Book Review: Olivier Blanchard's Macroeconomics, 5th Edition

I'm currently the TA for a course using Olivier Blanchard's macro book. Olivier is, of course, the Chief Economist of the IMF and was formerly the head of the department of economics at MIT (Daron Acemoglu's department). While I have not read the entire book at this point in time, I will try to update this review as I read more. Here are my current thoughts about the book (which I shall update):

1) Blanchard should be ashamed at price-gouging students in this manner ($135 new). I think it says a lot about who he is as a person and scholar. To me, ripping off students is a question of character and class. Mssrs. Blanchard apparently has neither. Tells me he's just in it for himself and he doesn't care about broader issues or teaching economics. This is a rent he believes he is entitled to b/c of his department affiliation (MIT) and his role at the IMF. (Of course, this is a society-wide problem and he is not the only one guilty of over-priced textbooks. Doesn't make it right though.)

2) The book is filled to the brim with typos. This tells us he didn't think carefully about the book or its contents. For example, check out the blue box on p. 102: "Instead, the tax cuts were permanent..." two sentences later begins again "Instead, the tax cuts were permanent..." OK, Olivier, we got it the first time. I've noticed several other obvious typos of this sort even though I'll confess I have not read that much of the book yet.

3) In Chapter 5 on the IS-LM, I think it was a questionable idea to detach the IS-LM model from the entire historical discussion of the Great Depression which led to the theory. He should have shown that, during the Great Depression, when the US found itself with close to zero nominal rates, Hoover decided to increase taxes in order to balance the budget, shifting the IS curve left and worsening the depression for no good reason. (Instead, Blanchard just leaves students with the one example that increasing taxes leads to lower income... In normal times, increasing taxes is counteracted by the Fed cutting rates, having no impact on income but reducing the long-term budget... This leaves students with the wrong impression.) Hoover later recanted of course, saying he should never have raised taxes nor let the economy burn. So the lesson is clear, and it is a lesson every student of economics should know -- why skip it? Given that 95% of Republicans recently voted for a balanced budget in a liquidity trap, skipping this history lesson is not inconsequential...

4) Yes, yes, I know he does go on to discuss the Great Depression and liquidity traps generally later in the book. I think it is really worth noting that he does an exceedingly poor job both with the Great Depression and in dealing with Japan. My problems with this section are:

i) the statement on p. 477 that "There is clearly nothing monetary policy can do in this case [i.e., a liquidity trap] to raise output..." This is wrong -- printing money to retire debt can at least reduce the price of a currency, increasing net exports. In addition, there is more than one interest rate in an economy -- the Fed can always buy long-term bonds. These are fairly fundamental, enormous mistakes which happen to be consequential at present. That this guy is in a leading role at the IMF is not a good thing for the world economy...

ii) His explanation of why deflation stopped during the Great Depression is not quite satisfactory. He lists three things: a) the NIRA, b) output growth, and c) perception of "regime change". To his credit, in (c) he goes on to mention Roosevelt's decision to leave the gold standard, but he did not mention that this gave room for the Fed to cut interest rates w/out having to worry about defending an over-valued peg. Hence, it was really Hoover's policy to stay on the gold standard which led to high interest rates... He also should have at least mentioned how misguided the economic ideology which ruled during the Great Depression, of how Hoover had foolishly thought that the budget must be balanced, and the when Roosevelt came into office, he at least ran some deficits and did increase spending. (Yes, these spending increases were only a small part of the recovery, but they were part of the story.) He needs to add that even Roosevelt's Treasury secretary believed in the preposterous idea that budgets should be balanced in a recession... As far as I know, Blanchard nowhere mentions the role of ideology. Lastly, he needs to talk about Roosevelt's bank holiday and the FDIC's role in restoring confidence. Stopping the bank runs was a big factor in stopping deflation -- I don't know how Blanchard doesn't know this. Lastly, the NIRA, by itself, likely would have done nothing, and b) was likely caused by ending deflation as much as it was the other way around. And I have yet to see Blanchard mention that, in the end, it was large increases in Government spending which ended the GD once and for all -- WWII. All in all, Blanchard's discussion of the Great Depression leaves much to be desired.

iii) As bad as his history-telling on the GD is, his section on japan may be worse. His general conclusion was that Quantitative Easing does nothing, but that having an inflation target is what helped Japan in the early 2000s. So, basically, imagine you've got a fat, lazy friend who wants to be thin. If your friend declares to you that he's going to lose 50 pounds, but doesn't do anything to change his eating habits or start working out, why should you believe him? Or, in other words, when the Japanese Central bank announced that it was "committed" to creating inflation, without actually, you know, doing anything to create inflation, why would anyone believe it? If they were rational agents, of course, they wouldn't -- Japan has had deflation every year since 1994, and still has deflation. Blanchard wrote, excitedly, that since the BoJ's announcement in 2003 "Although the current inflation rate is still negative, inflation is now expected to become positive in the future, and the long-term interest rate has fallen." (p. 489) Wow was Olivier Blanchard wrong about inflation in Japan!!! (It's hard to imagine how anyone could be more wrong about anything, no?) At the same time, he was apparently ignorant of two other events in the 2000s -- Japan's flirtation with Quantitative easing -- it bought $300 billion of it's own debt, and then, after exports increased, ending its recession briefly, it was afraid of "hyperinflation" so it sold its debt back, resulting in more deflation and recession.

I just find it really inexcusable that a tenured Macroeconomist, anywhere, much less at MIT can get both Japan and the Great Depression so wrong. It's as if Blanchard literally can't be bothered to provide the minimal amount of facts for students to form any meaningful lessons. And it's hard not to come to the conclusion that the reason is that Blanchard himself has taken no meaningful lessons from either Japan or the Great Depression. And you know what they say about societies who don't know their history...

In conclusion, this book is not careful enough to assign to undergraduates, and it is certainly not insightful enough to justify the price. It is the latest chapter on the Dark Ages of Macro...


UPDATE: I just took a look at the section on economic growth, and it is just horrible. Awful. This guy has no business writing a textbook. First, on page 213, he writes: "From about 1500 to 1700, growth of output per person ... was ... around .1% per year." But he must have gotten this from the data Maddison made up, b/c, due to the Black Death, there was a dramatic drop in living standards in Europe over this time period. 1500 was a plague-induced golden age. On page 214 he writes "For much of the first millennium, and until the fifteenth century, China probably had the world's highest level of output per person." No, no, no, no, no. During those centuries, China was likely the most technologically advanced. In a malthusian world, this says nothing about income per person. The highest incomes per person would certainly have been hunters-n-gatherers. This is just entirely wrong-headed. Blanchard simply does not know anything about economic history.

Also, in the section on wage inequality, he basically just floats two theories: Increases in international trade, and skill-biased technological change. Unfortunately, not all rich countries which have traded more have registered increases in inequality since 1980, so neither of these theories match the bare minimum a real scholar might require for a theory to be successful. For example, Japan and Europe other than the UK also have experienced much more trade since 1980, but no change in inequality. Thus the theories Blanchard suggests can be safely discarded.