Monday, May 24, 2010

Mark Thoma regrets commenting on a blog. I probably will regret commenting on Mark Thoma. My comment follows.

"It's the suggestion that the people advocating fiscal policy cannot possibly understand what modern models say, that they must be relying on old-fashioned, out of date theory, that brought the reaction."

Speaking for myself only, I don't care what modern macro models say. I don't think that New Keynesian models add anything much of value to the Keynesian cross. I certainly haven't noticed any great empirical success. Oh also speaking only for myself, I have never bothered to keep up with macro theory.

It is entirely possible that people understand new Keynesian DSGE models and think they are worthless.

I object to equating "fair and balanced" (Brad's words) with "based on rigorous theory" (Krugman's words). I think it is possible to be eminently fair and pay no attention at all to the application of economic theory to macroeconomics.
I don't think it is possible to be fair and defend the view that modern macroeconmic theory has any scientific value whatsoever (note I am thinking of New Keynesian theory).

I argue that it is all worthless -- that the point is to introduce intertemporal maximization into old models and all models of intertemporal maximization are so far from the actual behavior of actual econmic agents that they are better ignored. How would you contest my claims ? I note that many people argue that modern macro has added nothing to the work of Keynes and Hicks of any use in the present situation (consider Greg Clarke). How do you respond to that claim ?

It seems that you and whoever writes "adolfato" share the assumption that one must be familiar with rigorous modern theory (as DeLong and Krugman certainly are) in order to be competent to discuss macro policy. That the alternatives are basing your reasoning on rigorous modern theory or basing them on prejudice. I don't think any reasonable person bases any actions at all on modern macroeconomic theory. I also think that the choice isn't between DSGE theory on the one hand and prejudice or accidental theory on the other. There have been natural experiments (wars). It is possible to estimate fiscal multipliers based on spending that was not caused by the business cycle. The results are clear -- a balanced budget multiplier greater than 0 and less than 1. Who needs more theory than the theory that the US business cycle didn't cause the war in Korea and caused WWII (if at all) with a very long lag ?

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