The witness panel is basically 4 quacks and Chari. The witnesses appear to have been asked to give testimony on the "DSGE model" which the committee seems to view as representative of what a typical macroeconomist is up to. Robert Solow's testimony is representative of what is in the other testimony, though Page mainly tries to sell his ideas on complexity theory and does not do much criticizing. Solow has plenty of bad things to say about macroeconomics, but comes off as totally cluless. Here is how he starts out:
Here we are, still near the bottom of a deep and prolonged recession, with the immediate future uncertain, desperately short of jobs, and the approach to macroeconomics that dominates serious thinking, certainly in our elite universities and in many central banks and other influential policy circles, seems to have absolutely nothing to say about the problem. Not only does it offer no guidance or insight, it really seems to have nothing useful to say.Well unfortunately, it's Solow who has nothing to say. Here is his main problem:
I do not think that the currently popular DSGE models pass the smell test. They take it for granted that the whole economy can be thought about as if it were a single, consistent person or dynasty carrying out a rationally designed, long-term plan, occasionally disturbed by unexpected shocks, but adapting to them in a rational, consistent way. I do not think that this picture passes the smell test. The protagonists of this idea make a claim to respectability by asserting that it is founded on what we know about microeconomic behavior, but I think that this claim is generally phony. The advocates no doubt believe what they say, but they seem to have stopped sniffing or to have lost their sense of smell altogether.I should get Solow to sniff my models before I write up the papers. First, as Chari points out in his testimony, the majority of work in macro these days is done in heterogeneous agent models. Representative-agent is a useful baseline model in what we teach, but most serious research departs from that. Clearly Solow hasn't been paying attention. Next we have this:
An obvious example is that the DSGE story has no real room for unemployment of the kind we see most of the time, and especially now: unemployment that is pure waste. There are competent workers, willing to work at the prevailing wage or even a bit less, but the potential job is stymied by a market failure. The economy is unable to organize a win-win situation that is apparently there for the taking. This sort of outcome is incompatible with the notion that the economy is in rational pursuit of an intelligible goal. The only way that DSGE and related models can cope with unemployment is to make it somehow voluntary, a choice of current leisure or a desire to retain some kind of flexibility for the future or something like that. But this is exactly the sort of explanation that does not pass the smell test.Now we know that Solow is really out to lunch. For more than thirty years, economists have been working on general equilibrium models of search and matching (including the Mortensen-Pissarides framework that Chari mentions) that have been used extensively to help us understand how labor markets work, and the role for policy in intervening in those markets. Then:
The point I am making is that the DSGE model has nothing useful to say about anti-recession policy because it has built into its essentially implausible assumptions the “conclusion” that there is nothing for macroeconomic policy to do.Solow should take Chari's cue and attend the SED meetings. He would see a lot of papers where models are constructed in which there are financial and search frictions, and where there are important things that policy can do.
Question: Who chose these witnesses? Why can't the House Committee choose witnesses who are actually serious macroeconomists engaged in research and policymaking? The committee could have talked to, for example: Kiyotaki, Gertler, Woodford, Lucas, or Sargent, and actually learned something useful.