to an overseas magazine. … Unlike today’s central banks, which mainly control inflation through adjusting interest rates, New Zealand used direct regulatory controls on financial institutions. The government forced banks to hold specific amounts of government debt and set limits on interest rates for savers. It used capital controls to restrict money flows in and out of the country, allowing it to retain a fixed exchange rate. … Inflation began to fall in 1982, but only after [Prime Minister] Muldoon imposed a complete freeze on prices and wages, which then coincided with an economic contraction.

In short, New Zealand by the mid-1980s had substantial reason to distrust political control of the goals and methods of its central bank. Moreover, US inflation under had fallen from 13.5% in 1980 to 3.2% by 1983, with the US Federal Reserve under the leadership of Paul Volcker, which suggested that a central bank did have the power to reduce inflation–if it was allowed to use that power.

In keeping with a strain of economic thought often associated with the work of Milton Friedman, the Reserve Bank decided that it would target the growth of the money supply, with the idea that a low and steady growth rate for money would lead to a low and steady inflation rate. But it didn’t work well. All around the global economy, shifts in financial deregulation and financial innovation were changing what “the money supply” actually measured. So what to do next?

The New Zealand government decided that it would just set a numerical goal of 0=2% inflation, with the Reserve Bank to focus on that goal. Sike notes:

Michael Reddell, head of the Reserve Bank’s monetary policy unit, said it was settled on ‘more by osmosis than by ministerial sign-off’. … David J. Archer, a former Assistant Governor, said inflation targets were eventually chosen ‘as the least bad of the alternatives available’.

But now and then, a deeper wisdom is born from these kinds of political compromises. As economists would come to argue, central bank independence and inflation targeting were useful steps to address a political conflict-of-interest: specifically, current politicians always want lower interest rates to stimulate the economy, but will almost never vote for the higher interest rates needed to fight inflation. By taking the day-to-day politics out of monetary policy, households and firms in the economy can actually believe that the goal of low inflation will be pursued, and their expectations that low inflation will be pursued can help to “anchor” a lower rate of inflation when shocks and stresses inevitably occur.

The idea that a central bank should purely be governed by the single goal of inflation targeting has become more controversial over time, especially in the aftermath of the Great Recession of 2007-09. At that time, central banks around the world took on a set of tasks that had nothing to do with fighting inflation: specifically, the task of providing short-term support to financial markets, which otherwise seemed in real danger of collapsing and causing even more severe economic damage. For the US Federal Reserve, there was no legal conflict here, because the law governing the US Federal Reserve is often described as a “dual mandate”: “price stability and maximum sustainable employment.” In practice, even central banks with an inflation-targeting mandate commonly act as if they have a dual mandate: Keep inflation low, but in a financial crisis or economic recession, act as needed to stabilize markets.

There are not a lot of memorable quotations about bond markets, but one of my personal favorites is from James Carville, the chief political strategist for President Clinton, who still shows up as a talking head doing news commentary from time to time. Early in Clinton’s presidency, a particular focus was reducing budget deficits, with the belief that a lower path for future government borrowing would make US Treasury debt seem safer to investors–and thus lead to lower long-term interest rates that would stimulate the economy. For example, David Wessel and Thomas T. Vogel described the dynamic in an article for the Wall Street Journal on February 25, 1993, “Arcane World of Bonds is Guide and Beacon to a Populist President.”

The Clinton budget proposals, along with the economic “dot-com boom” of the 1990s, caused the federal budget to move from a deficit of about 4% of GDP when Clinton took office in 1993 to budget surpluses over four years from 1998 to 2001. But in early 1993, the budget legislation was still taking shape, and Clinton was being briefed on the market for federal bonds almost every morning. In the WSJ article, Wessel and Vogel quote Carville: “I used to think that if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

Indeed, after President Trump announced his “Liberation Day” package of tariffs back on April 2, adverse reaction from the bond markets for US Treasury debt (along with US stock markets) pushed back, causing Trump to start declaring a series of pauses and suspensions in the tariff timelines that have continued on. Moreover, Trump’s proposed federal budget strategy is the opposite of Clinton’s: that is, Clinton moved toward a balanced budget with the goal that it would also lead to reduced long-term interest rates, while Trump’s proposed tax cuts move away from a balanced budget, and he instead seems to be relying on criticizing the Federal Reserve as a way of trying to reduce interest rates.

For a primer on US bond markets, the Spring 2025 Journal of Economic Perspectives (where I work as Managing Editor) includes a symposium on the subject. As Nina Boyarchenko and Or Shachar note in the opening paper: “US fixed income markets are among the largest in the world, with $28.3 trillion in US Treasuries, $11.2 trillion in US corporate bonds, $4.2 trillion in municipal bonds, and $2 trillion in agency debt outstanding at the end of 2024.” (“Agency debt” refers to debt issued by a government-sponsored enterprise. These agencies are often (but not exclusively) related to borrowing money that buys home mortgage debt and turns it into financial securities, like the Federal National Mortgage Association, often called Fannie Mae, and the Federal Home Loan Mortgage Corporation,  often called Freddie Mac.) For comparison, the US GDP this year will be about $28 trillion.

When we talk about bond markets “intimidating” politicians, what we are actually talking about is how bondholders view the riskiness of those bonds. But who are the bondholders? Boyarchenko and Shachar offer a useful figure, showing who is likely to hold each category of bonds. They write:

Panel A focuses on US Treasuries. Since the 1970s, foreign investors have played an increasingly dominant role, with their share rising sharply in the late 1990s and early 2000s. Their holdings peaked around 2009 before gradually declining to early 2000s levels by the end of 2024. Other significant holders include pension funds and mutual funds, though their shares have remained relatively stable over time. Panel B examines corporate bonds, where insurance companies have historically been the largest holders. However, their share has steadily declined, while mutual funds and foreign investors have gained prominence, reflecting broader shifts in investment preferences. Panel C presents the major holders of mortgage securities backed by government-sponsored enterprises. Household holdings were more significant in the earlier decades, but over time, foreign investors, mutual funds, and pension funds have increased their presence in this market. Panel D shows the holders of municipal bonds. Households have consistently been the dominant investors, although mutual funds have gained market share over time. Unsurprisingly, unlike the other securities categories, foreign investors play a minimal role in this market. This is largely due to the tax advantages that municipal bonds offer to US investors, as the interest income is generally exempt from federal taxes, and in many cases, state and local taxes. Because foreign investors do not benefit from these tax exemptions, they have less incentive to hold municipal bonds compared to domestic investors. Taken together, the figure highlights the changing landscape of fixed income ownership, emphasizing how different investor groups have adjusted to economic trends and market events over time.

Boyarchenko and Shachar go into more detail on how the Federal Reserve interacts with bond market in its conduct of monetary policy. The other papers in the JEP symposium take separate looks at US Treasury debt, US corporate bonds, and the US municipal bond market. All papers in JEP are freely available, compliments of the publisher, the American Economic Association. The four papers in the bond markets symposium are:

• “A Hitchhiker’s Guide to Federal Reserve Participation in Fixed Income Markets,” by Nina Boyarchenko and Or Shachar
• “How US Treasuries Can Remain the World’s Safe Haven, by Darrell Duffie
• US Corporate Bond Markets: Bigger and (Maybe) Better?” by Maureen O’Hara and Xing (Alex) Zhou
• “Why Is the Fragmented Municipal Bond Market So Costly to Investors and Issuers?” by John M. Griffin, Nicholas Hirschey, and Samuel Kruger

Macroeconomics is at times unfavorably compared to weather forecasting. But weather forecasts have in fact become more accurate over time: a forecast for four days inthe future, made today, today is as accurate as a one-day forecast 30 years ago. Can macroeconomics make at least a broadly similar claim to improvement? Olivier Blanchard makes the argument in “Convergence? Thoughts about the Evolution of Mainstream Macroeconomics over the Last 40 Years” (Peterson Institute for Internationl Economics, Working paper 25-8, May 2025). He writes:

Let me state my two main conclusions. First, starting from sharply different views, there has been substantial convergence, both in terms of methodology and in terms of architecture. Second, this convergence has been mostly in the right direction, allowing future research to build on the existing conceptual structure. Put strongly, macroeconomics may have a claim to calling itself a mature science. … As macroeconomists, we should stop self-flagellating and not accept flagellation from others.

As in all arguments about what constitutes “science,” the way in which an author defines terms matters. Blanchard uses a definition of “mature science” that includes factors like whether there is an established theoretical framework, in which researchers agree about standars of evidence, such that knowledge can be refined and can accumulate over time. A mature science needs to provide practical knowledge for addressing real-world problems. For example, pretty much every central bank in the high-income countries now uses a New Keynesian model for understanding and forecasting changes in the economy.

The specific model on which agreement has been reached, according to Blanchard is called “New Keynesian.” On one side, this model allows for households and firms to react to incentives, and to shifts in expectations about the future, and thus is built upon macroeconomic behavior. But on the other side, the model does not require that these markets involve perfect competition or smooth outcomes: that is, prices and wage can be slow to adjust, imperfect competition and imperfect information can play substantial roles, technology can shift, and more. (For those who would like more detail, Jordi Galí offers an overview of this approach in the Summer 2018 issue of the Journal of Economic Perspectives, where I work as Managing Editor.)

Blanchard argues that the virtue of the basic New Keynesian model is its flexibility: that is, it allows analyzing the effects oif a wide array of topics. \

To mix metaphors, I see the minimalist model as the basic unit in an erector set. By itself, the basic unit is not extremely useful, but you canplug into it a whole set of extensions. You can extend it to introduce myopia … and reduce the role of expectations. You can replace rational expectations with other expectation formation mechanisms. You can extend it to include borrowing constraints, which lead to a more important role for current variables and more realistic consumption dynamics. You can extend it to more than one country. You can extend it to introduce various forms of heterogeneity and derive aggregate implications. In short, it provides a common and generally understood structure from which to start and organize research and discussion.

Blanchard readily admits that the predictive power of the New Keynesian macroeconomics is limited, but I do not view that as a fatal flaw. After all, every new discovery in any field of science suggests that the previous prediction made by the subject was wrong in some way. Social sciences like economics have the additional problem that they built on some ever-shifting combination of people, institutions, and events, rather than on an understanding of fascinating but personality-free subjects like chemistry, biology, or properties of matter and energy. As a social science, economics also suffers from a feedback mechanism where improvements in macroeconomic thinking will alter the behavior of central banks and large firms, as well as affecting other policymakers and households, which in turn willl require additional improvements in macroeconomic thinking.

In short, when Blanchard refers to a “mature science,” he is talking about a framework that has proven useful and flexible for analysis, not making a claim that economists possess a crystal ball about the future. Greg Mankiw recently wrote a letter to the Wall Street Journal that encapsulated some of this perspective. Mankiw wrote:

I always find it amusing when people assert that economics isn’t a science. Such statements suggest that they don’t know what scientists do. Here’s a reminder: Scientists observe the world. They develop theories that aim to explain what they see. They collect data to test their theories and reject those that don’t conform to the data. They try their best to put aside ideological preferences and preconceived notions. Most important, they always remain open to changing their minds when presented with better theories or new data. This approach can be applied whether one is studying apples falling from a tree or gross domestic product fluctuating over time. As Albert Einstein put it: “The whole of science is nothing more than a refinement of everyday thinking.”

Many of the wealthiest people on earth hold their wealth in the form of a financial asset, like stock in a succesful company. When it comes to capital gains, there is a choice to be made between a tax on “wealth,” which seeks to estimate the value of these gains whether or not the assets have been sold, and an “income” tax that imposes taxes on capital gains only when they are sold (or “realized”). Florian Scheuer makes the case for the second approach in “Taxing capital, but right: Why realized gains, not asset values, should guide tax policy (UBS Center Policy Brief 1, 2025).

Scheuer focuses on the fact that movements in stock prices are often closely linked to interest rates. After all, the price of a stock is determined by the future stream of profits the firm is expected to produce, but the interest rate determines the “present v value” that an investor will put on that stream of future profits. Lower interest rates will tend to boost stock prices, because it means that future profits have a higher present value; conversely, higher interest rates tend to push down stock prices, because future profits will have a lower value in the present. Scheuer offers this example:

Take a stock that pays a constant dividend of $100 per year forever, and suppose the interest rate is 10%. Then the stock price, which reflects the present-discounted value of the flow of dividends, must equal $1,000. Now suppose the interest rate falls to 5%. As a result, the stock is now worth $2,000: The stock price doubles, a massive capital
gain. But notice that the dividends paid by the stock have not changed at all: They
are still $100 per year. Therefore, the income and lifetime consumption possibilities
for someone who does not sell have not gone up. The capital gains of $1,000 are a pure “paper gain.” Of course, an investor who sells the stock can cash in on the gains, resulting in an increase in consumption. Conversely, an investor buying the stock loses: She needs to pay twice the amount for the same fl ow of future dividends. In sum, sellers gain, buyers lose and those who hold the stock are unaffected. This is why a tax on realized gains is aligned with who gains and loses from asset price fluctuations. By contrast, a tax on unrealized gains (or a wealth tax) would fully tax the “paper gains” of those who neither buy nor sell even though they do not benefit from their capital gains.

Scheuer also points out that paying capital gains tax whenever a sale occurs will tend to lock investors into their existing investments–because they would owe income tax if they decided to sell one stock and buy another. Scheuer argues that sell-and-immediately-reinvest should not be taxed. The result of such a transaction is again a paper gain, rather than actually realized income. And it’s generally a good thing for investors to be able to reallocate their portfolios.

So far, those who would prefer to see a wealth tax or greater taxation of capital gains presumably don’t like what they are hearing from Scheuer, at least as I have described it so far. But Scheuer also argues that perhaps the biggest loophole in capital gains taxation should be closed. I refer here to “step-up in basis at death,” which basically means that if someone dies and passes an asset along to their heirs, the capital gains of that asset are never taxed. Scheuer argues that passing along assets at time of death should be treated like a “realization” of gains.

The capital gains tax systems in the U.S. and many other advanced economies feature a particularity referred to as step-up in basis at death for inherited assets. This tax rule eliminates the taxable capital gain that occurred between the original purchase of the asset and the time of inheritance, thereby reducing the heir’s tax liability. Effectively, it completely exempts from taxation all capital gains accrued during the original holder’s lifetime if she never realizes the gains but passes them along at death. This is considered a major tax loophole, and indeed comparisons between capital gain realizations reported on income tax returns with historical stock market gains suggest that a large share of all capital gains on corporate stock was never taxed purely because of this provision. Our findings imply that this tax rule should be abolished in favor of a “carryover basis” approach, which makes the heirs subject to a tax on the full gains going back to the original purchase price, and which is already used by a number of countries including Germany, Italy, and Japan.

Relatedly, a tax avoidance strategy of wealthy families known as “buy, borrow, die” has received attention in recent years. The idea is to borrow against appreciating assets rather than selling them and then taking advantage of the stepped-up basis at death, thereby avoiding capital gains taxes altogether. Eliminating the stepped-up
basis loophole would also close the door for this avoidance strategy.

Changing the “step-up in basis at death” can be done in two ways. In the version Scheuer describes, the value of capital gains is taxed on those who receive the inheritance. An alternative method would be to tax the estate of the decedent, as if that person had realized the gains at time of death. According to estimates from the Congressional Budget Office, either approach would raise tens of billions of dollar per year. However, a tax on capital gains nominally paid by the decedent raises more revenue that a tax on capital gains paid by the heirs, because the income received by heirs is broken up into smaller chunks and taxed at lower rates.

The leading economies of the future will be driven by technologies that are now only in research and development stage, as those technologies diffuse across production processes and types of products that are available. At some level, I think pretty much everyone knows this. But policymakers often don’t seem to take the next logical steps, which are to emphasize incentives for research and development spending, along with supporting workers and firms as they adapt to the innovations still to come. Mary Cowx, Rebecca Lester, and Michelle Nessa focus on one aspect of these issues: how tax policies affect incentives for business R&D spending, in “Bad breaks: Why US tax policies put innovation at risk” (Stanford Institute for Economic Policy Research, May 2025). The authors write:

There are two types of innovation tax incentives: input- and output-based incentives. Input-based incentives are tied to amounts spent on investing in innovation, including R&D deductions and credits. Output-based incentives provide lower tax rates on income earned from a firm’s innovation assets — a system popular among several European countries and known as “patent boxes.” The U.S. primarily has input-based incentives. The two largest U.S. R&D tax incentives are the R&D tax deduction and the R&D tax credit. Together, these benefits provided U.S. companies with more than $100 billion in tax savings in 2021, the most recent year with available data (IRS 2024).

Adding these various tax provisions together, the authors show “the value of R&D tax subsidies available for large, profitable companies in countries around the world. Twenty years ago, the U.S. provided a similar amount of incentives as other OECD countries. Now, however, the level of U.S. incentives is roughly 20 percent of the OECD average and less than 10 percent of what China offers.”

“What’s going on here in the US tax code? Traditionally, going back to 1954, the money that a company spent on R&D was “expensed”–that is, the company could treat R&D spending as an expense in that same year, which reduced the taxes the company owed. In contrast, if a company bought a piece of machinery that would pay offer over time with increased profits before eventually wearing out, the standard tax treatment was that that only some of the cost of the machinery could be treated as an expense each year, as the physical equipment depreciated over time. But this tax provision was changed in 2022:

In tax year 2021, U.S. corporations deducted more than $327 billion of R&D costs on their tax returns, resulting in $69 billion in tax savings (IRS 2024). … Prior to 2022, U.S. companies could immediately deduct 100 percent of their R&D expenditures in the year incurred. This deduction significantly reduces the after-tax cost of innovation. However, beginning in 2022, U.S. companies are now required to spread the deduction for domestic R&D expenditures over a five-year period, meaning they can deduct only 10 percent of their R&D costs in the year of the investment. … Companies cut their R&D investment and their numbers of employees working on R&D in response to this new policy. The most research- intensive public companies in our sample cut their R&D by 11.6 percent in the first year alone.

There is also a tax credit for research and development spending. As the authors point out, there is strong evidence that this tax credit offers further encouragement to corporate R&D spending, but with some limitations. For example, the R&D tax credit is based on the gain in R&D spending compared to the past, which creates issues of how to measure and compare R&D over time. Also, a tax credit only pays off for a firm that is making a profit–and many innovative R&D-intensive small firms are not yet making a profit.

Yes, there are also recent tax subsidies through laws like the Chips and Science Act of 2022 (CHIPS) and the Inflation Reduction Act of 2022 (which actually focused on green energy). But these tax subsidies are mostly for production using existing technology, not for supporting R&D.

While the US has been reducing tax incentives for R&D spending, other countries have been ramping up. While the US tax rules as of 2022 require that R&D expenses be spread over five years, countries like Brazil and China are offering “super-deductions” for R&D, where a company can write off 200% of its R&D spending. Countries like the United Kingdom and Netherlands have “patent boxes” in their tax laws, which means that income earned from innovation is taxed at a lower rate: “The U.K.’s patent box, for example, reduces the corporate tax rate on qualifying innovation income from 25
percent to just 10 percent — a cut of 60 percent.”

Corporate taxes serve multiple goals. For example, if corporate taxes didn’t exist, then people could invest corporations and let their money grow untaxed for years or decades. But the way in which corporate taxes are constructed also creates incentives for corporate behavior. Lower incentives for US corporations to pursue R&D is not a good long-term bet on America’s economic future.

Back in 2000, the World Bank published a report with the provocative title, “Can Africa Claim the 21st Century?” The tone of the report was carefully-hedged optimism. For example, it said:

The question of whether Sub-Saharan Africa (Africa) can claim the 21st century is complex and provocative. This report does not pretend to address all the issues facing Africa or to offer definitive solutions to all the challenges in the region’s future. Our central message is: Yes, Africa can claim the new century. But this is a qualified yes, conditional on Africa’s ability—aided by its development partners—to overcome the development traps that kept it confined to a vicious cycle of underdevelopment, conflict, and untold human suffering for most of the 20th century

So how is overcoming the development traps coming along? A quarter-century later, the World Bank has published a follow-up report, 21st-Century Africa
Governance and Growth, a collection of eight chapters on different aspects of development, edited by Chorching Goh. From the “Main Message” section at the start of the report, here’s some of the flavor. On one side, substantial and undeniable progress has been made.

Over the past 25 years, Africa has achieved notable progress … Mortality rates have fallen, with life expectancy rising from 50 years in 1998 to 61 years in 2022. School attendance has improved, with primary school enrollment increasing from 80 percent in 1999 to 99 percent in 2022 and secondary school enrollment increasing from 26 percent to 45 percent over the same period. The early 2000s saw strong economic growth fueled by high commodity prices. China emerged as a trade and investment partner, and the continent experienced a massive inflow of foreign capital from 17.6 percent of gross domestic product (GDP) in 1998 to 38.1 percent in 2018. Consequently, African countries have shown significant growth performances: from 2000 to 2019, 7 of the world’s 10 fastest-growing economies were in Africa. Aid dependence has declined, tax revenues have increased, and the median poverty rate fell by about 10 percentage points to about 43 percent.

On the other side, as the report notes, “Africa remains the world’s biggest development challenge.” Here are some bullet-points:

• Persistent poverty. By 2030, 90 percent of the world’s extremely poor population will live in Africa.
• Economic stagnation. Sub-Saharan Africa’s share of the global economy remains at 2 percent, with minimal change in the region’s merchandise exports.
• Investment levels. Private investment remains low, with the informal economy accounting for 59 percent of total nonagricultural employment.
• Limited growth. The reliance on smallholder agriculture limits economic growth due to low investment and productivity.
• Electricity access. Only 51 percent of the African population has access to electricity, compared to the global average of 91 percent. …
• Political upheaval. Violent conflicts increased eightfold between 2000 and 2023 throughout the continent, leading to increases in conflict-related deaths and the number of internally displaced people.
• Governance challenges. The issues of corruption, political instability, and a lack of trust in government and institutions persist.

The report also notes up front that “Africa’s income level per capita would be 40% higher if it had grown at the global average since 1990,” “Nearly 83% of Africa’s employment is informal,” and “86% of 10 year-olds in Africa can’t read and understand a simple paragraph.”

The volume includes chapters on all of these topics and more. My own sense is that if the authors of the 2000 volume could have looked forward to the situation in 2025, they would be more disappointed than pleased.

Here, I’ll add a few words on Chapter 3 of the volume, “Productivity,” by Cesar Calderon and Ayan Qu. Per capita GDP can serve as a rough measure of standard of living, as well as a rough measure of productivity. By that measure, the countries of Africa are struggling relative to the rest of the world. The subregion of West Africa had a little spurt from about 2000-2015, but has now given back those modest gains.

To get a sense of why this pattern is so disappointing, remember that lower-income countries have some potential for “catch-up growth.” They can draw on technologies developed elsewhere, and sell into markets of higher-income countries. A low-income country should have numerous opportunities. When starting from a low base, then achieving a higher rate of growth is somewhat easier. But the countries of Africa are instead experiencing only fall-further-behind growth. Here’s a figure comparing Africa, South Asia, and the East Asia/Pacific region to the US economy in labor productivity. Two of the regions are catching up to the US, at least somewhat, in the last two decades; Africa is below its relative level in the late 1970s.

As Calderon and Qu dig into the underlying data, they point out that the share of productivity differences explained by investment in physical capital is relatively small, and the share explained by human capital differences is only a little larger. The biggest factor is “total factor productivity,” in the lingo of economists, which is efficiently the economy translates these inputs into outputs. Thus, while investing more in human capital and infrastructure can pay off for these economies, the big challenge is to accomplish dramatic structural changes.

These economies need to move away from a focus on small-holder agriculture. The three channels to productivity discussed by Calderon and Qu are: 1) within-firm productivity growth, in which a well-managed company improves its worker skills, technology adoption, and innotation; 2) between-firm productivity growth, in which the high-productivity firms make up a bigger share of the economy than low-productivity firms, so the growth of the successes outweighs the failures; and 3) net entry of productive firms, in which more productive firms are more likely to enter and less-productive firms are more likely to exit. At the end of the day, economies only raise productivity when these dynamics are operating, and for roughly a jillion reasons (see the World Bank volume for details), these dynamics have not been operating especially well across sub-Saharan Africa as a whole.