Tuesday, November 30, 2010

The State of Macro

It's hard to tell who is more out-of-it, the author of this WSJ article, or Paul Krugman. To the extent that the WSJ guy talks to any serious economists, he gets reasonable answers. Lucas is quite polite, and Mark Gertler puts it nicely:
It strikes me as not productive to say that all we have done is a complete waste. The profession is extremely competitive. If you have a better idea, it's going to win out.
Krugman should take that to heart. As usual, here, he sees himself as the King of Prescience:
More specifically, we knew all about liquidity traps, and had at least thought about balance-sheet crises, a decade ago.
In fact, liquidity traps have been well-known to monetary economists for some time. Twenty years before Krugman thought about liquidity traps, Charles Wilson wrote this paper, which tells us most of what we need to know about the phenomenon:
“An Infinite Horizon Model with Money,” in General Equilibrium, Growth and Trade, edited by Jerry Green and Jose Scheinkman, Academic Press, New York, 1979, pp.81-104.
Krugman also says this:
It’s true that if you bought completely into rational-expectations macroeconomics, the crisis in the economy should be causing a crisis in your faith —
Now, the people who "bought completely into rational-expectations macroeconomics" would be essentially the whole profession. Krugman of course is stuck in 1978. He doesn't realize that Keynesians, new classicals, and whoever else, "bought in." This is what Woodford, Gertler, Gali, Kiyotaki, Lucas, Prescott, and all of the rest of us, do. There is no crisis of faith, only pressing and interesting problems to work on.

The WSJ guy finishes with this:
Many economists think the next big idea will more likely come from the ranks of younger Ph.D candidates, who are producing reams of work examining the financial crisis. Established academics—such as Mr. Gertler, Nobuhiro Kiyotaki of Princeton, Marcus Brunnermeier of Princeton, Michael Woodford of Columbia and Robert Hall of Stanford—are making progress on including banks, financial markets and even a bit of irrationality in traditional models.
I'm glad to hear that we are finally making some progress in getting banks and financial markets into "traditional" models. Of course, Gertler, Bernanke, yours truly, and Bruce Smith started doing that in the early 1980s.


  1. Stephen - when he says "we knew about liquidity traps" I did not interpret that to mean "I was the first one to think about it - nyah-nyah-nyah-nyah-nyah-nyah".

    Thinking about these issues extended well before 1979 as well, of course! Isn't this exactly what Krugman was saying - that "we knew about this stuff".

    I think you're more on target when you criticize him for his reaction to RE. He probably caricatures this gang. There was a good interview of Tom Sargent - I believe up on one of the Fed websites - where he walks through what RE was meant to address and speak to and what it wasn't meant to address and speak to, and that if you used it thoughtfully, you shouldn't have any crisis of faith. This strikes me as the better way to look at it, but I do think Krugman is probably right that not everyone was as thoughtful in their use of RE as Sargent.

  2. "It strikes me as not productive to say that all we have done is a complete waste. The profession is extremely competitive. If you have a better idea, it's going to win out."

    Not at all necessarily true, especially over periods as short as decades.

    1) Huge issue, economics is not easily empirically tested with control like hard sciences. If you invent a stronger metal, you can easily win out over an orthodoxy by just demonstrating it's harder and better. It's very hard to precisely demonstrate to others an economics is better. I think Krugman largely has with the unfolding events of recent years, but it's not nearly so persuasive and airtight as a controlled physical test of say tensile strength.

    2) If you have a better idea, but the journal gatekeepers don't want it published because it makes their paradigm a lot less important, it doesn't get published, and so, of course, doesn't win since publication in the big journals is just about the only thing in reward and advancement in academic economics. Economics is only competitive in the things the journal gatekeepers want it to be competitive in. If they wanted alchemy to be the dominant paradigm, then the journals would be competitive in who could come up with the most creative, intricate, mathful explanations of how to turn lead into gold.

  3. Yes, it's just a tool. Of course you can use the tool well, or you can use it badly.

  4. I think Nick Rowe agrees with you:

  5. The macroeconomists have no answer to Serlin.


    And the public should know it.

  6. Richard,

    1. I'm sorry that you have been taken in by Krugman. The reality is that practicing macroeconomists do not take Krugman seriously. His contributions to the profession were in international trade. What he has been doing for the last few years is political, and has nothing to do with advancing economics as a science.

    2. The science works imperfectly, but in general I think Mark Gertler is right - the cream rises to the top. The grumbling you hear about academic journals comes mainly from people who do bad work and can't get it published. There's no other way to do it other than peer review. Research is sifted by the editorial and refereeing process, and the best work tends to end up in the best journals. This is not always true of course. For example, Lucas's (1972) "Expectations and the Neutrality of Money" paper was rejected by the top journals and ended up in the Journal of Economic Theory, at that time a new journal with no reputation. However, eventually we figured out that Lucas had written a pathbreaking piece of work, and we corrected the error by giving him a Nobel prize.

    Last anonymous,

    There's your answer. Not sure what it is you want the public to know.

  7. Didn't Krugman do a lot of work in International Macro? Macro folks in my department take him pretty seriously (Stanford) even if they don't admit to it.

  8. A student of Gertler told me a few weeks ago that Gertler himself thinks high of Krugman... I don't know if its true, but that's what he told me.

  9. "If you have a better idea, but the journal gatekeepers don't want it published because it makes their paradigm a lot less important, it doesn't get published, and so, of course, doesn't win since publication in the big journals is just about the only thing in reward and advancement in academic economics."

    Nonsense. If this was true, then Prescott and Lucas should have never been able to publish their work and become famous. At the time they were doing their pathbreaking research the profession was dominated by Keyensians. They were the "gatekeepers" (to use Richard's language) at major journals. And shift of paradigm was exactly against them.

    You cannot argue, on one hand that there was a shift of paradigm which was unproductive for the profession and in the next paragraph cry about how the "gatekeepers" don't allow a change in paradigm!

  10. I think the WSJ article reflects the popular perception that economists failed to predict, had no adequate explanation for, and provide no useful prescription for the current economic crisis. I'm afraid this post, which tells us that all the economists you know agree that the state of economics is fine and dandy, will not be effective in countering that perception. But it will probably be popular among people who already agree with you.

  11. 1. Read the beginning of this interview with Tom Sargent:


    This account of Krugman's macro seminar attendance is indicative of the extent to which Krugman is engaged in the science of macroeconomics. I've been to plenty of economics conferences in my life, and have never seen Krugman at one.

    2. Last anonymous: Something tells me you are not very interested in learning what macroeconomists are up to. (i) You don't blame the seismologists whenever an earthquake happens. (ii) We actually have a good grip, I think, on what the financial crisis was about.

  12. Krugman has 2438 citations (google scholar) for "A Model of balance-of-payments crises" and 923 cites for "Target zones and exchange rate dynamics" and 779 cites for "Balance sheets, the transfer problem, and financial crises". I think in the "currency crisis" literature his contribution is well established and is discussed in the "other contributions" section of the nobel prize scientific background.

  13. The idea that Krugman is not a distinguished macroeconomist should be self-evidently silly. Thank you to the previous person who documented what Prof. Williamson should already know. Both of the papers that were cited in his post started vast, important literatures.

    It may be true that Prof. Williamson doesn't respect Krugman. He has that right. But lots of people do. Just asserting something to the contrary does not make it true.

  14. To be fair to Williamson, he at least engages in Krugman's ideas. The standard offense from Chicago etc. is to simply dismiss Krugman as "not really an (or former) economist, just a political hack". Williamson at least documents everything he thinks is wrong with Krugmans argument. Though I'm not frequently convinced, its a useful contribution.

  15. You can't argue with citations and publications. Krugman certainly had something to say about the economics of exchange rates, and people obviously read the stuff. However, it's hard to argue that he contributed anything important to the core of macroeconomic theory and policy. If there had been no Krugman, we would not be doing macro any differently today. Krugman's writings from 12 to 15 years ago make sense, and have useful things to say about important issues. When I read what he has to say today in his blog and in his NYT column, I think: Here is a guy who is out of touch with what macroeconomists are up to. That would be fine, if he didn't use his perch to dump on working macroeconomists who are actually trying to make some sense of the world. That's why I write these things. People like me understand this anyway, but maybe others might get the idea that Krugman is not representing us well.

  16. Well, there is plenty of reasons to dump on practicing macroeconomists. When you say things like "You don't blame the seismologists whenever an earthquake happens", you are missing the point. Seismologists didn't promise wonderful things like the great seismological moderation or write opinions in the wall street journals and the new york times. Other sciences strive to under-promise and over-deliver. Macroeconomists do the opposite. Krugman just pointed that out. It probably upsets other economists because it was a "you too Brutus" moment, not because a whole lot of what K said was off base.

  17. Seismologists didn't promise wonderful things like the great seismological moderation or write opinions in the wall street journals and the new york times.

    OK, so, indeed, it is about critizing economists, not economics, isn´t it?

  18. Krugman's currency crisis model is pretty cool. Salant's model to some extent though, I suppose.

  19. "Well, there is plenty of reasons to dump on practicing macroeconomists."

    You're confused. Go back and read my blog entries.

  20. Stephen,

    Could you add a search function (no pun intended) to the site?

  21. Another thought for confused:

    For Krugman there are good people and bad people. The odd thing is that the good people (the Keynesians) were the ones who were so proud of the Great Moderation, believing they had solved the problem through wise policy. Krugman's good people were the ones moving the gears of policy, but Krugman chooses to dump on the bad people. Further, the bad people he has in mind seem to be the bad people of another era - i.e. James Tobin's bad people from 1978. The conflict between the good people and the bad people of 1978 was resolved long ago, unbeknownst to Krugman, apparently. Where does that leave us? Krugman's confused, and it's no wonder you are confused as well.

  22. vimothy,

    I'm using a basic Google template here and, as far as I can tell there isn't a search function in there to add. If someone knows how to do this, please let me know.

  23. Stephen,

    Okay, no worries. Thanks for trying. It's a right pain having to trawl through the archives at times, but I'm confess that I have no idea how to do this either, sad technoloser that I am.

    Anyone reading this under the age of twenty-one? Old people need your help.

  24. There is a search bar in the top left corner, at least for me there is.

  25. [\Embarrassed\]

    So there is! I guess we fail to the reject the sad technoloser null with a high degree of confidence then.

  26. Yes, we are both old and sad technolosers.

  27. vimothy,

    See the top of the page now. Andolfatto showed me how to do it.

  28. Sorry, I posted to the wrong entry so I re-post here.

    All I want to say is:

    (1) Economists are hard-cord scientists (vs. [looked-down by economists] soft-core ones such as sociologists, psychologists, anthropologists, etc. who, despite of sometimes heated debates among their profession, are compromised, reserved,and weak: readily willing to admit their profession's ignorance, limited knowledge of their own field, not to be 100% sure and proud of their research tools and techniques and methodology).

    (2)Real economists are never wrong. Real world is.



    The list can go on. But, as old economists always told young ones, no matter how absurd your theories are, when people point it out, Just say "it's not me", "the data are controversial". There's no shortage of mantras for economists.

    Full disclosure:I have an advanced degree in economics. One has no choice but believe in his own religion. [Sigh]

    But hey, "It is difficult to get a man to understand something, when his salary depends upon his not understanding it!"

    Six-figure salary, lifelong tenure, lavish conference, consulting projects, and Wall Street checks. Anyone?

  29. I forgot "research grants" (public and private), "invited talks" (It specially feels so good to lecture perplexed dignitaries, other less mathematically divined mortals about the universe's mechanism, get paid, and respect).

  30. . . .and column in the NYT, trips, conferences, prestige power. . .

    We can go on and on accusing people of conflict of interest. Probably everyone who does something sustainably gets paid to do it. As we well know since Adam Smith, this doesn't mean what we are producing is bad.

    Economists get a bad rep because what non-economists have in mind are people like Keynes, Friedman, Galbraith Krugman. These are people who are engaged in public debate and who make a point of saying out loud things that they believe are right without giving much margin for doubt (and in extreme accusing others of being dishonest, compromised etc.) In academia you get these loud types of course, but this is a matter of personality. Mostly you see people who are just trying their best to make sense of a very complicated object all the while being careful about what they assume and what they say. If you are honest about how you do it (as most academics are), it will be hard to shout out louder than Krugman.

    On a more structural level, macroeconomists are in a really tough spot. Their science is not amenable to experimental work which makes it hard to be certain about much but, unlike sociologists and anthropologists, they are called to give policy advice in real time. Then, when the advice turns out not to work as expected, they get blamed for giving the advice in the first place.

    No wonder so many freshwater types retreated to academia and let non-economists to fend for themselves.

  31. "No wonder so many freshwater types retreated to academia..."

    1. Why is academia a retreat? I think of this as serious work, pushing the frontiers of knowledge, etc. We need specialization. You don't want everyone doing policy.

    2. There are now plenty of "freshwater" (an obsolete term, by the way) types now doing policy. The Federal Reserve System is well-populated with them, though of course there are more in Minneapolis, Chicago, St. Louis, Phildelphia, and Richmond, than elsewhere.

  32. It is a retreat from the daily grind of policy debate. Didn't mean to imply this is bad in anyway, but it is probably true that since the 70's the typical macroeconomist with an academic job is much further from this kind of debate.

    Also, as with any generalization, it is faulty and there are exceptions all around (Kocherlakota being the most prominent right now). But I stand my point: The vast majority of fed economists and in other policy institutions subscribe to a more keynesian view of the world.

  33. Macro will never progress unless it is allowed to conclude things that are contrary to the liberal consensus. Right now it is stuck on apologetics against Marxism.