Simon Wren-Lewis says something quite similar to my own view about the trouble with macroeconomics: it’s mostly political. And although Wren-Lewis bends over backwards to avoid saying it too bluntly, most – not all, but most – of the problem comes from the right.
If this sounds familiar, if it reminds you of the problem of partisanship in U.S. politics, it should. There are close parallels, as well there might be, since the trouble in macro is in effect a symptom of this wider political war. And there’s another parallel: many of those decrying the conflict within macro without facing up to the real sources of that conflict are playing the same unhelpful role being played by fanatical centrists within the punditocracy. (And no, “fanatical centrist” is not an oxymoron).
By now, the centrist dodge ought to be familiar. A Very Serious, chin-stroking pundit argues that what we really need is a political leader willing to concede that while the economy needs short-run stimulus, we also need to address long-term deficits, and that addressing those long-term deficits will require both spending cuts and revenue increases. And then the pundit asserts that both parties are to blame for the absence of such leaders. What he absolutely won’t do is endanger his centrist credentials by admitting that the position he’s just outlined is exactly, exactly, the position of Barack Obama.
The macroeconomics equivalent looks like this: a concerned writer or speaker on economics bemoans the state of the field and argues that what we really need are macroeconomists who are willing to approach the subject with an open mind and change their views if the evidence doesn’t support their model. He or she concludes by scolding the macroeconomics profession in general, which is a nice safe thing to do – but requires deliberately ignoring the real nature of the problem.
For the fact is that it’s not hard to find open-minded macroeconomists willing to respond to the evidence. These days, they’re called Keynesians and/or saltwater macroeconomists. (Some devotees of Keynes claim that people like me aren’t really Keynesians – and while there are some serious grounds for the charge, part of the reason is precisely that we’ve treated Keynes as an inspiration to be modified in the face of evidence rather than as holy writ).
What’s the evidence that Keynesians respond to evidence? Just think of how the view we call Keynesian has evolved since the 1950s. Time was when Keynesians were highly skeptical about the effectiveness of monetary policy under any circumstances; evidence, including but not only Friedman and Schwartz, persuaded the school otherwise. The idea of the natural rate, that there was no long-run tradeoff between inflation and unemployment, was very much disliked by people like Jim Tobin, but accepted by nearly everyone after the experience of the 1970s.
More recently the revisions have tended to go in the other direction, with a revival of the concept of the liquidity trap in the light of Japan’s experience, and a renewed acceptance, again based on evidence, that wages are downwardly rigid – and hence that the natural rate hypothesis breaks down at low inflation. And there’s a widespread acceptance that we were paying too little attention to debt and the financial sector.
Would Keynesians have been willing to change their views drastically if the experience of the global financial crisis had warranted such a change? I’d like to think so – but we’ll never know for sure, because the basic Keynesian view has in fact worked very well in the crisis.
But then there’s the other side – freshwater, equilibrium, more or less classical macro.
Recent events have been one empirical debacle after another for that view of the world – on interest rates, on inflation, on the effects of fiscal contraction. But the truth is that freshwater macro has been failing empirical tests for decades. Everywhere you turn there are anomalies that should have had that side of the profession questioning its premises, from the absence of the technology shocks that were supposed to drive business cycles, to the evident effectiveness of monetary policy, to the near-perfect correlation of nominal and real exchange rates.
But rather than questioning its premises, that side of the field essentially turned its back on evidence, calibrating its models rather than testing them, and refusing even to teach alternative views.
So there’s the trouble with macro: it’s basically political, and it’s mainly – not entirely, but mainly – coming from one side. Yet this truth is precisely what the critics won’t acknowledge, because that would endanger their comfortable position of scolding everyone equally. It is, in short, the centrist dodge carried over to conflict within economics.
Do we need better macroeconomics? Indeed we do. But we also need better critics, who are prepared to take the risk of actually taking sides for good economics and against dogmatism.
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