Economists Fired

For John, BLUF:  No one really understands how an economy works.  But, there are a lot of strong opinions out there.  Nothing to see here; just move along.

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At the blog site Quartz, back on 25 November, is an article titled "The shakeup at the Minneapolis Fed is a battle for the soul of macroeconomics—again".  As we all know, the Federal Reserve, a quasi-autonomous Federal entity,♠ is divided into twelve regional banks, each with a lot of independence.  There is also the Board of Governors and the Federal Open Market Committee (FOMC), plus some odds and ends.  The authors of the article, to give them credit, are Messrs Miles Kimball and Noah Smith.

Skipping the lede, we have:

Two of the Minneapolis Fed’s most eminent and long-serving economists, Patrick Kehoe and Ellen McGrattan, have been fired. The Star-Tribune article makes it clear that their departure was not voluntary on the part of either researcher. (Fortunately, both Kehoe and McGrattan will be fine, career-wise—both have stellar publication records and tenured professorships at the University of Minnesota.)

Why did this happen? We cannot know, especially since Minneapolis Fed Chief Narayana Kocherlakota isn’t giving his side of the story. But Jeffrey Sparshot makes this possible connection in the Wall Street Journal:

Mr. Kocherlakota switched in 2012 from opposing some of the Fed’s easy-money policies to calling for more aggressive Fed action to spur economic growth and employment. The move reflected a shift in his views on persistently high unemployment: He went from thinking the cause was largely structural (and thus could not be fixed with monetary policy) to thinking it was largely due to weak demand (which means it could be addressed through policies aimed at boosting demand).

In other words, although the Minneapolis Fed shakeup could be due to any number of reasons—a personality conflict, a disagreement over the Fed bank’s mission, etc.–one possibility is that the personnel changes are related to Fed officials’ changing attitude toward business cycles. To understand that possibility, it is crucial to understand an academic controversy that has been simmering for decades.

Then the authors go on to discuss "Freshwater" Macroeconomists versus "Saltwater" Macroeconomists.  It is all there for you to read, at the link, above.  However, it all reminds me of those who ask why Congress can't just compromise.  It the Minneapolis Fed can't compromise, when they are the ones who are so smart about the economy, how can we expect Democrats and Republicans in the US Congress to come up with a compromise?

At some point the authors use the word "apotheosis".  I had heard it before, about something related to G Washington, but wasn't sure of the definition.  The definition is "the highest point in the development of something; culmination or climax:  his appearance as Hamlet was the apotheosis of his career".  (In the case of G Washington it is the second definition, "the elevation of someone to divine status; deification".)

Regards  —  Cliff

♠  One of the knocks on the Federal Reserve Bank is that while the Directors and the Head are nominated by the President and confirmed by the US Senate, the institution is otherwise fairly independent of the Federal Government, the States, the Public and God (or at least they think so).