Robert Hall (economist) - Ideas

Ideas

Hall has a broad range of interest, including technology, competition, employment, policy and the such.

• Hall is perhaps most famous for co-originating the flat tax with Alvin Rabushka. They co-authored a book with the same name. Hall and Rabuska often act as advisors to countries in Eastern Europe that wish to adopt the flat tax.

• In 1978, Hall changed the direction of research on consumption by showing that under rational expectations, consumption should be a martingale. Prior to this time, influenced by Milton Friedman's permanent income hypothesis under adaptive expectations, economists had expected past income to affect current consumption by altering individuals' expectations about their permanent income. Instead, Hall's theory pointed to a relation between current consumption and expected future income, which implied that consumption should only change when there is surprising news about income. This, in turn, implies that changes in consumption should be unpredictable (which is called the 'martingale' property in statistics). Hall surprised the macroeconomic profession by providing evidence that consumption was, in fact, unpredictable. Subsequent evidence has shown that consumption is more predictable than he claimed, but ever since Hall's paper most empirical research on consumption has taken the martingale case as the baseline and focused on what mechanisms could cause deviations from martingale consumption.

• In describing if marginal cost is procyclical, Hall argued that the key is knowing the productivity shocks in real business cycle theory are actually the result of monopoly power. Because monopolies can sell where their price exceeds marginal cost, they tend to have excess capacity. Thus, as demand increases, the excess capacity shrinks and marginal cost approaches price and in that way it is procyclical. This idea captures the distinction between real productivity and productivity growth; while there is greater productivity (less is being wasted), workers aren't becoming more productive.

• To explain sticky wages, Hall emphasizes the importance of costs born by the employer. Firms benefit when times are good but are penalized when times are slim (because wages are usually fixed) and they pay for searching for a good employee/employer match. Thus, employers are more risk averse in hiring and have less incentive to engage in search. Hence employers simply do not hire in downtimes. This idea is reinforced because workers cannot collectively signal that they would work for less in downtimes, wages have a tendency to stick upwards.