Macroeconomic Priorities

Macroeconomics was born as a distinct field in the 1940s, as a part of the intellectual response to the Great Depression. The term then referred to the body of knowledge and expertise that we hoped would prevent the recurrence of that economic disaster. My thesis in this lecture is that macroeconomics in this original sense has succeeded: Its central problem of depression-prevention has been solved, for all practical purposes, and has in fact been solved for many decades. There remain important gains in welfare from better fiscal policies, but I argue that these are gains from providing people with better incentives to work and to save, not from better fine tuning of spending flows. Taking U.S. performance over the past 50 years as a benchmark, the potential for welfare gains from better long-run, supply side policies exceeds by far the potential from further improvements in short-run demand management. My plan is to review the theory and evidence leading to this conclusion. Section I outlines the general logic of quantitative welfare analysis, in which policy comparisons ∗Department of Economics, The University of Chicago, 1126 East 59th Street, Chicago, IL 60637. I am grateful for discussions with Fernando Alvarez, Gadi Barlevy, Lars Hansen, Per Krusell, Ellen McGrattan, Chris Phelan, Edward Prescott, Esteban Rossi-Hansberg, Tom Sargent, Matthew Shapiro, Tony Smith, Nancy Stokey and Tom Tallarini, and for the able assistance of Adrian Kats and Mikhail Golosov.