Chris asks “what can macroeconomic policy do?” The answer is above.
A one percentage increase in the unemployment rate is associated with a 6-7% decrease in initial wages for someone like me, who graduated at the trough of the Little Depression. The effects are persistent, with long term indirect effects including “poor job match, lower prestige placements, and fewer opportunities for training and promotion.” These numbers were compiled comparing those that graduated in the US during the 1982 employment trough with those that graduated during the 1988 employment peak and cumulatively this difference amounts to a net present value of $100,000.
The early 80s disinflation and subsequent expansion may well have been worth it. Inflation attacks the old and the poor, who tend to live on fixed incomes or are unable to inflation proof their savings. Plus, as Harberger argues, inflation makes it more difficult to workout what innovations are worthwhile or business ventures viable, lowering our economy’s growth potential.
However, the benefits of macroeconomic policy are unevenly spread. The recessions and unemployment which helped tame inflation cost some their jobs and some of those entering the labour markets a lifetime of underachievement. Today we seem to be suffering without purpose. That purposeless suffering is unevenly distributed, and along with the disabled, the poor, those looking to work like me are suffering too, and that suffering will continue for years to come.
Some of Chris’s comments on macro matter. He is correct that successful policy might help cause crises, Hyman Minsky pointed out stable growth and low inflation can cause financial exuberance which causes a panic rather than prosperity. Likewise, Kalecki is correct too, that there are those that gain from unemployment because unemployment lowers workers militancy and raises bosses power to pay them less.
That there are things that macro cannot do, like replace decaying capital equipment, or reskill the unemployed doesn’t mean we shouldn’t use it for what it is good for. But, if there is excess demand for safe financial assets, somewhere safe to place your savings, then an expansionary macro policy, deficit spending by solvent governments like the – US, UK, Germany, France, Japan – is a much more effective way of increasing their supply than any micro policy.
However, this doesn’t mean we shouldn’t push for the best macro policy possible. If there are those that gain from suboptimal macro policy then we should make sure it is as difficult as possible for them to succeed, that means pushing for full employment. If finance poses a threat to the real economy then perhaps it needs to be repressed so that it has a smaller effect on it. Firms’ reluctance to invest is worrying, but returning demand for currently produced goods and services would be a good way to convince them investing is a good idea.