Macroeconomics in the Crossfire (Again)

By Pia Hüttl, an Austrian citizen and an Affiliate Fellow at Bruegel. Originally published at Bruegel

What’s at stake: After a first go at macroeconomics and its flaws a year ago, Paul Romer kicked off the debate again with a recent essay on how macroeconomics has gone backwards. The way that this debate, along with the debate of the role of economics in general, feeds into today’s election woes, has also attracted attention in the blogosphere.

The Macro Debate between Past Beliefs and the Lack of Data

Romer kicked off the debate in an essay, stating that for more than three decades, macroeconomics has gone backwards. He finds that the treatment of identification now is no more credible than in the early 1970s, but escapes challenge because it is so much more opaque. Macroeconomic theorists dismiss mere facts by feigning an obtuse ignorance about such simple assertions as “tight monetary policy can cause a recession.” For Romer, the Nobel Prize-winning crop of macroeconomic theorists who transformed the field in the late 1970s and 1980s — Robert Lucas, Edward Prescott and Thomas Sargent –  are the main people to be held responsible for this this development. Their models attribute fluctuations in aggregate variables to imaginary causal forces that are not influenced by  actions that any person takes. Especially when it comes to monetary policy, the belief that it has no or little effect on the economy is disturbing, or as Romer puts it:

“The trouble is not so much that macroeconomists say things that are inconsistent with the facts. The real trouble is that other economists do not care that the macroeconomists do not care about the facts. An indifferent tolerance of obvious error is even more corrosive to science than committed advocacy of error.”

While Noah Smith agrees with Romer’s general message, he points to the fact that most of the profession does believe in the power of monetary policy by now. The dominant form of macroeconomic models for at least a decade has been the so-called New Keynesian models, which say that interest rates play a very large role in stabilizing the economy. These are also the dominant form of the modern macro model in use in  central banks. New Keynesian theorists such as Greg Mankiw, Michael Woodford and Olivier Blanchard have not yet received Nobel prizes, but their views and ideas are thriving in the marketplace of ideas. Noah Smith identifies the lack of good evidence as the real fundamental problem with macroeconomics. Because data is sparser and weaker in macro, theorists have a natural incentive to rely on their own pre-existing beliefs, on generally accepted practice and on the wisdom of authorities.

Nick Bunker points out that in a recent speech, the Federal Reserve Chair Janet Yellen raised important questions about  macroeconomic research in the wake of the Great Recession. The first area of interest is the influence of aggregate demand on aggregate supply. Yellen points to research that increasingly finds so-called hysteresis effects in the macroeconomy. Hysteresis, a term borrowed from physics, is the idea that short-run shocks to the economy can alter its long-term trend. One example of hysteresis is workers who lose jobs in recessions and then are not drawn back into the labuor market but rather permanently locked out, therefore increasing the long-term unemployment rate. Another open research question that Yellen raises is the influence of “heterogeneity” on aggregate demand. Ignoring this heterogeneity in the housing market and its effects on economic inequality seems like something modern macroeconomics needs to resolve. Yellen raises other areas of inquiry in her speech, including better understanding how the financial system is linked to the real economy and how the dynamics of inflation are determined. Nick Bunker concludes by stating that perhaps it is time for each of these questions to rise on the collective research list so that policymakers have better vantage points as they assess the effect of inequality on economic growth and stability.

Simon Wren-Lewis identifies yet another factor which lies at the heart of macroeconomic criticism: ideology. As an example he quotes Real Business Cycle (RBC) research from a few decades ago. That was only made possible because economists chose to ignore evidence about the nature of unemployment in recessions. There is overwhelming evidence that employment declines in a recession because workers are fired rather than choosing not to work, and that the resulting increase in unemployment is involuntary (those fired would have rather retained their job at their previous wage). Both facts are incompatible with the RBC model. Why would researchers try to build models of business cycles where these cycles require no policy intervention, and ignore key evidence in doing so? The obvious explanation is ideological. While Simon Wren Lewis cannot prove it was ideological, it is difficult to understand why one would choose to develop theories that ignore some of the existing evidence, in an area that lacks data. There is a reluctance among the majority of economists to admit that some among them may not be following the scientific method but may instead be making choices on ideological grounds. This is the essence of Romer’s critique.

The Ideology in Economics and Today’s Woes

Over at critical macro finance, Jo Michell disagrees with Wren-Lewis when he chooses to draw a dividing line between those who use a sticky-price New Keynesian DSGE model and those who use a flexible-price New Classical version. Simon Wren-Lewis suggests that the beliefs of the latter group are ideological, while those of the former group are based on ideology-free science. This strikes Jo Michel as arbitrary. Simon’s justification is that, despite the evidence, the RBC model denies the possibility of involuntary unemployment. But the sticky-price version – which denies any role for inequality, finance, money, banking, liquidity, default, long-run unemployment, the use of fiscal policy away from the ZLB, supply-side hysteresis effects and plenty else besides – is acceptable. Instead, both have an ideological bias – the reason being that the standard New Keynesian model is not a Keynesian model at all – it is a monetarist model. Aside from the mathematical sophistication, it is all but indistinguishable from Milton Friedman’s ideologically-driven description of the macroeconomy. In particular, Milton Friedman’s prohibition of fiscal policy is retained with a caveat about the zero-lower bound in recent years. To argue otherwise is to deny Keynes’ dictum that ‘the ideas of economists and political philosophers, both when they are right and when they are wrong are more powerful than is commonly understood.’

Ann Pettifor reflects more generally on the fact that the Brexit vote is but the latest manifestation of popular dissatisfaction with the utopian ideal of autonomous markets beyond the reach of regulatory democracy. Brexit represented the collective, if (to her mind) often misguided efforts of those ‘left behind’ in Britain to protect themselves from the predatory nature of market fundamentalism. In a Polanyian sense, it is a form of social self-protection from self-regulating markets in money, trade and labour. In her opinion, with the historic Brexit vote, the British people rejected this flawed brand of economics — and in particular the dominant liberal finance narrative. And they did so because the hardship they are experiencing—repressed wages, diminished public services, rising housing costs and shortages, and insecure employment—is indirectly a consequence of the theories and policies of the mainstream economics profession.

This gets backing from other economists, among them Kevin O’Rourke, who argues that after the Brexit vote, it is obvious to many that globalisation in general, and European integration in particular, can leave people behind – and that ignoring this for long enough can have severe political consequences. He argues in a recent  piece that this fact has long been obvious. As the historical record demonstrates plainly and repeatedly, too much market and too little state invites a backlash. Markets and states are political complements, not substitutes.

Print Friendly, PDF & Email
Tweet about this on TwitterDigg thisShare on Reddit0Share on StumbleUpon0Share on Facebook0Share on LinkedIn0Share on Google+0Buffer this pageEmail this to someone

46 comments

  1. PlutoniumKun

    I can recall my very first lecture in Macroeconomics back in the mid 1980’s when the Prof. freely admitted that macro had very little real world validity as the models simply didn’t match the real world data. He advised us to focus on economic history if we wanted to understand how the real world worked. That was the only useful thing I learned from three years studying the subject.

    1. Foppe

      Trouble is, once people have learnt them, they apply macro models to history too, and complain that the data don’t fit the model. Something like this affects the ‘historical analysis’ of the workings of the (late) Roman (and early medieval) economy, where history profs constantly lament the fact that coinage didn’t exist in most of the roman empire, as though its invention is a great feat, and its presence a marvel, rather than it being a function of the presence/absence of armies & ‘international’ merchants, while the notion that money!=coinage, and that there are alternatives to barter that don’t involve coins — accounting/tallying — eludes them entirely. (See Debt.)

      1. PlutoniumKun

        The sole economist who called the Irish boom and crash correctly several years before it happened was famously a specialist in studying medieval European economics. He was once asked when he knew a crash was certain, he replied that it was when he heard some of his ex students who were employed as bank economists pontificating on the radio about how there was no reason to expect anything but a ‘minor correction’.

        1. Procopius

          Sounds like the anecdote about John D. Rockefeller (the elder) who famously got out of the stock market in 1929 before the crash. When asked how he knew a crash was coming he replied that it was when his shoe-shine man gave him a tip on the market.

    2. Dr. George W. Oprisko

      I cut y teeth on computer models of rainfall – streamflow relationships.
      We always started with constants derived from experimental or theoretical bases
      Recently I was asked to critique a paper written by a colleague which reported results of a numeric model of plankton distribution in the Arabian Sea. In this paper his original constants based on known relationships gave results which did not agree with reality, so instead of looking for mistakes in his fundamentals, he massaged the constants until he got agreement. When I pointed out that he neglected the Somali Current, he was livid. That is, instead of thanking me for pointing out a glaring deficiency in his methodology, he chose to obfuscate.

      I see the same thing prevalent in macro-economics, with the sole exception of Modern Monetary Theory. I find MMT to be the only variant which concretely explains the real economy.

      What I find most egregous in Neo-classicism, is it’s failure to accept that people invented government to perform tasks they individually could not.

      iNDY

  2. Jake

    …..and none of the economists were held responsible, refused tenure, tried in court or had their nobel prizes taken away. They continued serving their pay masters or their ideologies and nothing changed. Life went on, gradually becoming shittier, full of anxiety and ultimately meaningless. But hey atleast the great information processor is satisfying your utility!

    1. PlutoniumKun

      One Irish macro professor did quite well after the Irish economic crash (2008) informing everyone about the correct policy approaches on various public media. His university department had one of his peer reviewed papers online dating from 2005 which advocated the adoption of US style sub-prime mortgages as a ‘solution’ to rising housing costs. Around 2010 the paper was quietly removed from all servers. I regret not saving a copy so it could be linked to every time he popped up in public.

  3. I Have Strange Dreams

    Kill it with fire!

    Economics is a foul and pestilent ghetto, an intellectual dead-end akin to Ptolemaic astronomy. The priests will continue adding epicycles to epicycles until they are dragged screaming to the asylum. Burn the whole subject to the ground and sow the razed economics departments with salt. Require economists to ring a bell when approaching the uninfected and cry “unclean! unclean!”

    1. makedoanmend

      “unclean! unclean!”

      actually belly-laughed – 1st ever belly-laugh from an interweb comment – Bravisimmo!

      H/e, can’t agree with you re: economics. As a historical and social area of study, it is valid in my book – even a necessity. Still, my eyes cross lately when I read the latest in economic “theory” on any scale. Such a dreary and detached subject these days. Rootless and toothless. Too bad.

      best

    2. Steve H.

      Every time a bell rings, an angel gets his wings.

      That is a called a positive externality in macroeconomics, and can therefore be defined in an equation. Which makes it thus so.

    3. bh2

      There is no chance of killing off this mystery cult as long as politicians rely on its ruminations and incantations to help perpetuate them in office.

      There is always some revered academic economist readily available to support virtually any political narrative imaginable, even if it’s total rubbish. It is truly a “science” for all seasons fostered by reverend figures with authority earned by many years diligent practice in translating gibberish into runes of mathematical formulae. That’s more dainty than poking about in sheep guts with a sharp stick, but of little more use in the real world which lies outside the ivied towers.

      Economists, like carny balloon sellers, are paid based on volume, not weight. Diligence blesses them with tenure followed by offers to serve private or public patrons perpetually engaged in rent-seeking. These made men (and women) are essentially set for life, regardless of whatever nonsense they may forever promote thereafter. A few are blessed by the good luck of a Nobel which guarantees a prosperous sinecure and unlimited opportunity to promote their own vacuous political narratives masqueraded as “science”.

      This cult enjoys perpetual protection within public and private safe spaces created by their well-heeled paymasters. It is one of a number of deeply attached parasites which cannot be safely excised from the corrupt body of the host without killing it.

  4. Lyonwiss

    We live in a post-truth or post-fact world, where truth and fact do not matter.

    But the fact is: Keynes has never gone away in the sense that governments have always been trying to manage the economy with fiscal and monetary policies – which (to me) is the essence of Keynes and macroeconomics. Most governments run budget deficits to stimulate demand. It is merely cognitive dissonance of academics to think neoclassical economics only is mainstream and solely responsible for the GFC, just because to them there is an apparent bias in research funding at universities.

    1. Yves Smith Post author

      Have to tell you I don’t agree entirely.

      First, government is such a huge portion of the economy that its actions have huge influence and therefore the impact has to be managed. Pretending you can have some type of neutral autopilot is a false idea, but that is the bedrock of economic thinking, that economies have a natural propensity to equilibrium and that equilibrium is full employment.

      Second, it’s not done much these days, but the best forms of intervention are ones that are naturally countercyclical so you don’t have politicians wrangling and have pork and election timing and results and inertia get in the way.

        1. OpenThePodBayDoorsHAL

          “The Battle of Bretton Woods” is very instructive. Start with two intellectuals (Keynes and Harry Dexter White) who were big fans of Stalinist Russia’s command economy (“I’ve seen the future…and it works!”). Last time I checked this kind of tomfoolery (“we will raise X number of cows because we think we’ll need leather for Y number of shoes”) has been utterly discredited. Implement for the global currency and trade systems. Fast forward to today where there are massive imbalances, global currency wars, and a race to zero and beyond that has sucked all demand from the future to the present and now the past. And the shining answer, the clarion rallying cry, is “we just need more debt, and we need some new rugs to sweep all the bad debt under”. All while “macro-economists” propagate models that completely misunderstand how money is actually created and distributed. All I can say is “Forward Soviet!”.

      1. Ruben

        Indeed. Gov’t is the biggest business in town in every economy, everything else, even giant corporations, are minuscule players in comparison. This is a large source of dynamical behavior, the swings and re-balancing as the State throw its weight around in the marketplace.

      2. diptherio

        …the bedrock of economic thinking, that economies have a natural propensity to equilibrium and that equilibrium is full employment

        And, of course, “full employment” is defined as whatever level of employment actually exists…’cause science!

      3. Lyonwiss

        I should add that neoclassical economics has damaged economics by excluding explicitly the government sector in their models. As a result, the impact of government on the macroeconomy has not been properly understood. The empirical facts, without theories or equilibrium assumptions etc., show the failure of government policy of demand stimulation:

        http://www.asepp.com/fiscal-stimulus-of-consumption/

        1. Procopius

          I would have said neoclassical economics and every other flavor of economics that ignores time and money and power relations has damaged economics by ignoring explicitly the factor of dishonesty. I am not an economist, so perhaps I am wrong in believing that Milton Friedman, like Alan Greenspan, believed that government regulation is harmful because there is no possibility that businessmen would use short weight or short measure or tainted materials. I mean, it is so obvious, isn’t it, that soon people will all know how untrustworthy those suppliers are and stop buying from them, right? Because all the infinite number of customers have perfect knowledge about all the infinite number of suppliers who will never move and never change their name /s.

          1. Lyonwiss

            Yes. In Adam Smith, everyone is moral so free market works. In neoclassical economics, everyone is rational and there is no information asymmetry, so free market works. In Keynesian economics, the government is wiser than individuals and there is not bad government or corrupt government, so government works. There is no good and evil in economics – everything is good. Even in non competitive markets, monopoly is perfect and monopsony is perfect. Markets are infinitely liquid, no arbitrage opportunity exists. No matter how simple and beautiful is the theory, facts do matter.

            http://www.asepp.com/facts-and-economic-science/

    2. Foppe

      It seems to me that for something to be called “keynesian”, it should also mean that the aim of those policies was to help create robust private demand (though I doubt Keynes was as emotionally handicapped as today’s mainstream bean-counting theorists are, if only because gdp figures didn’t yet dominate macro thinking in the manner they do today, thanks to everyone having received “economics education” in school); if not, it wolud more fairly be called Marxist, because he was the one from whom Keynes (indirectly, as he refused to read Marx personally) pilfered his insights. What matters is whether we’ve got ‘socialism for the rich / incumbents / industrial complexes’, or “socialism” (well, social-democrat, liberal new-dealerism) for the “masses”.

  5. craazyboy

    Well, I have to say this article reminds me too much of the DNC sole searching over why Hillary didn’t win. Just another room full of wantonly clueless people.

    Does start out on a high note where Romer states the problem is economists don’t care if they are winging and slinging BS from their arses same as chimpanzees.

    I guess the article coulda ended there. But no.

    Noah Smith laments a shortage of macro data – so the who knows how many gigs at FRED are found wanting and I guess the BLS, etc… aren’t up to snuff either. Or maybe Noah means they are fabricating phoney data? Then Noah doubles down on the efficacy of interest rate policy – after 9 years in the liquidity trap.

    [Caution: The following is allegory – we are speaking of the high priestess here.]

    We then are treated to JYell and her discovery of the buggy whip. She states there is current research being done on buggy whips, and more research is necessary. She is able to use big words to speak of these buggy whips. Some of these words are borrowed from real science – making this more scientific. Like hysteresis – and even an example for lay-off people. It’s possible you may never work again and add to the long term employment rate! Yikes. Worse yet, their definition of “long term” is longer than 6 months. After that, 7 months or retire at 30 is all the same to them. “Heterogeneity” is another good one. For use in polite company. Has an Evil Twin named inequality and a macro version called crony capitalism. JYell can keep the hits coming!

    I’m tired of typing someone else can take up the rest of it.

    1. Ruben

      The complaint about not enough data struck me too; actually economist have vasts amounts of data to gain insights from and test hypothesis against because economies are well recorded human endeavours, recorded in actual painful detail thanks to the inexhaustible efforts of statemen and statewomen to know everything about the populations they control and harvest. Probably more data-oriented lines of research would lead to progress in macro-economy as a scholarly discipline?

      1. John Zelnicker

        @Ruben – They want more data because the data that exists cannot be explained by their eloquent mathematical theories, which are based on assumptions that are ridiculous on their face e.g., rational expectations and utility maximization. The hope is that additional data will fit the theories better allowing them to remain comfortably ensconced in their fantasy world of regressions and p values.

        1. fledermaus

          Which is how we get adjustments to CPI based on the premise that CPI is overstating inflation. Now the hip thing is that productivity is undermeasured because economists don’t like what the numbers are saying, so we can expect an upwards adjustment there as well.

        2. Procopius

          I don’t have a problem with “utility maximization.” I just think they tend to forget that “utility” is not a synonym for “money.” The Prophet Mohammed is said to have confessed to having a sinful weakness for pleasant scents — that’s not a form of utility the economists I have read are willing to consider. They also define “rational expectations” in ways that differ from the way my Econ 101 professor defined it, “Expecting that people make their choices rationally given the limits of their knowledge and resources, so we can understand what their reasons for a particular choice were.” Aside from the completely unrealistic idea that all agents have perfect knowledge of all products in the market and all price and quality information into the infinite future, they seem to think that any expectations other than the ones they hold are not rational.

      2. Barry

        One of the problems with all that data is that events not recorded or whose price can’t be measured are defined as not really real.

    2. H. Alexander Ivey

      I’ll take up my keys then.

      Read Romer’s article, twice. Will need a third try to fully get it, but as someone with a modest background in engineering and engineering mathematics, I still can’t quite believe what Romer is saying. Do the economists he names really not understand the computer stat model they are using? Are they admitting to making up the fudge factors to make their ‘data’ fit their (wrong headed) totem pole, supply and demand? I mean, there it is in black and white, by the economists’ own words, that their math is just flat out wrong.

      Now Romer is writing for the inside crowd, as an long time, connected insider himself, so don’t expect an easy read. But he writes quite clearly what is the problem with economics so the main idea, that macro economics, in rejecting an early model of macro economics (Keynesian) because said model was based on a few openly stated fudge factors, have spent the last 40 years building models that are 1. full with even more fudge factors, 2. these fudge factors are never openly stated, and 3. the new models have given truly disastrous results in the real world (also known as the US economy, amoung others). Along the way, he names names and steps on some toes. Then he finishes up with a full charge of how the ‘dismal science’ is a lying religion, nothing at all like truth seeking science.

      Okay, I’ll quit here before I hurt myself. Let someone else slam the keys. (haha)

    3. Ed

      And they don’t actually know what hysteresis is! In it’s simplest form it is just that the dependent variable does not take the same path if the independent variable is increasing OR decreasing, rather it has one path when the independent variable is increasing and a DIFFERENT path when it is decreasing. The paths are not the same in the hysteresis zone, but outside of that zone they are the same. So the question is how big is the zone? This is the way that word is used in Physics and Engineering. Oh, and one more thing; in a hysteresis zone simple statistical models can’t work because there are 2 paths, not 1, and so any computation that assumes a central tendency (like an average) or a simple equation that assumes a single path, will find or calculate a path that is never followed.

      I would also question the very concept of a dependent or independent variable in economics, as I don’t believe that any of them can really be controlled. Rather they are assumed, and the ‘extraneous variables’ are assumed away or at least to be invariant. But then I’m an Engineer and have to deal with physical reality and provide services to those who want them to work with very high precision.

  6. Steven Greenberg

    The economics I learned in the early 1960’s seems to work as well now as it did back then. I was lucky enough to be so busy at work in the decades that followed, that I did not have a chance to keep up on the mis-education of the time. When I had the time to start paying more attention to the subject again, I couldn’t understand what had happened to the knowledge that I had learned that seemed to explain all that was happening in the economy.

  7. Katharine

    I was surprised to learn that Yellen had expressed any interest in the people permanently out of the labor market. I thought all the discussions of interest rates focused almost exclusively on what in my mind is the unemployment pseudo-rate, which completely ignores those people.

    Regardless of which rate is considered, I have never been able to comprehend the mind that can talk about acceptable levels of unemployment. Acceptable to whom? The people who lose their homes, and sometimes their neighborhood networks when they have to move, and may with just a little bad luck slide into still worse conditions? The communities that see more people becoming burglars, muggers, bank robbers, drug dealers, and prostitutes because only the illegal economy has any place for them? I have never seen a sustained or general effort to look at the economic consequences of those events, much less an admission of the immorality of causing so much trouble. It seems to me that a macroeconomics that divorces itself from those possibly micro concerns will be forever irrelevant to good policy.

  8. chuck roast

    Way back prior to the great Permian-Triassic Extinction, I was fortunate enough to wander around an Economics Department where I could encounter intellectual dead-ends like Keynes, Marx, Polanyi, Kalecki, Veblen – all of whom prepared me to pump-gas at the local filling station…oh wait!
    Having somehow successfully survived the subsequent big-brain epoch, I settled comfortably into making a modest annual donation to a scholarship fund for budding economists at the olde U. Then it came to my attention that not only could one still obtain a BA in Economics, but the olde school was also awarding two different Bachelor on Science degrees in Economics. Breathtaking! Economics, an actual science! Like for example physics!
    I am now in the reduced circumstance of donating only to my old high school in the doubtless vain hope that the youngsters will study enough science to be able to shoot these aspiring BS cone-heads to the moon.

  9. ChrisAtRU

    It’s 2016 and some Dismal Scientists are still debating whether “involuntary unemployment” exists.

    #FacePalm

    Perhaps we should deploy them to that Carrier plant to investigate. So thankful for heterodox voices:
    Abba Lerner – Functional Finance
    Hyman Minsky – Financial Instability
    Wynne Godley – Sectoral Balances
    Entire MMT School – Mosler, Wray, Kelton, Tcherneva et al
    #ThereIsHope

    1. Procopius

      They are not “debating” whether involuntary unemployment exists, they are insisting adamantly that it cannot possibly exist under any circumstances and that any person who thinks it is even conceivable must be lying for nefarious reasons. Ni shagu nazad!

  10. witters

    Gee, why attack the one healthy sector of the economy, the Wealth Defence Industry?

    (Why did so much of ‘the social-democratic left’ go along all this? I think John Rawls gave them the excuse. He said inequality is great if the worse off are better off under this economic system than they would be under a more equal one. The poor can therefore protest if they can show that if we did things more equally they would be better off. The task of the economist today is to ward this possibility off by ensuring that economic thought is utterly subservient to oligarchic extraction. It does this by lying – Trickle Down! Rising Tide Lifts all Boats! This has worn out. So next it does There Is No Alternative! – ‘Those Jobs are Never Coming Back’, ‘Robots!’ And finally, to make really certain, it turns the whole discipline into toadying intellectual fantasy. Romer homed in on the last.)

  11. Jim

    “Too much market and too little state invites a backlash.”

    If anything, Philip Mirowski has persuasively argued that neoliberalism requires a powerful State.

    He has shown that the neoliberal thought collective theorized an elaborate political mobilization, and recognized early on that the creation of a new market is a political process requiring the intervention of organized power. The political will to impose a market required a strong state and elaborate regulation and also that the State would need to expand its economic and political power over time.

    The neoliberal market had to be imposed it did not just happen.

    A key issue for the future is defining the nature of the state–whether under neoliberalism or MMT or under Trump or Sanders, or left populist or right populist.

  12. ChrisPacific

    Mankiw belongs in the non-ideological camp? I don’t see how anybody with a brain could read any of his work past the first page and still hold that view.

    I’m imagining them all as engineers on the deck of a half-submerged Titanic, debating about whether the hull integrity model might perhaps not have been 100% accurate.

    1. Robert NYC

      agreed, Mankiw is an intellectual clown and he has been mis-educating students for decades now.

  13. susan the other

    Ann Pettifor. give me ann pettifor always. she never puts the cart before the horse, only the ideological neoliberals try to do that while keeping a straight face – they are quintessential con artists if there ever were.

  14. Dick Burkhart

    Excellent article, except it failed to point out that there are realistic and successful modeling techniques, in addition to historical studies. These techniques are based on the nonlinear nature of real world economies. Just use complexity and evolutionary techniques like agent based models and nonlinear dynamical systems. Nothing new here – I still think that the limits-to-growth models (“system dynamics” = nonlinear dynamical systems) of the early 1970s represent the best mathematical economics ever done. And the economists’ agent based models are just a variation on cellular automata, which have been used with notable success in other fields for many decades.

    The problem is that economists either maintained a deliberate ignorance of such methods, or have outright rejected them, like Nordhaus with system dynamics. In part this is because these techniques involve a different mind set: they trade off simplistic models that are easy to understand, but whose assumptions are demonstrably false, with complexity results that give much better real world results but have more nuanced narratives.

  15. RBHoughton

    Ann Pettifor is right about Brexit imo. The belief and the fact is that government is trying a fast one on the people without being straightforward in its motives or intentions and a major cause of the discontent and disillusionment seems to stem from the macro-economic error she highlights.

    People don’t want this mumbo-jumbo any more. The old professions – medicine, accountancy, law – created jargons of specialist words and phrases (usually Latin) to make their speech and writings incomprehensible to the hoi polloi. Then in recent decades all sorts of trades have adopted the same jargon approach to mystifying their work. Enough already! Say what you mean, mean what you say.

  16. ewmayer

    “Nick Bunker points out that in a recent speech, the Federal Reserve Chair Janet Yellen raised important questions about macroeconomic research in the wake of the Great Recession.”

    Hint: Citing an ivory-tower twit like J-Yel as “raising important questions” is a huge bullshit tell. While she was at it, did Janet raise any important questions as to why virtually every highly credentialed macroeconomist on planet earth completely fail to foresee the global financial crisis and the massive distortions, in very large part caused by the machinations of the high priests of those “believers in the power of monetary policy”, which portended its coming? But, on to the bullshit:

    “The first area of interest is the influence of aggregate demand on aggregate supply. Yellen points to research that increasingly finds so-called hysteresis effects in the macroeconomy. Hysteresis, a term borrowed from physics, is the idea that short-run shocks to the economy can alter its long-term trend. One example of hysteresis is workers who lose jobs in recessions and then are not drawn back into the labuor [sic] market but rather permanently locked out, therefore increasing the long-term unemployment rate.”

    That’s irreversibility, not hysteresis. The latter is a special case of the former, which the chosen example does not illustrate. An example of hysteresis from my shower’s temperature control: I find the temp is a tad too high, and turn the control a bit toward the cold setting. But I overshoot my target, and now it’s too cold. Nudge back toward hot, but the somewhat-sticky mechanism again overshoots and lands more or less on the starting “too hot” position. But the water is still too cold, and I find I have to nudge even further toward hot to fix that. That’s hysteresis. In the context of the recession example, hysteresis would be e.g. if once the E/P ratio had recovered to its pre-recession level but growth and its correlates remained weaker than expected, say due to the “recovery jobs” being on average of poorer quality than those which were lost. Kinda like the current 8-year-long “recovery”, come to think of it! But I will admit that glossing over such messy real-world details like “widespread worker immiseration” with hifalutin terminology-borrowed-form-actual-science like “hysteresis:” is a great way to make oneself sound important, cloistered there in one’s ivory tower.

    “Another open research question that Yellen raises is the influence of “heterogeneity” on aggregate demand. Ignoring this heterogeneity in the housing market and its effects on economic inequality seems like something modern macroeconomics needs to resolve.”

    Ah yes, “needs to resolve” — that implies lots of high-powered academic conferences and PhD theses. And it’s so wonderfully wishy-washy compared to “is something only a joke pretend-scientific discipline would even need to consider stopping doing, because no self-respecting discipline would have abandoned assumptions of homogeneity in roughly Year 2 of said discipline’s evolutionary history.”

    “Yellen raises other areas of inquiry in her speech, including better understanding how the financial system is linked to the real economy and how the dynamics of inflation are determined.

    Hey, when y’all finally “better understand” how this whole “financial system” thingy is linked to the real economy, by all means do let us know, because it seems like such a linkage might have, like, “important ramifications”, or something. As to inflation, you mean actual inflation, or the fake measures thereof the folks at the world’s central banks make their stock in trade? You know, for example, “in determining house price inflation we studiously ignore actual house prices and instead use an artificial metric called Owner’s Equivalent Rent, which itself studiously ignores actual prices renters pay. Ain’t it cool?”

    Sorry if I sound grumpy, but this article is rather reminiscent of reading US Dem-party insiders pretending to “soul search” in re. Election 2016. Let’s see:

    “Another open research question that Team HRC raises is the influence of “heterogeneity” on voting preference. Ignoring this heterogeneity in the electoral trends and its effects on election outcomes seems like something modern macroelectorodynamics needs to resolve.”

  17. UserFriendly

    Paragraph 2

    1970s and 1980s — Robert Lucas, Edward Prescott and Thomas Sargent – are the main people to be held responsible for this this development.

    Is there something I can say to make sure the automod snags me when I’m pointing out a typo so you don’t have to keep the comment?

Comments are closed.