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Depression Economics Needs to Become a Regular Part of Macroeconomics

There are many different subfields within economics. For example, some macroeconomists focus mainly on short-run stabilization policy, i.e. designing monetary and fiscal policies that keep us as close as possible to full employment, while others are more concerned with maximizing long-run growth. I think we need another branch of macroeconomics, "depression economics."

In recent decades, people studying short-run stabilization policy have focused mainly on how monetary policy can be used to fine tune the economy during relatively normal times. Fiscal policy and "depression economics" were not part of the mainstream research agenda.

But how to manage the economy during severe recessions and depressions -- a time when fiscal policy is generally a key component of the policy response -- needs to be an integral part of the research agenda in macroeconomics, and a larger part of the curriculum at the graduate and undergraduate levels. The economics at work in depressions is distinct from the economics at other times, and hence "depression economics" is worthy of its own area within macro (Paul Krugman likes to say that "when we're experiencing depression economics,... virtue becomes vice and prudence is folly... The trouble in practice is that conventional modes of thought tend to prevail even when they shouldn't...").

Since large contractions of the type we've recently experienced are relatively rare, it's easy to understand why research and teaching about this topic wanes over time. There are generally pressing contemporary issues that crowd out older questions.

But not fully understanding how these events occur, and not knowing what the best response is when they do happen, makes it difficult for us to prevent large downturns in the first place, and to respond to them effectively when they happen anyway despite our attempts to prevent them.

We need to have research and teaching about depression economics continue even as the recent downturn fades from our memory. This type of classroom instruction from Brad DeLong and others is a start, and there have been many academic papers recently trying to understand how economies work when they are far from full employment, interest rates are at zero, etc. The question is whether people like Brad will continue to teach this topic ten years from now -- will we begin to see separate chapter in the textbooks on "depression economics"? -- and whether research into these questions will continue to find a place in the best journals.

I think there's a chance this will happen. But there's a much better chance that after a short-run burst of interest, we'll forget about great recessions and depressions, and focus on the questions of the moment only to be caught, yet again, unprepared for the next major event.

I hope I'm wrong about that.

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