This is a writeup of a medium investigation, a brief look at an area that we use to decide how to prioritize further research.
In a nutshell
What is the problem?
The recent Great Recession points to the large humanitarian costs of business cycle downswings. Going forward, it seems reasonable to expect recessions to cost the global economy an average of hundreds of billions of dollars a year in lost output due to idle capacity. To the extent that better stabilization policy is possible, it could carry large humanitarian benefits.
Who already works on this issue?
Central banks, including the U.S. Federal Reserve, are generally the most active players, as both economic policymakers and researchers. Academic economists outside of central banks do a significant amount of research on policy-relevant questions, and there is some philanthropic support for research. A few think tanks and international organizations also work on the topic.
What could a new philanthropist support?
A philanthropist could focus on advocacy or research. Advocacy work might involve supporting think tanks, educating the public, or building interest group coalitions. There seem to be a number of unresolved research questions of substantial policy relevance, and a funder aiming to facilitate progress on them could pursue any of a number of approaches.
1. What is the problem?
Economic recessions can carry enormous humanitarian costs. For instance, the 2008 financial crisis and the associated Great Recession appear to have:
- Cost the US economy roughly ten trillion dollars, and the rest of the global economy a comparable amount, in lost output due to idle capacity.1
- Reduced potential output over the long run by forcing some people out of the workforce, reducing investment, and delaying productivity improvements.2
- Caused millions of people to suffer bouts of long-term unemployment, which may carry significant psychosocial and health costs and result in permanent income losses.3
Despite these harms, the impacts of the recession could plausibly have been much worse had the response of policymakers been less aggressive.4
The 2008 financial crisis prompted an unusually deep recession, and it is difficult to assess the likelihood of similarly deep recessions in the future. A very rough approximation, based only on the occurrence of the Great Depression and the Great Recession, might be to expect such events twice per century, which would suggest that recessions carry annual global costs in the hundreds of billions of dollars range.5 Accordingly, the possibility of reducing the frequency or depth of recessions would carry significant humanitarian value, though the extent to which such reductions are possible or desirable is disputed amongst economists.6
It is not clear to what extent we should expect certain features of the recent recession to recur in the medium to long term. The relatively stable economic conditions observed in the U.S. during the decades prior to the recession may have prompted an underestimate of the magnitude of variability in the economy – deep recessions may be more likely than the recent experience prior to the Great Recession would suggest.7 Real interest rates also appear to have been declining throughout the developed world for much of the last thirty years,8 increasing the probability that economies will reach the “zero lower bound” on nominal interest rates, as they have recently, with greater frequency in the coming years. (The “zero lower bound” presents a particularly challenging situation for monetary policy, discussed more below.)
Note: this page focuses on macroeconomic issues related to business cycle stabilization. We may investigate other macroeconomic policy issues separately at a later date.
2. Who already works on this issue?
The Federal Reserve (“the Fed”), the United States’ central bank, plays an enormous role in U.S. macroeconomic policy and research.9 Its “dual mandate” is to promote maximum employment and stable prices.10 During recessions, the Fed typically uses monetary policy tools, e.g. lowering short term interest rates, to attempt to return the economy to full employment. Recently, having hit the “zero lower bound” on short term nominal interest rates, the Fed has been pursuing “unconventional policies” including large scale asset purchases (“quantitative easing”) and forward guidance about the future trajectory of interest rates that aim to stimulate the economy using other channels. Economists are not in full agreement about the likely impacts of these policies.11
It is difficult to accurately estimate the resources that the Fed devotes to monetary policy research, but the Board of Governors budgeted $64 million for “research and statistics” in 2013, while the twelve regional banks budgeted a total of $602 million for “monetary and economic policy” in 2013.12
There are also hundreds or thousands of economists, primarily based in universities, who conduct research on macroeconomics, though they do not necessarily produce research that aims to influence policy.13 Some people we spoke with noted that the outsize influence of the Fed extends to academic macroeconomists, who tend to be hesitant to criticize it too stringently for fear of alienating friends or harming their careers.14 Accordingly, it may not be correct to view academic economists as a fully independent check on the research and decisions of the Fed.
- The National Science Foundation (a U.S. government institution), which spends roughly $40 million a year on grants for economic research (most of which is not for macroeconomics).17
- The Institute for New Economic Thinking (INET), which was initially funded by a $50 million, 10-year grant from George Soros.18
- The Washington Center for Equitable Growth, which seems to focus primarily on inequality and growth rather than fiscal or monetary policy, expects to fund a few million dollars a year of research.19
- The Russell Sage Foundation, which spent $4 million on a program (now ended) on the impacts of the Great Recession.20
- The Alfred P. Sloan Foundation, which makes grants to support research on “economic institutions, behavior, and performance” including the economic implications of the Great Recession.21
- The Peter G. Peterson Foundation, which spent $12.8 million in 2012, predominantly focuses on efforts to limit the federal budget deficit (as opposed to other macroeconomic research or policy focus areas, such as unemployment).22
Think tanks working on these issues include:23
- The Brookings Institution, which houses the new Hutchins Center on Fiscal and Monetary Policy and the Brookings Papers on Economic Activity.
- The Peterson Institute for International Economics (PIIE).
- The Center on Budget and Policy Priorities’ Full Employment project.
Our discussion has focused primarily on research and policy in the United States, but macroeconomic research and policy is highly globalized. A number of international organizations, like the International Monetary Fund, play important roles, as do central banks in other countries.
3. What could a new philanthropist support?
Philanthropic efforts to reduce the frequency or depth of recessions would likely have to aim to ultimately change (or prevent changes to) policy or the behavior of institutions such as the Federal Reserve. Toward this end, a philanthropist might support advocacy for particular policies and behaviors or research to help determine which policies and behaviors would be the best ones to adopt. Though the distinction between advocacy and research may not always be clear, we discuss them separately below.
A number of people who we spoke with noted that most advocacy on monetary policy tends to come from people who are skeptical of the Federal Reserve and want to focus on limiting inflation or return to the gold standard, and they argued that supporting groups that are more concerned about unemployment to engage in debates around monetary policy could be valuable.24 An example of such an opportunity might be to support more liberal/progressive think tanks to be more involved in debates over monetary policy.25 One risk from supporting progressive advocates on monetary policy is that they might continue to advocate for looser monetary policy even when it was appropriate for the Fed to tighten, potentially leading to worse policy in the long term.26
Other advocacy opportunities might include:
- Attempts at improving public communication around macroeconomic policy in order to help people understand the issues and tradeoffs.
- Supporting think tanks or advocacy groups to work on proposals for other countercyclical policies, such as automatic aid to states during recessions or other automatic stabilizers.27
- Creating a “shadow” Federal Open Market Committee to offer informed commentary and alternative policy proposals after Federal Open Market Committee meetings.28
- Supporting advocates for stricter financial regulation, which may reduce the risk of recessions caused by financial crises like the one in 2008.
- Collecting and disseminating the consensus views of economists on macroeconomic policy questions, whether through surveys or credible nonpartisan research institutions.29
- Mobilizing business groups to convey points of economic consensus to a conservative audience.30
- Designing a model stimulus bill to have prepared in case of a future recession.
- Advocacy for more federal funding for macroeconomic research.
As with other advocacy efforts, it is difficult to predict what the likely impact of these efforts might be.
To pursue these strategies, a philanthropist might support think tanks like Brookings or PIIE, or more explicitly ideological groups like the Center on Budget and Policy Priorities’ Full Employment project, the Economic Policy Institute, or the Center for American Progress.31 We aren’t aware of many other organizations advocating on macroeconomic policy (while placing a strong emphasis on the importance of reducing unnecessary unemployment as opposed to focusing on controlling inflation).
3.2.1 Strategies for supporting policy-relevant research
A philanthropist aiming to eventually improve macroeconomic policy by supporting research might pursue any of a variety of strategies:
- Conventional research grants, similar to those provided by the National Science Foundation to economists.32
- Supporting journals, such as the Brookings Papers on Economic Activity, which focus on policy-relevant questions and aim to have some influence.33
- Summer programs to bring young economists up to speed on the state of a field and encourage them to pursue research in it.34
- Offering economists training or support to communicate their work to a policy audience.35
- Increasing the representation of women and people of color in economics.36
- Supporting awards for policy-relevant macroeconomic research or public communication.
- A fellowship or sabbatical program to fund a semester or year of paid leave for young macroeconomists interested in policy-relevant research.
- Funding economics PhD graduate programs to train more students.
- Supporting a conference or an edited volume on a topic of particular interest.37
We expect that these different approaches to supporting research might have very different cost-effectiveness profiles, though we do not have much sense of which are likely to get the strongest returns.
It is generally quite difficult to determine how much impact funding for research has on research output. At the margin, we would guess that grants allow academics to devote more of their time to a research project, but a number of people we spoke with mentioned the possibility that grants end up “supporting” research that would have occurred anyway, which intuitively strikes us as plausible.38
3.2.2 Important unresolved research questions
There appear to be a number of potentially important policy-relevant questions about macroeconomics that are, to the best of our knowledge, unresolved:
- Which securities are best to purchase under a quantitative easing policy? Is it better to simply purchase the securities or explicitly target longer-term interest rates?
- What specific short-run fiscal policies have the best tradeoff of economic impacts and political plausibility? What kinds of automatic stabilizers might be adopted to reduce the need for discretionary fiscal policy in the future?39
- Should the Fed adopt a higher inflation target?40
- Should the Fed target a price level or an inflation rate?
- Should the Fed target a Nominal Gross Domestic Product (NGDP) level?
- Should long-term debt contracts be structured in non-traditional way to reduce the likelihood of future financial crises?41
- To what extent do unconventional monetary policies (such as quantitative easing) increase risks of financial instability?
- In measuring economic slack, should policymakers focus on short term unemployment, long-term unemployment, or the labor force participation rate? To what extent are declines in the labor force participation rate cyclical or demographic? How do high unemployment rates affect wage growth for people who are employed?42
- What would be the costs and benefits of moving to a system of electronic money (which could conceptually overcome the zero lower bound problem), and how politically feasible might such a system be?
To the extent that there is a literature on these questions (which varies), it is often difficult to find credible, unbiased syntheses of the literature that are accessible to a non-economist reader. We are not aware of any institutions that regularly publish authoritative, unbiased systematic reviews of the economics literature on questions like these ones.
3.2.3 Novel methodological approaches to macroeconomic research
Critics often claim that traditional macroeconomic research tools are not well-suited to reaching conclusive answers to such questions, and call for novel approaches.43 It is difficult to anticipate in advance what kinds of new approaches might be helpful, but an incomplete list might include:
- Novel data collection efforts, whether qualitative (such as Alan Blinder or Truman Bewley’s research on wage stickiness), quantitative (such as the Billion Prices Project), or historical (such as digitizing archival bankruptcy records).44
- Using large-scale multi-player online games to experiment with macroeconomic phenomena.45
- Using agent-based models to develop a more sophisticated understanding of the impact of various economic policies.46
- Incorporating approaches from other disciplines, such as economic history, into macroeconomic research.47
We do not have a strong sense of whether support for more conventional research approaches or these (or other) more radical new approaches are likely to be more valuable.
3.2.4 Potential grantees
Potential grantees for a funder aiming to support research might include:48
- The National Bureau of Economic Research (NBER)
- The Brookings Institution, which houses the new Hutchins Center on Fiscal and Monetary Policy and the Brookings Papers on Economic Activity
- The Peterson Institute for International Economics (PIIE)
- Academic centers that conduct research on fiscal or monetary policy
- Individual academics or research projects
We do not have a strong sense of which of these potential grantees are likely to be most promising. Funding individual academics or research projects would presumably give a funder more control but would also require more internal capacity.
4. Questions for further investigation
Our research in this area has been fairly limited, and many important questions remain unanswered by our investigation.
Amongst other topics, further research on this cause might address:
- What is the macroeconomic policy and research situation in other countries? What impacts do unconventional policies that may be beneficial for developed countries have on emerging market economies?
- How effective is marginal funding in producing policy-relevant economic research? Are there cases where important research projects have not occurred because of a lack of funding?
- What kind of advocacy efforts are most likely to be effective in promoting better policy?
- To what extent do economists agree about the appropriate macroeconomic policies to adopt? In areas of disagreement, is further research likely to result in a consensus? Do important unresolved questions represent a natural process of research progress or a more problematic shortcoming?
- How likely is the zero lower bound to be an ongoing problem? Is additional research over and above that likely to occur in the status quo necessary in order to develop optimal policy responses to the zero lower bound problem?
- To what extent are monetary policy disagreements partisan ones? To the extent that they are, how should we weigh intervening in them?
5. Our process
Our investigation of the field of macroeconomic research and advocacy has been relatively limited: we’ve followed a number of blogs on the topic, reviewed some of the academic literature, and spoken with people with knowledge of the field. Public notes are available from our conversations with:
- Joseph Gagnon, Senior Fellow, Peterson Institute for International Economics; former Associate Director at the Division of International Finance and Senior Economist, US Federal Reserve Board
- Mike Konczal, Fellow, Roosevelt Institute
- Josh Bivens, Research and Policy Director, Economic Policy Institute
- Robert Johnson, President, Institute for New Economic Thinking; Senior Fellow and Director of the Project on Global Finance, Roosevelt Institute; former Chief Economist, U.S. Senate Banking Committee
- Justin Wolfers, Professor of Economics and Public Policy, University of Michigan; Senior Fellow, The Brookings Institution
- Robert Bloomfield, Professor of Management and Accounting, Johnson Graduate School of Management, Cornell University
- Laurence Ball, Professor of Economics, Johns Hopkins University
- Scott Sumner, Professor of Economics, Bentley University
After reading this page, Jared Bernstein of CBPP sent some feedback, which we’ve shared here.
|Active NSF Economics Awards 3-26-14||Source (archive)|
|Amir Sufi explains how old consumer debt holds back today’s economy||Source (archive)|
|Atkinson, Luttrell, and Rosenblum 2013||Source (archive)|
|Blanchard 1994||Source (archive)|
|Blinder 1994||Source (archive)|
|CBO 2013||Source (archive)|
|Economic Institutions, Behavior, and Performance||Source (archive)|
|English, López-Salido, and Tetlow 2013||Source (archive)|
|Farmer and Foley 2009||Source|
|Federal Reserve Annual Report: Budget Review 2013||Source (archive)|
|Furman 2014||Source (archive)|
|GAO 2013||Source (archive)|
|Institute for New Economic Thinking Inaugural Grant Report 2010-2011||Source (archive)|
|International Monetary Fund 2014||Source (archive)|
|Notes from a conversation with Joe Gagnon on February 4, 2014||Source|
|Notes from a conversation with Josh Bivens on February 6, 2014||Source|
|Notes from a conversation with Justin Wolfers on February 26, 2014||Source|
|Notes from a conversation with Laurence Ball on April 17, 2014||Source|
|Notes from a conversation with Mike Konczal on January 23, 2014||Source|
|Notes from a conversation with Robert Bloomfield on April 4, 2014||Source|
|Notes from a conversation with Robert Johnson on February 18, 2014||Source|
|Peter G. Peterson Foundation 2012 Form 990||Source (archive)|
|Plumer 2012||Source (archive)|
|The Social and Economic Effects of the Great Recession: Recent Awards||Source (archive)|
|Williams 2014||Source (archive)|