I Think I Am A Macroeconomics Denier

Microeconomics generally provides a powerful set of tools that have proven useful and successful predictors of how things work in the world.  But I am not sure I trust anything at all from macroeconomics.  Sure, I am fine with work about what contributes to or hinders wealth creation over long time periods -- Ricardo and Adam Smith and Julian Simon and Deirdre McCloskey and that sort of work.  But I am not sure macro is capable of any useful predictions on the 5-20 year scale.  Perhaps it is like climate and trying to isolate output effects of changing one input when millions of other variables are changing is simply impossible for us at this time.  Perhaps the stakes of macro, since it drives major public policy and government spending and regulator decisions, are simply too high for objective work.  I don't know, but I don't trust any of it.  Particularly when so many of the current recommendations for increasing near-term prosperity contradict what we know to have driven long-term prosperity.


  1. Daniel:

    I've had this thought before. It seems like macroeconomics should simply be microeconomics extrapolated over a larger population. Instead it uses tautologies, and personifies countries in a way that leads to incoherence. But these are the numbers you need to give legitimacy to planners.

  2. ErikTheRed:

    Mainstream macroeconomics (neoclassical, Chicago, Keynesian, etc.) are fundamentally broken. Keynesianism is based on bizarrely wishful thinking and the only it got traction because its implications happen to be incredibly convenient for both economists and politicians - it's an excellent example of Mencken's snark that “There is no idea so stupid that you can’t find a professor who will believe it.” The neoclassical and Chicago schools are somewhat better, but they've inherited the silly Keynesian notion that money itself is somehow magically exempt from the laws of supply and demand and its over-obsession with problematic econometrics - especially the worship of GDP as an indicator of economic well-being.

    I think the Austrians have taken the best stab at it from an analytical standpoint; the Austrian school's biggest problem is so-called Austrian economists like Peter Schiff who combine Austrian analysis of the overall situation (fair enough) with a neoclassical methodology for predictions (fail) - hence their tendency to predict that "The End of the Fiscal World is Happening Next Week - Buy Muh Gold!!!"

  3. kidmugsy:

    If as clever a fellow as Maynard Keynes couldn't find anything sensible to say about macroeconomics then there probably isn't much sensible to say.

  4. August Hurtel:

    I wouldn't expect much predictive value, especially when you've got people expending a lot of time and resources trying to keep the charade going.

  5. gr8econ:

    Been teaching Intro to Macro for 13 years now. Almost all of the macro models (theories) have some applicability at certain times. None of them work consistently in every circumstance. Add to that an underlying economy that continues to change, and it’s amazing that any of the predictions are ever correct.

    200 years ago about 80% of the US economy was agriculture. In 1900 it was about 40%, while today it’s about 1.5%. Right after WWII around a third of the US labor force worked in manufacturing. Today it is about 8%. In 1960 most women worked in the home (65%) and by 2000 most women (60%) were part of the labor force.

    Banking is vastly different and finance continues to change at a rapid pace. The shipping container totally changed global trade as well as where and how manufacturing was done.

    In defense of the Macro economists, you try modeling something that keeps changing out from underneath you. On the other side, most Macro economists think they know more than the really do.

  6. William Woody:

    I believe, as another of your posts allude to, that the growth of wealth comes from new ideas, new inventions and new concepts that we discover as we solve problems that face us.

    Predicting future growth requires us to predict what new ideas or concepts we will discover. That's why we can't predict future growth: because we cannot predict what we will discover in the future.

  7. gr8econ:

    New growth theory doesn't predict what will be invented, only that inventions and innovation will continue. This results in ever growing real output per person and a continually rising standard of living. The driver behind this is the thought that there is no limit on knowledge.

  8. William Woody:

    Sure. But such predictions or assumptions are inherently lumpy and subject to continual argument.

    For example, Tyler Cowen's "The Great Stagnation", which argues the low hanging fruit of invention has all been discovered--and what we have left are incremental improvements on existing inventions rather than radically new stuff that pulled us out of our agrarian past. (It helps explain why, for example, everything in the modern kitchen, with the exception of the microwave oven, would be immediately familiar to someone living during the Great Depression.)

    OTOH, if someone were to stumble on some radical discovery--like workable anti-gravity, for example, or a cheap cure for cancer--would greatly alter the trajectory of the economy in ways we couldn't conceive.

    We just can't know. Worse, it seems that many policy wonks seem to think innovation will continue at the same rate as in the past, often regardless of policy recommendations. Personally I believe there is a huge amount of potential pent-up innovation that could radically improve health care--but we're all off talking about insurance policies instead, and not paying as much attention to the regulatory policies that prevent innovation. But I could be wrong.

  9. William Woody:

    Suddenly reminded of this guy, Yoram Bauman, the Stand Up Economist. https://www.youtube.com/watch?v=VVp8UGjECt4

    His comments about Macro are classic.

  10. WhoStruckJohn:

    Microeconomics seems to work fine. Macroeconomics, not so much. I think the problem is that as soon as political policy becomes involved (and it sure is in macroeconomics), people stop being rational actors. Look at the reaction to the study of the Seattle minimum wage increase: "Quick, gin up a study that says the opposite!" rather than "Oops, guess that actually hurt the minimum wage workers by a net $125 per month." It's worth noting that political science and economics used to be one field called political economy - and should have stayed that way. Those nice mathematical macroeconomic models all assume rational actors, which just isn't the case as soon as political decisions enter into the equation.

  11. jdgalt:

    More to the point, the models assume non-malicious actors. Look back to the Progressive Era (1910s-20s) when progressives were campaigning to enact laws like minimum wages, and you'll hear the explicit desire that "the stupid, the vicious, and the ugly" ought to be excluded from the job market so that they'll have to be institutionalized. And the laws achieved that goal (except that today, with so many of the institutions shut down, they become homeless instead.

    If today's "liberals" were truly liberal or even honest, they'd take responsibility for the mess they've made and work to fix it.

  12. gr8econ:

    Electric motors didn't really change things until 20 years after they were implemented. Totally changed how factories worked. We are only now discovering what is possible when everyone carries a computer with communications capability on their person at all times. Yes it's lumpy. No, we haven't yet plucked all of the low hanging fruit.

  13. gr8econ:

    Love that presentation. Macro being summed up as "blah, blah, blah" is essentially correct.

  14. Andrew Garland:

    Macroeconomics is Astrology, Not Science
    By Frank J. Tipler, Professor of Mathematical Physics at Tulane University.

    [edited] Our leaders are being advised by macroeconomists who haven’t got a clue where they are leading us. Their actions may lead us out of the current recession, or they may lead us into a depression as bad as the Great Depression.

    Science is about prediction and precise explanation. It is not enough to construct a different explanation about each past event. Science must produce a consistent, precise explanation for all of the relevant past events.

    Then, real science predicts the future and is testable according to those predictions. If a "science" cannot predict what will happen, then it is clear that it does not understand enough about what is going on, and of course it is of no practical use in arranging for a better life.

    Real scientists bend over backwards to make their data, methods, and results available for review and criticism. This corrects for personal bias, and allows for quickly sorting out the truth. A true scientist tries to examine all possible explanations for his results, before believing that his new analysis is correct.

    You often hear about a supposed scientist withholding data or methods. He may complain that it is beneath him to release data to people outside his field, or complain that he has no time to give information to his critics. This is an indication of a closed mind, or someone afraid that his results won't survive review. It is the mark of a pretend scientist who cannot be trusted.
    === ===

    The ability to predict what will happen from following pre-defined rules is the essence of science and knowledge. The inability of macroeconomics to do this is evidence of cult, not science. The shaman says he is particularly able to interpret the signs and do the right thing when the rules fail. Especially after the fact.

    We rightly object to the idea of pervasive central planning. The disruptions caused by ObamaCare should be a lesson about central planning in any secton of the economy (our lives). Why should we be happy with central planning of the value of money, assets, and the cost of loans?

    The common desire of governments is to steal through inflation. It reduces real government debt by collecting a hidden tax. The only fear is that big inflation (say 6+%/yr) will upset the peasants. So, theories are welcomed which can do inflation targeting, just enough and not too much. It is just a waste, from the FedGov view, to have inflation of less than 2-3%. They could be stealing more, up to the "inflation bound".

  15. Todd Ramsey:

    In the long run, it's all micro.

  16. cc:

    An example of the inability of macro is the effect of Fracking. The economy is highly correlated with energy availability and no economic stimulus by taxing or whatever will overcome high energy costs.
    Another is the computer revolution.

  17. Zachriel:

    Coyote: But I am not sure macro is capable of any useful predictions on the 5-20 year scale.

    Macroeconomic policy largely tamed the market cycle in the post-WWII period, that is, until the Bush Administration implemented a procyclical policy during an economic expansion, exacerbating the bubble in the securities market. That was followed by attempts to restrict stimulus policies during the Great Recession, based on claims about the danger of the debt. Today, with an even larger debt, the same politicians are calling for large tax cuts.

    Like most other tools, macroeconomics doesn't work if you don't actually use it correctly.

    Edited deficit to debt.

  18. An Inquirer:

    Zachriel, your politics cloud your ability to analyze economics.
    Yes, the detrimental aspects of the economic cycle have diminished since World War II. Most likely, the reason for that is increasing acumen of the Federal Reserve to manage the economy. Moreover, the economic cycle has been increasingly upbeat since the 1980s when supply side economics became the dominant theme of fiscal policy -- and the greatest supply sider in fact was Bill Clinton, even if at times he was a reluctant supply sider.
    Your discussion of the Bush Administration just does not fit the facts. We were on the verge of a recession when Bush took office, but for most of his presidency we had a fairly robust economy -- not an overheated economy -- despite headwinds that our society rarely sees. To a large degree, the robust economy depended upon judicious and timely action of the FED. However, the FED made a couple big mistakes in 2008, and those mistakes exasperated the mistakes of the federal housing policy -- for which both parties can take a lot of credit. The Great Recession was not due to fiscal policy; it was due to federal housing policy along with a couple of other contributing factors.
    Most likely we did not have a severe bubble in the Stock Market. That fact can be seen in how quickly it recovered to its previous level -- and then grew beyond -- following the plunge which was driven by fear and herd mentality.
    Your comments on debt should be addressed also, but not in this post.

  19. Zachriel:

    An Inquirer: Zachriel, your politics cloud your ability to analyze economics.

    An Inquirer, your politics cloud your ability to analyze economics.

    An Inquirer: Yes, the detrimental aspects of the economic cycle have diminished since
    World War II. Most likely, the reason for that is increasing acumen of
    the Federal Reserve to manage the economy.

    Sure. Monetary and fiscal policy are both important to stabilizing the market cycles.

    An Inquirer: Moreover, the economic cycle has been increasingly upbeat since the
    1980s when supply side economics became the dominant theme of fiscal

    From WWII until the Great Recession, the market cycle has been largely manageable.

    An Inquirer: and the greatest supply sider in fact was Bill Clinton, even if at times he was a reluctant supply sider.

    Clinton significantly raised marginal tax rates, so that is hardly supply-side economics. It led to the longest peacetime economic expansion since WWII. The Obama expansion is the second longest.

    An Inquirer: We were on the verge of a recession when Bush took office, but for most
    of his presidency we had a fairly robust economy -- not an overheated
    economy -- despite headwinds that our society rarely sees.

    The U.S. economy, especially the housing and securities markets, was clearly overheated. If Bush was worried about a recession, a short-term stimulus may have been warranted. Instead, they passed long-term cuts in the marginal tax rate, exacerbating the bubble economy.

  20. An Inquirer:

    Zachriel, I may have politics, but I do not let politics drive my economic analysis. I do not ignore facts that are inconvenient to my politics or twist analysis to come up with a desired result.

    Macroeconomic analysis is difficult because we do not have laboratory experiments where we can isolate variations in one parameter while keeping other parameters constant. One cannot simply look at marginal tax rates without considering what was happening due monetary policy. Moreover, fiscal and monetary policy is taking place while there are developments in government regulations, government policies, technology advances, business revolutions and international geopolitical issues. Yes, macroeconomic analysis discussion is difficult in itself, and it becomes virtually impossible when facts are ignored and contorted as they are in your posting.

    When one looks at the crises over the past 40 years that could have led to extreme economic and financial difficulties, we see the key role of the FED and sometimes the supportive role of the Treasury Department. Typically, they were agile and prudent, and the times that they were not (such as Lehmann Brothers), we experienced a great amount of pain.

    You talk about a rise in marginal tax rates under Clinton (proving he was not a supply sider) and claim it led to the longest peace time expansion. But you ignore that the economy and financial markets stumbled following that increase; you ignore that Clinton said it was a mistake; you ignore that we were coming out of a recession (which probably was largely due to end of Cold War) so growth should have been robust; you ignore that Clinton later significantly reduced Capital Gains tax rates; you ignore that Clinton signed the great welfare reform act; you ignore that Clinton agreed to significantly reduce the effective tax rate paid by welfare recipients when getting jobs; you ignore that Clinton reduced tariffs and promoted international trade; you ignore the deregulations under Clinton; you ignore the Roth IRA initiatives under Clinton's watch; you ignore the constrained growth of government spending under Clinton; you ignore the moves to reduced malinvestments under Clinton; and the list goes on in showing the Clinton years were hallmarked by supply side economics. The Bush administration was flaming Keynesian in comparison.

    It is important to note the difference between a reduction in tax rates and a reduction in tax payments. And the difference between an increase in tax rates and an increase in tax burden. Tax burden of the rich did not rise with Clinton's tax increase. I guarantee that not one of my clients paid more in taxes after the tax increase; we recharacterized income (very legally), and in the 40,000 + pages of IRS tax code, there are many opportunities to recharacterize income if one is willing to lose a little flexibility and make a minor payment to a tax advisor. At the same time, tax payments went up when Clinton later reduced rates.

    You modified your statement about a bubble in the securities market -- now stating it was a bubble in the securities and housing markets. Yes, there was a bubble in the housing market, but you blame marginal tax rates on the bubble on the housing market! That claim stretches my ability to think I can have a conversation with you. It is incredible to associate the bubble in the housing market with marginal tax rates and not mention government's housing policy and low interest rates. The federal housing policy (rules and bully pulpit) led to so many loans that should not have been made and loan gimmicks that would later prove disastrous.

    Time does not allow me to further discuss in great detail the contention of a bubble in the securities market. Yet, note that economic theory and experience show that bubbles in the securities market depend more on low interest rates than on marginal tax rates. Also, again, if the stock market was in a huge bubble, it would not have quickly come back to previous levels once the panic and herd mentality faded.

    Economic theory and individual examples point out that cuts in marginal tax rates lead to improvements in long term economic growth, and one could contend that both Clinton and Obama benefited from this.

  21. Jeffrey Deutsch:

    I earned my M.A. in Ph.D. in Economics at George Mason University, with Austrian Economics as one of my three specialized fields.* Prior to that, I took a week-long lecture and discussion program in Austrian Economics sponsored by the Institute for Humane Studies**. As an undergraduate, I inhaled Ludwig von Mises', Israel Kirzner's, Murray Rothbard's and Friedrich Hayek's work.

    Very regretfully, I eventually learned that hard-core Austrian Economics isn't relevant, because:

    (1) Its major contributions, particularly dynamic markets, discovery, subjective perceptions and knowledge, have been co-opted by mainstream microeconomics. For example, see Armen Alchian's and William Allen's Exchange and Production: Competition, Coordination and Control.

    (2) It insists on not being prescriptive (beyond, say, "Free markets!") or predictive. So what, exactly, is it good for?

    (3) It also insists on being unfalsifiable -- on exempting itself from any external tests. Austrians believe that all you need to know is that humans want things and are rational (we'll get back to that last one in a minute), and all the real economics falls into place.

    Austrian Economics' famed emphasis on the a priori means, in practice, "Trust us, accept all our premises -- including highly controversial moral, political and psychological premises -- as true and then let's discuss any questions you still have."

    Sorry, but in a world of people half as selfish as economists assume we are -- not to mention half as rationalizing as we really are -- nobody gets to move the goalposts around or paint targets around the bullet holes.

    Oh yes, rationalizing. Guess what: Humans aren't fully or even almost fully rational. Humans are systematically myopic, conformist, habit and default driven, cognitively miserly, frame susceptible, self-deceptive, egotistical and many other things that make us human -- not "homo economicus".

    And yes, sometimes that means we choose better collectively than we do individually. Like when we as a society instruct our elected representatives to make sure that the police and other officials they in turn select see to it that everyone will wear seat belts or pay a fine (so that nobody stands out as a coward for doing it, and we all support each other through our examples). Richard Thaler won the Nobel Prize for a reason.

    Hey, if you believe that individual freedom is everything, that's arguably a perfectly good moral and political belief. Just don't dress it up in circular jargon and call it economics.

    [*] My other two were Law & Economics and Industrial Organization.

    [**] And held at the Foundation for Economic Education.