Back on this side of the Pacific, but still not in a position to post.

The Theory of Interstellar Trade has now been published, 32 years late.

Meanwhile, more evidence that Chicago people can’t be bothered actually to read anyone else. Steve Levitt:

I did not think that Paul Krugman was still writing academic papers. Nor have I seen any evidence in the last decade that he still has any sense of humor.

In Korea, at the World Knowledge Forum. First up, a panel with Niall Ferguson.

Fun and games.

I’ve been getting some mail over yesterday’s column, with angry correspondents posting charts like this, showing government spending as a percentage of GDP, to claim that government spending has too surged:

Bureau of Economic Analysis

But if you look at the raw numbers on government spending, here’s what you see:

Bureau of Economic Analysis

Feel the surge!

What’s going on? Yes, that’s right: it’s what happens when you divide by GDP in a time of terrible economic performance. Spending hasn’t surged; in fact, it grew more slowly in the two years after Lehman collapsed than in the two previous years, despite a sharp rise in spending on safety-net programs. Instead, GDP growth has plunged.

Limited posting and delayed comment moderating for the next few days.

This year’s Diamond/Mortenson/Pissarides Nobel is for work on search models of unemployment. What’s that? And why does it matter?

Full disclosure: this is not an area I know as well as I should. But I think I know enough to give a quick read.

So, this line of research concerns the fact that many markets, and above all the labor market, don’t fit the classic supply-and-demand paradigm, in which prices quickly rise or fall so as to ensure that everyone who wants to buy finds someone willing to sell and vice versa. Instead, the labor market, or the housing market, is one in which heterogeneous sellers confront heterogeneous buyers, and it takes time and effort to find appropriate matches. That’s why the unemployment rate isn’t zero at “full employment”; it’s why structural unemployment is an issue.

This year’s Nobel is for economists who worked out the implications of this observation, both for empirical observation and for policy.

With regard to current concerns, probably the most relevant paper is Blanchard and Diamond on the Beveridge Curve — the relationship between job vacancies and unemployment.

What’s the moral of that paper? It shows that structural unemployment is a real issue, and that the volume of structural unemployment shifts over time. It also shows, however, that short-term movements in unemployment are overwhelmingly the result of overall shocks to demand — in effect, Keynesian business cycles.

And given the debate now underway about whether we’re mainly facing a rise in cyclical or structural unemployment, it’s definitely worth noting that they give us a simple way to make that distinction:

The economy, however, is subject to two types of shocks with quite different effects. Changes in the level of aggregate activity cause rates of job creation and job destruction to move in opposite directions, while changes in the intensity of the reallocation process cause them to move in parallel.

What do we see? Here’s some recent data from the Cleveland Fed:

Overwhelmingly, what we’ve seen is a simultaneous fall in vacancies and rise in unemployment, which tells us that this is an aggregate demand shock.

What about that uptick at the lower right? That worried many people, myself included. But we should have read Blanchard and Diamond more closely: they carefully explain why business cycles tend to produce counterclockwise spirals in the unemployment/vacancies relationship, so this was just what we should have expected.

Deeply relevant work. And by the way, for those of us in the modeling business, Peter Diamond’s work is breathtaking in its elegance — nobody cuts through the complexities with such grace.

A happy day for economic theory.

Just in case someone brings it up: yes, the last line of today’s column was taken with small modification from the classic Cary Brown article on fiscal policy in the 1930s. Too good a line not to use; not enough space to provide the cite.

To go with today’s column. I just couldn’t bear posting it the same day as Mozart.

My former colleague Peter Diamond, along with Dale Mortenson and Chris Pissarides, has won the Nobel. Richly deserved. The prize is for work on frictions in markets, which is very important stuff; but Peter, an incredibly profound thinker, has done much much more.

And yes, this is the same Peter Diamond whose nomination to the Fed board has been held up because of Republican doubts about his qualifications.

No particular reason to post this, but I felt like it.

OK, that’s weird. I just taped This Week, which included an interview with Christine Lagarde, the French finance minister. In her defense of austerity, she asserted that unemployment in France is down from 9.6 to 9.3. But I looked it up on Eurostat (pdf), which has French unemployment in August at 10.1, up from 9.6 a year ago.

Maybe she has somewhat different data — French concepts versus harmonized? was that a September number? — but one thing is clear: if the unemployment decline isn’t visible in the standard numbers, it can’t be that solid.

Oh, and are senior French ministers allowed to say “Holy Cow”? Doesn’t the Academy have a rule about that?

Via Yglesias, an interview with Laurence Meyer, in which he says

So I think we have two kinds of modeling traditions. First there is the classic tradition. I was educated at MIT. I was a research assistant to Franco Modigliani, Nobel laureate, and the director of the project on the large-scale model that was used at the time at the Federal Reserve Board. This is the beginning of modern macro-econometric model building. That’s the kind of models that I would use, the kind of models that folks at the Board use.

There’s also another tradition that began to build up in the late seventies to early eighties—the real business cycle or neoclassical models. It’s what’s taught in graduate schools. It’s the only kind of paper that can be published in journals. It is called “modern macroeconomics.”

The question is, what’s it good for? Well, it’s good for getting articles published in journals. It’s a good way to apply very sophisticated computational skills. But the question is, do those models have anything to do with reality? Models are always a caricature—but is this a caricature that’s so silly that you wouldn’t want to get close to it if you were a policymaker?

My views would be considered outrageous in the academic community, but I feel very strongly about them. Those models are a diversion. They haven’t been helpful at all at understanding anything that would be relevant to a monetary policymaker or fiscal policymaker. So we’d better come back to, and begin with as our base, these classic macro-econometric models. We don’t need a revolution. We know the basic stories of optimizing behavior and consumers and businesses that are embedded in these models. We need to go back to the founding fathers, appreciate how smart they were, and build on that.

My first reaction, on reading this, was to say that Meyer overstates the case — and he does, a bit. It has been possible to publish New Keynesian models in the journals, and these models do, I think, provide some useful guidance — if only as a consistency check on more ad hoc approaches.

But fundamentally Meyer is right. And it has been going on a long time. By the early 1980s it was already common knowledge among people I hung out with that the only way to get non-crazy macroeconomics published was to wrap sensible assumptions about output and employment in something else, something that involved rational expectations and intertemporal stuff and made the paper respectable. And yes, that was conscious knowledge, which shaped the kinds of papers we wrote. So you could do exchange rate models that actually had realistic assumptions about prices and employment, but put the focus on rational expectations in the currency market, so that people really didn’t notice. Or you could model optimal investment choices, with the underlying framework fairly Keynesian, but hidden in the background. And so on.

In my own case, the part of my work that intersected macroeconomics was always on the international side — and international macro kept in closer tough with Meyer’s “founding fathers” than the rest of the field. For example, we never stopped modeling and teaching fiscal policy, and hence never fell completely into the Dark Ages. But the reason, I think, was that focusing on the technical razzle-dazzle needed to model exchange rate and balance of payments issues allowed people like Maury Obstfeld and Ken Rogoff to sneak their Keynesian foundations in without attracting too much attention.

So yes: something has gone terribly wrong in macro. And I’m sorry to say that the crisis has only made people dig deeper into their positions.

After the Asian financial crisis of 1997-1998, it was often said that a key barrier to recovery was the uncertain state of property rights: so much debt had been run up during the boom, and there had been so many defaults in the bust, that it was no longer clear who owned anything. Plus, these countries lacked clear legal procedures, and in general suffered from insufficient rule of law. All this was said, of course, in a tone of superiority: we Americans had solved such problems.

Or maybe not. Reading Mike Konczal’s crystal-clear explanation of the mortgage/foreclosure mess, you have to say that Thailand and Indonesia 1999 had nothing on America 2010. You really have to wonder how all this gets resolved.

For new commenters: no obscenities, this is the Times. Also, to prevent trolls from hijacking the discussion, I have a length limit — trying to get it automated, but pending that, a quick and dirty rule of about 3 inches on my screen. So if you wonder why your comment didn’t make it, that’s why.

Oh, dear. Brad DeLong is right: the CBPP transcript (pdf) of Jan Hatzius, Marty Feldstein, and yours truly being gloomy does keep calling Marty “Feldman” instead.

Someone has a rotten brain! Destiny! Destiny!