The State of Macro 2012

Matt Yglesias points out it’s way too easy to bullshit in the field of macroeconomics:

 “The work that macroeconomic theorists and modelers do is genuinely difficult—certainly I can’t do it—but it’s far too easy for people with the relevant skills to demonstrate just about anything.”

This entire idea was started off by a post by Noah Smith, where he asks a simple question:

“But I feel like there’s a larger question: What has macro done for the human race in the last 40 years? How are we better off as a result of all this macro research effort?”

Those are good questions. Macro is difficult, but it’s not that difficult. We are very close to making gigantic breakthroughs in a variety of technological areas, like solar energy, faster than light travel, car engines, and robots, but we’re somehow having massive debates on the simplest topics in modern macroeconomics.

Noah’s post was part of a long string of posts started off by Paul Krugman and Steve Williamson. Paul says the state of macro is rotten because some people are bullshitters instead of honest participants:

“And many of the economists doing this stuff imagined that they were part of real discourse with the freshwater side, as witness Olivier Blanchard’s The State of Macro, written just before the crisis. Olivier’s abstract declares that

“largely because facts do not go away, a largely shared vision both of fluctuations and of methodology has emerged”

and concludes that “the state of macro is good”. Famous last words.

In fact, the freshwater side wasn’t listening at all, as evidenced by the way 80-year-old fallacies cropped up as soon as an actual policy response to crisis was on the table; and as for changing views in response to facts, well, we all know how that has gone.” [Italics mine]

One side in the debate on macroeconomics was not engaging at all. They were not trying to find the truth of the matter – rather, they were engaging in bullshit. It’s not what they were saying was always incorrect, or that it involved lying, but instead that they had an agenda which was not concerned with either the truth or falsity of what they were saying. They didn’t care as long as it advanced their agenda.

This type of engagement has a name: Bullshit. Bullshit has an essential quality that does not involve lying or even truth:

“This points to a similar and fundamental aspect of the essential nature of bullshit: although it is produced without concern with the truth, it need not be false.The bullshitter is faking things.But this does not mean that he necessarily gets them wrong.”

Harry Frankfurt elaborates on bullshit:

“It is impossible for someone to lie unless he thinks he knows the truth. Producing bullshit requires no such conviction. A person who lies is thereby responding to the truth, and he is to that extent respectful of it. When an honest man speaks, he says only what he believes to be true; and for the liar, it is correspondingly indispensable that he considers his statements to be false. For the bullshitter, however, all these bets are off: he is neither on the side of the true nor on the side of the false. His eye is not on the facts at all, as the eyes of the honest man and of the liar are, except insofar as they may be pertinent to his interest in getting away with what he says. He does not care whether the things he says describe reality correctly. He just picks them out, or makes them up, to suit his purpose.”

It seems to me like one of the major focuses of macro should be to create systems which weed out bullshit. Macro needs a way to falsify claims, because right now, it’s ” far too easy for people with the relevant skills to demonstrate just about anything.””

Over at Brad’s place, commenter Claudia points out the need for a common metrics in macro:

“I started working as a central-bank macroeconomist in the summer of 2007…and I still have a feeling of intellectual whiplash. In my short policy career, I have seen the value of all three types of macroeconomists, including academics, but it sure can be hard to get them all talking the same language and using the same metrics. But I am hopeful on that front…the bigger stumbling block, I fear, is getting people to let go (or even hypothetically consider letting go) of beliefs that did not serve them, the profession, or the public well. “

These metrics and language already exist. The only way to do macroeconomics is to start from the accounting and work with those accounts, and figure out how these accounts interact with each other. Here is Jan Hatzius on this very issue, from a recent interview with Joe Weisenthal:

“every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero. That’s the starting point. It’s a truism, basically. Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector’s financial balances.”

Right on, Jan! It is so hard to do macro already. It’s really easy to make basic mistakes. It’s much wiser to begin from the accounting, and then do empirical research on how all these identities interact with their real world analogues. It is wiser to begin with this accounting based approach because bullshit becomes nearly impossible. It would be impossible for someone like Lucas to make this statement on March 30, 2009:

 “We had some lively sessions this morning about fiscal stimulus.  Now, would a fiscal stimulus somehow get us out of this bind, or add another weapon that would help in this problem?  I’ve already said I think what the Fed is now doing is going to be enough to get a reasonably quick recovery committed.  But, could we do even better with fiscal stimulus?

I just don’t see this at all.  If the government builds a bridge, and then the Fed prints up some money to pay the bridge builders, that’s just a monetary policy.  We don’t need the bridge to do that.  We can print up the same amount of money and buy anything with it.  So, the only part of the stimulus package that’s stimulating is the monetary part.”

“Reasonably quick recovery” is not really that funny 33 months later. Lucas was wrong on a monumental scale, and it should have been obvious to him we were not going to get a quick recovery with the fiscal and QE we were doing at the time.

But of course, it wasn’t obvious to him, or even to most economists. What he said wasn’t an uncommon statement at the time – many economists thought the fed was doing plenty to get the economy going. And many people were also thinking the U.S. was on the brink of massive inflation in February of 2011.

My point isn’t to show Robert Lucas was wrong. My point is to show mainstream macroeconomics does not have a feedback mechanism with which to point out statements like this are bullshit.

Here is how David Glasner responded to Lucas:

“I then suggested that if monetary policy is indeed effective in providing stimulus to an economy in recession, it is not that hard to construct an argument that fiscal policy can also be effective in providing stimulus, fiscal stimulus being a method of transferring cash from those indifferent between holding cash and holding bonds to those who would spend cash”

That’s great and all, but why did David Glasner have to make this counter-argument at all?

If macro economics was constructed around the principles of accounting, Lucas would have never been able to make his claim in the first place. Lucas would have already known his statement would be recognized as bullshit immediately by everyone with a basic knowledge of macroeconomics.

Yglesias is right. It’s way too easy for skilled people to construct nearly any argument in macro, and too hard to falsify wrong ideas. This is the state of macro in 2012. Perhaps in 2013, we can make some changes.


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Fed Up
4 years 1 month ago

“every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero.”

I’d say this is more accurate:

savings of the rich = dissavings of the gov’t (preferably with debt) plus dissavings of the lower and middle class (preferably with debt)

Deaggregate the private sector.

4 years 1 month ago

Good post Mike. I think the biggest problem with macro is that almost every single school starts with a policy agenda and builds an understanding of the system to confirm this view. Austrians start with small govt and design an understanding of the world that confirms this. Market monetarists start with NGDP targeting and explain the world so that this policy makes sense.

Who actually starts with just an explanation of how the system works?

4 years 1 month ago

Keynes, John Maynard.
“Keynes despised the American Keynesians. His whole idea was to have an impotent government that would do nothing but, through tax and spending policies, maintain the equilibrium of the free market.”

4 years 1 month ago

Yes, quite right, that Keynes was an upper class English snob, which about as close to aristocracy as one can get without the title. Oh wait, Lord Keynes?

But this equilibrium at full employment was not the neoclassical version of equilibrium achieved through the operation of the market, which is the basis of neoliberalism as a social, political and economic agenda.

4 years 1 month ago

“I think the biggest problem with macro is that almost every single school starts with a policy agenda and builds an understanding of the system to confirm this view.”

This is manifestly untrue. You have no evidence to support such an assertion

Oilfield Trash
4 years 1 month ago
Dilletaunted ‘This is manifestly untrue. You have no evidence to support such an assertion” Really? Ideology innately lurks within economics in the form of the core belief in equilibrium. Most mainstream economic theory has contorted itself to ensure that it reaches the conclusion that a market economy will achieve equilibrium. The defense of this core belief is what has made economics so resistant to change, since virtually every challenge to economic theory has called upon it to abandon the concept of equilibrium. It has refused to do so, and thus each challenge – Sraffa’s critique, the calamity of the Great Depression, Keynes’s challenge, the modern science of complexity – has been repulsed, ignored, or belittled. This core belief explains why economists tend to be extreme conservatives on major policy debates, while simultaneously believing that they are non-ideological, and motivated by knowledge rather than bias. If you believe that a free market system will naturally tend towards equilibrium – and also that equilibrium embodies the highest possible welfare for the highest number – then any system other than a complete free market will produce disequilibrium and reduce welfare. You will therefore oppose minimum wage legislation and social security payments – because they will lead to disequilibrium in the labor market. You will oppose price controls – because they will cause disequilibrium in product markets. You will argue for private provision of services – such as education, health, welfare, perhaps even police – because governments, untrammeled by the discipline of supply and demand, will either under- or oversupply the market (and charge too much or too little for the service). You may also argue a system of government was not needed to ensure order: instead, social order would arise naturally in a market system in which each individual followed his own self-interest.… Read more »
Oilfield Trash
4 years 1 month ago
4 years 1 month ago


4 years 1 month ago

Manifestly untrue? Where’s your evidence of that? Let’s just take MMT for instance. They have literally designed an entire theory around the idea of the money monopolist which is the rationale for the Job Guarantee. Wray and Mitchell have built their entire careers around this policy idea.

Sumner has built his whole career around one policy idea, NGDP Targeting. He doesn’t care how the system works. He’ll make his policy work in the system we have.

Austrians generally want the gold standard or some form of smaller govt. They’ll argue in favor of this approach regardless of what the empirical evidence says about how the system works.

Krugman has built an entire idea of a liquidity trap around the idea that govt spending won’t hurt the economy. Of course he does that. It’s not based on any rational understanding of the system, but it confirms his biases.

My comment might be a bit general in nature, but there are similarities in all of these schools. They all confirm some preconceived policy bias no matter the operational realities say….

4 years 1 month ago

…….if you cant get the accounting right, you cant get the economics right!

This post makes me think of Silvers book again. One of my takeaways from his book is that we need a lot more people making predictions but they also must have a way to be “accountable” for their predictions, and rewarded or punished based on the accuracy of their predictions. Accountability for your predictions makes one a little less prone to trying to get away with bullshitting.

Some sort of market where economists who wish to be part of public policy making must put their predictions and models up against others and be rewarded if very specific predictions come true? They will lose something if they are wrong too. Too many wrongs and they are reduced to posting on the blogosphere, not getting to talk on MTP.