The Only Thing Macroeconomists Have Learned

Monday, March 1st, 2010

Russ Roberts interviews Nobel prize-winning macroeconomists Edmund Phelps in the latest EconTalk podcast, and Phelps states that macro has been very productive over the last generation. Eric Falkenstein disagrees:

Phelps thinks we know a lot more about the economy, and by this he means, I think, that several theoretical innovations — the Phillips curve, the steady growth of money ensuring steady growth — have been proven wrong. So, some ideas have been rejected, and in that sense we know more. But there have been many innovations — overlapping generations models, dynamic programming, Hansen’s generalized method of moments — have shown themselves to not really focus our efforts, but rather allows everyone to add rigor showing that some things could be true. That’s hardly helpful, in that theories that explain everything explain nothing, and bad ideas are a dime a dozen (ie, developing an enthusiasm for the Phillips curve, and proving it wrong, is hardly progress).

So, we currently have debates about the value of the multiplier, where values over 1 suggest government spending is good, less than 1 means counterproductive (assuming that government and private consumption and investment have the same value, ie, the cost is the value created). Robert J. Barro — a well respected economist — suggests a value of –1.1. Joseph Stiglitz — a well respected economist — argues that the multiplier is around 2.0 (1.5 in the short run). Monetary policy currently targets a nominal GDP via the Taylor rule, an ad hoc policy that is indifferent to how much of GDP is inflation or real growth, so it reflects nothing that macro theorists have figured out, but rather, a reasonable rule of thumb. There is no consensus on why poor countries are poor (Easterly: too much top-down control; Stiglitz: too much markets, too little government spending).

I think the only thing macroeconomists have learned, is that Soviet style socialism does not generate higher growth than non-Soviet style socialism, and this fact wasn’t predicted by any economic consensus, but rather, the obvious failure of the Soviet Union, and the comparison of countries like East and West Germany, or North and South Korea.

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