HBO may have attracted millions with its “Game of Thrones” series, but economists recently attracted, well, not millions — maybe a few hundred nerds — with their Team Games: noisy and sometimes scary public disputes between opposing factions about economic prospects.

True, economists’ games have been rather lacking in sex and, at least until now, violence. The teams playing these games are also, I’m sorry to say, almost entirely devoid of beautiful people. But while I’m tempted to use the old line about how academic debates are so bad because the stakes are so small, these debates matter. Like John Maynard Keynes argued at the end of his masterpiece, “The General Theory of Employment, Interest and Money”, economic ideas can later have great real-world effects:

Practical men, who believe themselves entirely exempt from any intellectual influences, are usually the slaves of some dysfunctional economist. Madmen in authority who hear voices in the air distill their madness from some academic scribbler from a few years back.

A current case is the determination of central banks around the world to lower inflation to 2 percent. Why 2 percent? That goal came largely from academic research suggesting (probably wrongly) that inflation at that rate would be more or less optimal. But that fixation has since taken on iconic status, with monetary officials insisting that failure to achieve it would fatally undermine their credibility.

Which brings me to the controversies of the past few years.

In 2021, when inflation took off, the big debate was between Team Transitory – who argued that we mostly saw temporary disruptions from the Covid-19 pandemic that would disappear over time – and Team Permanent, who put the main blame on inflation. on the combination of large government spending and low interest rates. I was on Team Transitory, but as inflation went much higher for much longer than I imagined possible, I admitted I was wrong.

By the summer of 2022, however, a new dispute erupted. This pitted what we might call Team Soft Landing against Team Stagflation. Team Stagflation argued that lowering inflation would require years of high unemployment, just as it had in the 1980s. Here is a diagram from my May article on the subject:

Larry Summers, with admirable directness, suggested that we would need two years of 7.5 percent unemployment to bring inflation under control.

Team Soft Landing, on the other hand, argued that the 1980s were a bad model for our current situation and that we might well be able to lower inflation without severe unemployment.

Are we just talking about the same teams under different names? No and yes. The intellectual basis for the dispute about rising inflation was very different from that of the dispute about the possibilities of lowering inflation. But the membership of each team was almost the same people.

This says something uncomfortable about the economics profession: We are supposed to be doing dispassionate analysis, but the fact that most economists are consistently either inflationary optimists or inflationary pessimists, whatever the circumstances suggests that one suffers from motivated reasoning. (But not me. I am, of course, totally objective. Okay, I sometimes catch myself engaging in motivated reasoning. But I try to fight it.)

In any case, despite the almost identical lists of players, the debate between Team Soft Landing and Team Stagflation differs from the previous debate in at least two important ways.

First, this time the optimists were right. I’ve seen some attempts to sugarcoat the wrongness of Team Stagflation’s predictions, but seriously, if you were to say that we’d need years of high unemployment to tame inflation, the fact that inflation has come down a lot without any rise in unemployment means you’re really, really wrong understood it.

Somewhat ironically, some members of Team Stagflation have argued that the decline in inflation is not fundamental, that it reflects, well, temporary factors. And some of it does. But there are several measures out there that try to extract underlying inflation from the temporary noise, and while they differ in detail, they all tell the same story. For example, here is the New York Fed’s Inflation Gauge Below:

Overall, indicators of underlying inflation suggest that it is still above the Fed’s target, but it has come down a lot, at no cost in higher unemployment. Team Stagflation was wrong.

Second, and this is a bit more subtle, in the second phase of the Team Game the two sides reversed roles in their relationship to standard economic models.

In 2021, textbook economics suggested that a large fiscal stimulus like the US Bailout, applied to an economy where unemployment had already fallen, would lead to overheating and inflation. I and others managed to convince ourselves that this time would be different – that the overheating would be mild and the inflationary impact modest. Team Permanent followed the book, and were right.

In 2022, by contrast, Team Stagflation was the side that threw the book away.

After all, we have a standard economic theory of why stagflation occurs: High inflation can persist despite high unemployment if continued inflation is embedded in expectations. That was the case in 1980, but very much not the case in 2022. Here’s a chart from a newsletter I published last August:

I was actually shocked when Summers and others started invoking 80s type sacrifice ratios to justify their evil predictions. It seemed obvious, from textbook economics, that their logic did not apply to the situation in which we found ourselves. And sure, no.

That said, even I was surprised at how much disinflation we achieved at no apparent cost. How did that happen?

One possible answer is that Team Transitory was actually mostly right, except that “transitory” meant years, not months. This is what Matt Klein, who was more pessimist than optimist about inflation, just wrote: “Most of the excessive price increases of 2020-2022H1 were attributable to disruptions associated with the pandemic … From this perspective, it was never necessary squeeze out inflation from the economy as a whole. It just faded away, just like many of us said it would.”

An alternative answer is that the Phillips curve is non-linear — or, to put it in something more closely approaching English, when the economy heats up, you don’t need a large increase in unemployment to produce a large drop in inflation. Here is a chart from a recent one San Francisco Fed paper:

These stories don’t have to be mutually exclusive. There is probably some truth to both of them. And none of them tell us that we are guaranteed to continue to see “untainted” disinflation – falling inflation at no cost in higher unemployment.

So this story is not over. What is clear from the Game of Teams is that so far we have seen two big misjudgments: Team Transitory greatly underestimated the dangers of inflation in 2021, even if it may be getting some belated vindication now. Team Stagflation has vastly overestimated the costs of bringing down inflation, although we still don’t know if we can get back to 2 percent without some cost.

These big mistakes have led to some attacks on mainstream macroeconomics. But what I find striking is that both mistakes came from no following the textbook. Team Transitory found reasons to disbelieve the standard proposition that large fiscal stimulus can cause inflation. Team Stagflation, for some reason, chose to ignore the standard view that inflation persists despite high unemployment only because expectations of high future inflation have become embedded in the economy.

Or to put it another way, if you want to understand how much economists have really gotten things wrong in recent years, the problem may lie less with economics as a discipline than with economists as people.

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