Why do Macroeconomists Think We Know Macroeconomics ?

This post is a comment on Noah Smith's brilliant post "Why do non-experts think they know about macroeconomics?" which is, itself, a reply to Scott Sumner's presumably brilliant post (which I haven't read and on which I am not commenting -- for one think I can't find a link in Noah Smith's post).

Noah Smith doesn't have a very high opinion or really existing macroeconomics. However, I think he is a bit too diplomatic. I think I will quote bits of his post and comment.

Sumner argued that macroeconomics uses familiar words (with unfamiliar meanings) so people think they understand it. Like Noah, I agree that this is part of what is going on. I also mostly agree with Noah that

there are some other reasons too: 1. Macroeconomics is relevant to most laypeople. String theory, to use Scott's example, is not. String theory is something you hear Brian Greene or Michio Kaku talk about, and you think "Wow, neato, the Universe is mysterious and funky!", and then you never think about it again. Macroeconomics is something related to our jobs and our investments. It affects us every day. Notice that laypeople do not often hold forth on game theory or decision theory. 2. Macroeconomics has political implications. Many people have political agendas. The "heterodox" people you meet in the blogosphere are almost all just leftists who see mainstream econ as a tool of the neoliberal oppressor, and since macro is by far the most visible branch of econ, they equate "econ" with "macro" and bash it. Or take the "Austrians", whose goal is actually to make econ into a tool of the neoliberal oppressor, for real. Then you have a whole bunch of people who aren't pushing political agendas, but who feel that macroeconomists are pushing agendas, and don't like that. In fact, some macroeconomists are pushing political agendas, though I think it's a clear minority (no, I won't name names). This is also why a lot of laypeople get involved in climate science debates. 3. There is the perception that macroeconomists don't understand their own subject. The Great Recession convinced a lot of people that macroeconomics hasn't solved any of the problems it was created to solve. Contrast that with physics or bio or chem, which have very obviously given us a lot of the awesome stuff that makes our society rich. In addition, you have very public and acrimonious debates between macroeconomists like Krugman, Cochrane, and Sumner. That convinces a lot of people that there is no consensus within macro, which in turn makes them suspect that macroeconomists haven't gotten any answers out of the Universe. If the experts don't understand anything, why can't the amateurs weigh in?

update: I see Mark Thoma found this post (this blog is for stuff I don't want many people to read update: I post stuff which I think is worth reading at http://angrybearblog.com -- I do put some effort into those posts end update). I wish to clarify and revise my remarks.

First, ordinary people think they know other technical subjects too. It is easy to get into debates about microeconomics (think pf discussing the incentive effects of welfare or the economic effects of international trade) climate science, food science, and military strategy. Clearly Noah's first two points are valid.

However, I think there is special disrespect for the opinions of macroeconomists. I see two quite different problems. The first (discussed vaguely below and discussed better by Noah) is that there isn't a macroeconomists' consensus on anything. There isn't even a consensus among academics (or for that matter Nobel memorial prize winners) but also wingnut welfare recipient hacks are presented to the public as prominent economists.

I think there is a main stream of contemporary macroeconomics -- New Keynesian DSGE. It matters that the implications of those models are dismissed by real business cycle theorists, austrians, market monetarists, Post-Keynesians, and modern monetary theorists (you can't imagine how much fun I had putting real business cycle theory in that list). But it also definitely matters that new Keynesian DSGE models don't explain patterns which would otherwise be puzzling and don't generate very good forecasts.

end update:

That [Noah's] is an excellent effort. I disagree with two points. First I think macroeconomists with a political agenda are a clear majority (I will name one name -- Robert Waldmann). Second, I don't really think that the Krugman, Cochrane, Sumner debate has a big effect on the opinion the general public has of macroeconomics. The reason is simply that most people don't know who Cochrane and Sumner are ( many times as many people know who Cochrane and Sumner are than know who Robert Waldmann is, but the number is still small). I think that radically different views on everything expressed by Nobel memorial prize winners does have that effect. I note (as a member of the public) that I haven't heard anything from Lucas or Prescott recently.

I realize that I have very little sense of what most people think macroeconomists say. I'm pretty sure that most people think of macroeconomics when they think of economics. I think it is a sign of the strength of the perception that we don't understand our subject that pollsters don't ask people what they think we think.

I hand the microphone back to Noah

Ryan Decker writes in response to my Reason #3 above: When I fire up my web browser I'm not bombarded with confident non-expert opinions about earthquakes, despite seismology's apparent inability to predict them.

True, but seismologists are pretty up front about this, including any seismologist in the press. I think there's a public perception that while seismologists realize their shortcomings, and are therefore probably "on the job" in terms of trying new stuff, macroeconomists might have declared premature victory.

I don't think the modesty of seismologists is the issue. For one thing I don't think that declaring premature victory deprives people of their influence. Prominent pundits and politicians all express extreme confidence that they understand the world. They are influential. I think one clear difference is that seismologists can predict lots of things, just not the thing that we care about for practical reasons. It is hard to doubt that their model of earthquakes is approximately correct. In any case, there is an overwhelming consensus -- when there is an earthquake siesmologists publicly agree about things that happened under the earth.

I think the problem here is that the analogy is much too kind to macroeconomists. It is true that macroeconomists can't predict recessions. It is also true that macroecomists almost all admit this. However, macroeconomists don't agree on the explanation of what happened. Also macroeconomic models have lots of implications which can be confronted with the data. However they don't fit the data as the implications of models of plate tectonics do.

Finally, I think point 2 it is critical. Seismology does not involve ideology (although it has gigantic implications such as get the hell out of Tokyo). Notably lots of non experts have strong opinions about global warming and evolution by natural selection.

A lot of macro people in the press express a lot of certitude about things. John Taylor expresses incredible confidence that the Taylor Rule (with coefficients of exactly 1.5 and 0.5!) is THE best monetary policy rule. Scott Sumner expresses incredible confidence that NGDP targeting is best. Paul Krugman expresses incredible confidence that fiscal stimulus is effective and that austerity is counterproductive. John Cochrane expresses incredible confidence that structural form - removing "sand in the gears" - is the best medicine for an economy in recession. Robert Lucas said that the "central problem of depression prevention has been solved." And so on, and so forth.

I think normal people realize that that certitude is basically never warranted. Yes, those economists often (but not always) have some evidence to back up their claims. But not the kind of evidence that people have in disciplines where data is more abundant, controlled, and replicable.

Here I object to the Ballance. I think there is overwhelming evidence that, when the economy is at the zero lower bound, stimulus is effective and austerity is counterproductive. I think the evidence collected in the 1930 was overwhelming. I think the evidence collected so far in the 21st century is overwhelming. I actuall challenge Noah Smith -- do you really think that Krugman's confidence in claims on those points is "incredible" ? Here's another one -- do you doubt that austerity in economies at the ZLB is counterproductive ?

On the others, Lucas said that long ago (I remember I was in the room) and wasn't widely quoted in the mass media. Again I ask how prominent Sumner and Cochrane are.

update 2: I don't know where to put this but here's some more Krugman fandom. Prominent pundits all express extreme confidence that they understand the world, but none of the others in a small sample of 26 were as successful forecasters as Krugman (pdf warning). Almost everyone must have been put off by his intellectual confidence and his eagerness to say I told you so. However, people who have been keeping track have to notice just how often he claims he told us so and how he always provides links to him telling us so. Noah and Decker agree that a problem for macroeconomists is that we have very little data and no experimental data. I think this is special pleading. Existing macroeconomics is based on the the decision that the 30s are irrelevant and Indonesia is irrelevant and Argentina is irrelevant. We have few data, and we ignore a substantial fraction of them, because they are inconsistent with our models. Even the most standard data set (post WWII US quarterly) doesn't fit the models at all. Yes it is hard to do well without decent data. But it is also hard to do as badly as macroeconomists have without decent data.

And this brings us to

Macroeconomists know more than a lot of people think they do. That doesn't mean they know a lot. And macro discussions in the public sphere tend to focus more on the contentious stuff - the stuff where no one really knows all that much. That's where normal people feel justified jumping in. If you tell them that investment is the most volatile component of GDP, they're not going to argue.

I note again that Noah is no admirer of current macroconomics, but this is pathetic update: not a convincing defence of current macroeconomics which convincing defence is not likely to come from harsh critic of current macroeconomics Noah Smith who wasn't trying to defend existing macroeconomics in that post anyway end update. The discovery is a simple measurement. People can guess that macroeconomists know the coefficient of variation of consumption and investment. People also have good reason not to bow down to the superior insight of someone who has done that calculation. A more interesting question is whether the pattern is convincingly explained by existing models (no) and whether it is easy to explain in many different reasonably convincing ways (yes).

Update: welcome noahpinioners I really really want to extend and revise this paragraph. First, it is important that Noah Smith is a very harsh critic of macroeconomics. In the post to which I link, he mentions that there are non controversial claims in macroeconomics, but one just can't expect him to be the one who comes up with a convincing defence of current macroeconmics. I didn't mean to say that no example of a statement which is accepted by almost all macroeconomists and isn't obvious -- say just a measurement exists. I just mentioned that he (unsurprisingly ) didn't present such a statement. Oh now I am in a bit of trouble, as a commenter might ask me if I, Robert Waldmann, can come up with a non obvious statement accepted by almost all macroeconomists, and especially one not accepted by almost everyone in general. I will try 1. This recession isn't the end of the world. It's mostly cyclical. We are well into a recession so growth is likely to be unusually high averaged over the next 5 years. I think every reccession a lot of people decide that this time its different and we will go into a second great depression. Macroeconomists generally believe in mean reversion. This is, in fact, a measurement with atheoretical VARs implying hump shaped impulse response functions. I don't think it is controversial anymore and it is not obvious. Now maybe it should be controversial as the current troubles seem to have lasted for a long long time. but they haven't lead to total collapse (except in Greece -- massive foreign denominated debt makes things different and macroeconomists know this).

2.Government spending and deficits do not cause low output quickly and in the short run. There is a wide range of guesses of fiscal multipliers but none is well below zero. I think the range is zero (Fama Lucas) to 2.3 (Brad DeLong of course). I think this view is not shared by lots of ordinary people and also by a signficant number of policy makers. Macroeconomists also generally guess that deficits and unproductive government spending probably reduce the trend rate of growth.

I am, if anything, more harshly critical of existing macroeconomics than Noah, but that was a good faith effort. end update.

There are statements which aren't contentious in macroeconomics because almost all macroeconomists assume they are true, when doing academic work, and almost all macroeconomists agree that they are false (but maybe models based on those assumptions might be OK because who knows anything might be). This is not the sort of consensus which wins a field respect.

I think the post is excellent. I would put a lot of stress on point 3. I'd say that, when I think as a citizen and try to guess what policies are effective, I rely on Keynes and ignore the other stuff which was written since 1937 (date of the QJE article not The General Theory). I think I am not so unusual (and I am being paid as a macroeconomist). When I think of pure economic science, I think the same way. This is very unusual, but why ?