Symposium | Has Economics Failed Us?

Myth of the Macro Monolith

By Jason Furman

Tagged Economics

The notion that there is a single, monolithic way of doing “macroeconomics” is a convenient myth perpetrated both by some of the guardians of elite economics journals, who view it as a good thing, and by their critics, who view it as the rallying cry for the creation of a new form of economics altogether. Both camps are wrong—macroeconomics is much more than what is published in a handful of top journals. It includes the research produced by the Federal Reserve system, international organizations, the Congressional Budget Office, investment banks, think tanks, bloggers, and many others. Taken together, this is a vibrant ecosystem that is actively helping to better understand and formulate policy responses to the major challenges we face: the slowdown of productivity growth, the rise of inequality, the decline in labor force participation, the impact of reduced competition on the economy, and much more.

My problem is not a lack of stimulating, exciting reading about macroeconomics defined broadly—it is a lack of time to consume it all. On any given day, I aspire to read not only a few of the latest working papers from the National Bureau of Economic Research (most of which end up in peer-reviewed journals), but also a wider range of materials that might include a research note from the San Francisco Fed, a daily note by Martin Sandbu, a blog post by Mark Thoma, a column by Noah Smith, a short analysis by Goldman Sachs, a policy brief by the Peterson Institute for International Economics (my employer), and a working paper from the Washington Center for Equitable Growth. Much of this analysis is not peer-reviewed, which means it should be read with care, but peer-reviewed research also should be read with care. Moreover, the active debate and discussion among the participants in the ecosystem provides tools that help a careful reader to better evaluate alternative analysis.

To be sure, some of academic macroeconomics, the so-called “freshwater approach” practiced at places like the Universities of Chicago, Minnesota, and Rochester, took a detour several decades ago, and many of these freshwater economists are still lost. This approach traded immediate policy relevance for a research program built on purer microfoundations that it hoped would produce a better understanding of the economy over the long run.

But such model-gazing is just one part of the broader universe of academic macroeconomic research, and there are substantial incentives for academic economists to make progress in understanding real-world issues like the effects of permanently lower interest rates, the consequences of financial crises, changes in the dynamics of labor markets, and the ways in which more realistic models of human behavior can improve our understanding of the economy—the staple of the so-called “saltwater” macroeconomics taught at places like Harvard University and the Massachusetts Institute of Technology.

Academic researchers are taking the lead in addressing many of today’s major issues, especially around the changing nature of the business cycle and the policy response to downturns in a world with lower interest rates. The latest issue of the American Economic Review (AER), the profession’s leading journal, for example, includes an article that helps us better explain why the liquidity shock in the wake of the financial crisis led to such a severe collapse in the real economy—and how efficacious unconventional monetary policy was in dealing with it. This is not a case of out-of-touch academics catching up to reality; Gauti Eggertsson, one of the paper’s authors, had been a leader in developing a better understanding of how to conduct monetary policy when it is effectively impossible to cut interest rates further because they cannot go below zero percent (or at least not much below zero percent). Eggertsson was doing this research years before the United States and Europe actually found themselves in this situation. Moreover, much of this research, including this latest paper, draws on contributions from both “saltwater” and “freshwater” macroeconomics.

In many cases, the different parts of the macroeconomics ecosystem play complementary roles. To take another example, in recent years economists have advanced what I’ve called a “New View” of fiscal policy. This set of policy principles draws in part on research in the leading peer-reviewed journals, including several papers that estimate multipliers for fiscal policy and analyze their relationships to monetary policy at the zero lower bound. But it also draws on journals closer to economic policymaking, like the Brookings Papers on Economic Activity, where J. Bradford DeLong and Lawrence Summers showed that, under plausible assumptions, fiscal stimulus could pay for itself when the economy was close to the zero lower bound. And many of the disparate ideas underlying the “New View” have been tied together in the International Monetary Fund’s (IMF’s) flagship publication, the World Economic Outlook, and in the Organisation for Economic Co-operation and Development’s (OECD’s) Economic Outlook. Countries like Germany and legislators like the Republicans in Congress have ignored this growing consensus—an example of policymakers making too little use of macroeconomics, not too much.

In other cases, academic research is catching up to the rest of the ecosystem. One of the more exciting developments in contemporary economics is a growing understanding of how rent-seeking has served to limit competition, leading both to lower productivity growth and to upward redistribution of income. Much of the modern emphasis on rent-seeking did not originate in journals, but from a variety of sources: a book by Joseph Stiglitz, a column by Paul Krugman, a blog post by Lawrence Summers, a think tank policy paper by Brink Lindsey, a range of output by Dean Baker—and even a small contribution in a conference paper I coauthored with Peter Orszag. But academic research is catching up and pushing forward, testing these ideas empirically and helping to develop them further. Such efforts include a paper attributing much of the slowdown in investment growth to market power and two papers finding that more concentrated industries have seen larger declines in labor income. This research can help form the basis for a revitalized approach to antitrust policy, as well as initiatives to reform regulations that impede competition and mobility—like occupational licensing and land-use restrictions.

Some of the biggest questions in economic policy, like the relationship between growth and inequality, have also been the subject of an increasing volume of research in recent years, in this case coming out of international organizations. The IMF has published influential papers on how inequality can contribute to macroeconomic instability and slower growth, ideas that are mirrored in OECD research. Less output from academics on this topic has appeared in the top journals, but this is due less to lack of interest and more to the difficulty of convincingly disentangling cause and effect—although the IMF and OECD papers make a valiant attempt to do so. It may be better to eschew generalized claims about the relationship between inequality and growth altogether and instead focus on how different forces can affect both equity and efficiency and on how policies can advance them together or best balance the tradeoffs between the two.

The area in which economists have failed to show meaningful improvement is on the one matter that many people mistakenly identify with macroeconomics as a whole: forecasting. The Great Recession looms large as a spectacular miss on the part of the profession, and our ability to forecast the economy—whether in the short or long run—has not materially improved since the crisis. But I am skeptical that any advances in macroeconomic research will greatly improve our ability to forecast the economy in real time. We certainly need to better incorporate the financial sector into our models, but I would not be surprised if this ends up predicting, as Paul Samuelson quipped, nine of the next three recessions.

While I would not give up on trying to improve macroeconomic forecasting, I would not recommend basing economic policies on the premise that we will be successful in doing so. Instead, the right lesson here is greater humility—humility not only about what macroeconomics can accomplish today, but also about what it will likely be able to do after the latest theory is published, whether in the AER or a radical critic’s blog. Part of this humility is understanding how to incorporate uncertainty into economic policymaking, whether by designing more robust automatic stabilizers to counteract recessions in the fiscal system, or possibly even by accepting an uncomfortable conclusion for many progressives—that we do not understand enough to devise a policy for every problem.

To say that macroeconomics has never been more vibrant is not to say that macroeconomists all agree or that there is not a decent amount of what I would consider useless research or wrong-headed policy conclusions. But given the underlying complexity of the economy, the constant structural shifts, and the impossibility of conducting randomized trials or even natural experiments, this will always be the case. But in general, there is a growing amount of research that sheds light on the most important questions—and a growing ability to use the tools it provides to weed out certain ideas or explanations as implausible or even illogical. My worry is not that macroeconomic research is not doing a good enough job answering the important questions but that economic policymakers are being insufficiently attentive to that research in crafting their policies

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Jason Furman is a Professor of Practice at Harvard University and was Chair of the Council of Economic Advisers from 2013-17.

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