Transaction Costs

In the late 70s, Robert Lucas - the true father of the "Chicago School" - came along and revolutionized macroeconomics. One of his biggest points was that not only was it difficult, if not impossible, for governments to smooth out the business cycle, but that they shouldn't even try. He looked at a long-run graph of U.S. GDP and noticed that even the Great Depression didn't move us too far off the trend. "The trend is everything," Lucas wrote. Ups and downs just aren't a big deal.

Of course, that's ignoring "transaction costs," as all business-cycle models do. What are transaction costs, you ask? Jeff Madrick gives us an idea:

"I think people don't understand how many lives can be ruined in a very serious recession. Not just a pause in your career. But ruined. People losing their houses, people losing their jobs, careers ended...marriages broken."

But of course, those things must not matter, because they're not in any mainstream model. They're not in any mainstream model because we didn't put them there. And because they're not in the model, we economists - at least, those of us who realized what a genius Robert Lucas was - continue to blithely tell the government never to get involved in the economy, and to sit on its hands every time a recession comes around.

Truly, a triumph of Science.