On vibecession and progressive thinking about the macroeconomy

The numbers for the American economy are finally out, with a delay of two months. Growth was 4.3 percent in the third quarter, which is fundamentally related to an expansion of consumption. Investment is flat (a bit negative actually, so much for the AI investment boom), and government spending is positive (but not much), mostly defense. In the previous two reports it was barely positive. There is also a contraction of imports. Normally, that would imply a slowdown of the economy, but in this case part of it might be associated with the tariffs.

At any rate, what I had suggested all along throughout the year, in many debates, often against the grain, was that we were not on the verge of a recession because of tariffs, nor that tariffs would be inflationary. And I was correct. What happened is what I had suggested: we are seeing a continuous slowdown that had already started under Biden, simply after the expiration of many of the measures associated with the Pandemic and the fiscal expansion that followed it. Tariffs have not had a significant impact on quantities, and only a limited impact on prices. If they had an effect, it would be a one-off increase in the level of prices, not in the rate of growth of prices, meaning inflation. And inflation remains subdued.

There are a couple of things worth pointing out. First, there is this whole discussion about a “vibecession,” or whatever people want to call it. Most of the discussion, including this piece in the Financial Times, is not really about quantities. A recession is a decline in the level of output and employment. Employment numbers are not great, they reflect the slowdown of the economy. The last report in September, which I discussed here, does suggest that the economy is slowing down. Those things are connected. One of the few laws we have in macroeconomics, Okun’s law, tells us that a slowdown in the economy should be reflected in a softening of the labor market. But unemployment remains relatively low, so we are not in a recession, for what it’s worth.

The vibe is not one of recession, and it is also not really about inflation (really). The graph above from the Financial Times suggests that wages grew less than rents (shelter), largely due to high mortgage rates that feed into higher rental prices. Wages also grew less than food prices. So food and shelter are supposedly getting more expensive. But the wages shown there are average wages. Once you look at the wages of non-supervisory workers, those seem to be growing more or less at the same pace, still above average CPI inflation, and particularly close to rental inflation.

Wages at the bottom have not really lost much (red line). They did lose a little during the pandemic, but they recovered fast enough and have been growing at roughly the same pace as inflation.

Of course, there is a perception that things are not good, and things are not good for working-class people, but that does not mean that the problem is inflation. By suggesting that the problem is inflation, something Trump used against Biden, progressives miss the point. I have discussed how Bidenomics had been good in several respects, with many policies favoring working-class people, although many of them expired before the end of his term. The perception that things were not good was not because of inflation, but because the quality of jobs and the conditions facing the working class have been deteriorating for a generation, going back to the 1970s.

For a long period, productivity gains have not translated into better living standards or higher wages for people at the bottom. This is not a recent phenomenon. Anger has increased over time, and in particular after the failure to redress the injustices and unfairness of the system following the global financial crisis of 2007–2009, the so-called Great Recession. There was great hope that Barack Obama would bring a different kind of politics and economic policy, and the disappointment contributed to the backlash we see today.

People are now angry at Trump because of affordability issues, but this reinforces the idea that if Dems win and bring in someone not particularly different from Obama or Clinton, although Biden did move to the left of them, they may face the same problems. The issue is NOT inflation. I want to be absolutely clear: the issue is NOT inflation. That is what my graph above indicates.

The issue is the long run stagnation of wages, the quality of jobs, about future prospects, and about the inability of Dems to show that people will have a better quality of life in the future. Addressing this requires policies that promote higher minimum wages, that would have demonstration effects that would help lift wages more broadly; policies that tax the wealthy at higher rates so they are seen as contributing proportionally to the system; and policies that provide accessible healthcare. Healthcare in the United States is incredibly expensive and of poor quality compared to other advanced nations. The United States is the only advanced country without a single-payer national public health system, which makes it look, frankly, like an underdeveloped nation in this respect.

Also, progressives overemphasis on inflation will have a negative impact on macroeconomic debates, reinforcing very conventional views about how the economy works, as I noted in a piece I wrote for ProMarket, the magazine of the Stigler Center. This focus misses the real dangers facing the American economy. The real danger, as I have argued all year, is the Federal Reserve and its interest rate policy.

The slowdown of the economy suggests that the real issue is high interest rates. Shelter prices, which are the highest component in the graph, are being pushed up by high mortgage rates. These impact consumption more directly than any other mechanism. High interest rates may cause a recession in the United States, and the Fed needs to reduce rates much faster than it is willing to do (or at least that;s what it seems). Ironically, these strong GDP numbers may lead the Fed to keep rates relatively high because of the danger of inflation.

This raises another problematic issue: the idea that anything Trump says must be wrong (that's often correct). However, Trump is correct in arguing that interest rates should be lower. He is also correct in saying that there is no particular reason why the Fed should be independent of political power. I would not argue for direct presidential control, but the Fed should be more accountable to Congress, and to the people. Fiscal policy is clearly political, it involves the executive proposing a budget and Congress approving it. The idea that monetary policy is not political, should not be politicized, and should not be subject to democratic scrutiny is deeply entrenched in conventional thinking, but there is no reason it should be. Why is there no representative of labor on the Federal Open Market Committee? Someone who could point out, for example, that high interest rates raise mortgage rates, push up rents, and keep inflation higher. That it affects access to credit and consumption.

In this sense, progressives have played a role in reintroducing very conventional ideas into macroeconomic discussion: the idea that inflation is more central than employment and activity in policy matters, because it counts more for electoral purposes, and that the central bank must be independent of political power.

That’s it for the year. I don’t think I’ll blog again until 2026, so happy holidays to all!

The future of heterodox graduate programs

I wanted to comment on recent developments affecting heterodox economics programs in the United States, developments that relate directly to my own experience at two such institutions: the graduate program at the University of Utah and the PhD program at the New School for Social Research, where I completed my doctorate almost twenty-seven years ago. I should add that my colleague Geoff Schneider is organizing a panel on the topic at the forthcoming ICAPE conference, in which both of us will be joined by Katherine Moos to discuss the issue.

Although these two programs, and other heterodox programs, are often lumped together, their histories could not be more different.

The University of Utah’s economics program emerged as something of a paradox. Its heterodox character dates back to the 1950s, shaped by broader political and institutional forces. On the one hand, the Red Scare and McCarthyism led to the persecution of left-of-center scholars, those deemed communist or socialist. On the other, the Lavender Scare targeted LGBTQ individuals in academia and public life. At the same time, the University of Utah sought to distance itself from a narrow association with the Church of Jesus Christ of Latter-day Saints and to attract a more secular and religiously diverse faculty. These dynamics created space for the hiring of Marxist scholars, some of whom arrived from Berkeley and elsewhere as they fled persecution. Utah thus became, somewhat unexpectedly, a refuge.

This coincided with the broader presence of Institutional economists in mid-century American academia. Together, these conditions allowed for the formation of several generations of heterodox economists. Figures such as Kay Hunt, who earned his PhD at Utah, later held tenure at UC Riverside, and eventually returned to Utah, exemplify the program’s intellectual lineage. [Kay used to tell the story that when Joan Robinson visited Utah for the Tanner Lectures on Human Values, he was the only person she requested to talk to, I suppose to the chagrin of his orthodox colleagues]. 

For over fifty years, Utah sustained a solid heterodox economics program, which was characterized by an emphasis on the history of economic ideas, at least until Kay retired and I left. That era now appears to be ending. The reasons are well-known and have been discussed on this blog before, particularly in connection with the expansion of business schools. Roughly two decades ago, the University of Utah’s business school began hiring its own microeconomists to teach economics internally. That small group gradually grew into a parallel economics department. As in the case of Notre Dame, this duplication reduced enrollments in the original economics department. In a conservative political environment, Utah being a deeply red state, this provided an opportunity for administrators to push for the consolidation of economics under the aegis of the business school.

At the end of the day, what is at stake is ideology. Business schools tend to promote a free-market worldview that, in my view, has no proper place in a university. I used to joke with my students in Utah that business schools are like strip clubs: they may have a role in society, but not in a university. That quip aside, there is a serious institutional problem here, one I have addressed before in posts on management education [see above link].

The New School presents a very different case. The origins of its Graduate Faculty lie in the University in Exile, created to shelter scholars fleeing Nazism. However, the New School did not become a distinctly heterodox economics hub until much later [see this post on the history of the New School, and this on my views on heterodox economics; on the latter see also this paper]. It was really in the late 1960s that Marxism and other heterodox traditions began to leave a strong imprint.

Because of its location in New York and the prominence of many of its faculty, the New School became arguably the most visible center for the formation of heterodox economists worldwide. Cambridge was never fully heterodox; UMass Amherst, though larger and extremely important, lacked the same visibility; and the reputations associated with the New School carried particular symbolic weight.

The recent cancellation of the New School’s PhD program and its uncertain future are, in my view, primarily the result of financial and administrative decisions rather than a targeted ideological attack. For decades, the administration pushed the Graduate Faculty to be financially self-sufficient, despite the obvious fact that graduate programs almost never are. Typically, undergraduate programs or professional master’s degrees act as cash cows that subsidize PhDs. This reality was never fully accepted. Compounding the problem, the New School never provided substantial financial support to PhD students, and living in New York is extraordinarily expensive. As a result, the program’s importance was more symbolic than material in the long-term reproduction of heterodox economists.

I do not think these developments mean that heterodox economics is disappearing from the United States. Strong programs remain, notably at UMass Amherst and the University of Missouri–Kansas City, both of which in many ways seems to be doing quite well. There are also occasional heterodox economists who emerge from conventional programs, often thanks to a pluralist advisor. Nor do I see these closures as evidence of a heightened, coordinated attack on heterodox economics as such. Rather, they reflect the peculiar institutional histories of these two departments. That said, they are undeniably a blow and will have real effects on the heterodox groups.

There is also a broader structural challenge that affects all of higher education, but hits heterodox programs harder. The United States has reached a demographic peak in high-school graduates, and institutions now face a “demographic cliff.” Fewer students, rising costs, and the mistaken perception that college education is no longer relevant will reduce faculty hiring overall. Since heterodox programs are already more vulnerable, they will feel this pressure more acutely.

Ironically, heterodox economists are often better prepared to teach economics as political economy, making it more accessible and intellectually engaging for a broader public. Yet it is precisely in liberal arts colleges and public universities, where such strengths matter most, that job openings are likely to shrink. These are serious challenges we will have to confront going forward.