Saturday, July 07, 2012

A Macro Economist you can Take Home to Mother

I can't think think of anyone better equipped than Mark Thoma to sell the world on the plausibility of macro.  As the undisputed econ ubberblogger, he evinces an almost compulsive deal to get current, comprehensive news on academic economics to a waiting audience.  So it is perfectly right that he be picked to offer a Browser "Five Books" on macro theory.  His contribution is up today, although I'd say it is a bit misnamed: the piece is called "Mark Thoma on Econometrics," and while he covers both, it seems to me that macro  is the real centerpiece.

Ah yes, you are thinking, here at last I will get the definitive presentation on whether macro deserves to be recognized as a science and not mere necromancy.  And give him his due: I think he has laid out his case in as persuasive and fair-minded a manner as we are likely to get.  And yet (questions to MT in bold):
What surprised me, looking down your list, was that I think of you as very much on the left-wing side of the economics divide. Aren’t (Robert) Lucas and  (Thomas) Sargent at the opposite end of the ideological spectrum?

They are, and that’s an important point. Both sides of the spectrum within economics use the same tools and techniques. So I can honour everything they’ve done to allow me to do econometrics and understand theory without endorsing the way they’ve used those particular tools.

So these books are about the tools rather than the conclusions they reach?

There are conclusions in there, but they are more by way of example. Once you’ve learned the techniques, you’re all set to do anything. Lucas I would peg as very conservative. Sargent is a bit more open-minded.
Before I spoke to Paul Krugman, I’d never even heard the term “freshwater economist”, which I understand refers to the University of Chicago, the Minneapolis Federal Reserve, and various places near the Great Lakes which produce economists with a right-wing bent. I gather there’s a big divide between them and the “saltwater economists” who come from universities along the seaboards – Princeton, Harvard, Berkeley, Oregon – and who are more liberal.

There are several groups. There’s the divide between the New Keynesians who believe both monetary and fiscal policy are effective policy tools, the modern version of the monetarists who believe in monetary but not fiscal policy, and the Real Business Cycle economists who don’t think either type of policy is effective. The big split is the first one, monetarists versus Keynesians to use an older terminology -- That’s people like Lucas and Sargent people like me, Krugman, Brad DeLong and others. Then there’s another, much smaller group that don’t think any of us have a clue. Those are the heterodox economists. They don’t like the tools and techniques we use, they don’t like equilibrium models. It’s people like Jamie Galbraith, who don’t agree with either side.
Going back to fiscal stimulus, which you mentioned at the beginning as something time-series econometrics can test, I take it there isn’t overwhelming evidence in its favour? Even though you’re on the Keynesian side, do you think people that question whether it works have a point?
Yes I do, completely. The reason is that we don’t have data for historical episodes like this one. The Great Depression was like this, but our data pretty much ends in 1947. We can’t go back any further with anything close to reliable data. As an econometrician I can estimate these multipliers, but they’re for good times not bad times. I don’t have the data that I need. I don’t have enough big recessions like this one in my data set to give a precise answer.
 Etc., go and read the whole thing.  Like I say, I have all kinds of respect for this guy.  And that's precisely the point: if this is the best he can do, don't we have a slam-dunk confession that macro is a bunch of just-so stories, bound together with the confident faith that somehow, someday, the models may be able to tell us something?

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