The bitter, political fight to create a new macroeconomics

By R.A. | WASHINGTON

THE big debates in macroeconomics have never been polite. I suppose it's understandable that this is the case; after all, the stakes are high. Tyler Cowen excerpts a new blog post by Scott Sumner, which reads:

…what’s happened since 2009 involves not just one, but at least five new types of voodoo:

1. The claim that artificial attempts to force wages higher will boost employment, by boosting AD.

2. The claim that extended unemployment benefits—paying people not to work—will lead to more employment, by boosting AD.

3. The claim that more government spending can actually reduce the budget deficit, by boosting AD and growth. Note that in the simple Keynesian model, even with no crowding out, monetary offset, etc., this is impossible.

4. More aggregate demand will lead to higher productivity. In the old Keynesian model, more AD boosted growth by increasing employment, not productivity.

5. Fiscal stimulus can boost AD when not at the zero bound, because . . . ?

In all five cases there is almost no theoretical or empirical support for the new voodoo claims, and lots of evidence against. There were 5 attempts to push wages higher in the 1930s, and all 5 failed to spur recovery. Job creation sped up when the extended UI benefits ended at the beginning of 2014, contrary to the prediction of Keynesians. The austerity of 2013 failed to slow growth, contrary to the predictions of Keynesians. Britain had perhaps the biggest budget deficits of any major economy during the Great Recession, job growth has been robust, and yet productivity is now actually lower than in the 4th quarter of 2007.

Mr Cowen then makes a few points before closing:

We do in fact need a good aggregate demand-based macroeconomics; the topic is far too important to allow it to become so politicized.

I initially read that final jab as a poke at economists like Paul Krugman and Brad DeLong: the ones arguing in favour of deficit-financed fiscal stimulus even as the American economy (in Mr Cowen's view) approaches full capacity. Thinking it over, I'm not sure it isn't meant for Mr Sumner as well.

Why? Well, I understand why Mr Sumner objects to the views in his numbered list. They are at odds with his macroeconomic worldview, which is fine. But he doesn't simply say they're wrong. He labels them voodoo; a highly politicised term of criticism, and one of the nastier things one academic can say about another. (I should be clear that Mr Sumner has lots of company in wielding the term.) If one were trying to bring neutral, academic sobriety to an overly politicised argument, this is not the way one would typically begin.

And then, Mr Sumner claims that there is "almost no theoretical or empirical support" for the views he doesn't like. But that's simply false. Mr Sumner may not care for the Summers-Delong model showing that for certain values of the hysteresis and multiplier parameters stimulus is self-financing, but it does exist. And as far as I can tell, most empirical studies of fiscal policy find a multiplier of greater than zero, if not always greater than one. His list of counterexamples in the paragraph above is just one example of not considering the counterfactual after another. Again, if one were trying to take a highly political debate and pin the thing to the wall with the best available academic work, well, this is not what one would do.

Having said all that, I think I disagree with Mr Cowen that the topic is too important to become politicised. On the one hand, politics is how we resolve lots of really important, really difficult issues. One could indeed argue that the problems we face are the worse because there has been too little politicisation. To a remarkable extent, rich-world politicians of all political stripes have been aligned in their view that deficits should be reduced as quickly as possible, while the technocrats at the central banks have been relied upon to take decisions that go wildly beyond their narrow monetary remit.

And on the other: Mr Cowen's view of dispassionate progress in macroeconomics is just not how things usually work. In the 1970s it was not the case, for example, that rival macroeconomic camps settled their differences, then alerted the world of the new consensus so it could be acted upon. Instead you had bitterly divided academics; you had a political ideology which saw some things it liked in one of the camps, which made those things a part of a successful political programme, and which took a policy gamble; and that gamble created new evidence which informed (though by no means settled) the debate over how inflation and monetary policy and expectations all work. The same thing happened in the 1930s. And in the 1980s, when the original voodoo economics had its day in the sun.

Economists might not like it, but this is how the world will find its way out of the current mess. Not by the calm resolution of disagreements between Larry Summers and John Cochrane, but by the increasing politicisation of a set of radical economic ideas, of one sort or another, which eventually find their way into the practical political programme of a party with a mandate to govern. And then they'll do what they do and we will learn something about who was right and who was wrong, and a few economists will change their minds, but most will find a way to tweak their old models so that the new evidence looks like an affirmation of what they believed all along.

So what does that tell us about how macroeconomists ought to behave? Well, as scientists, they have an obligation to state their hypotheses as clearly as possible, to make testable predictions whenever possible, and to be rigorous and transparent in gathering evidence to support or falsify those predictions. But macroeconomics is also inherently political, and the practitioners who seek to "politicise" their ideas and make them a political reality play as vital a role in the advancement of the field as the scrupulously apolitical academics who never write a public word outside a peer-reviewed journal.