About the Great Marcoeconomic Debate

The increasingly snarky debate between so-called saltwater and freshwater macroeconomists seems to be drawing the irk of some of my colleagues walking the halls of my institution.   The public airing of our dirty laundry seems to make some uncomfortable.

For context, here's my earlier short post and a great compilation of the Great Debate by Mark Thoma.

I sympathize with my colleagues, but feel differently.  I actually find it all fun and interesting, even if the snark is too thick.  (Maybe this is easier for me to stomach as a non-macro specialist.)  In the long run we'll remember the substance as much as the snark, and the substance will stick.  Airing dirty laundry is good for the profession because it provides full transparency.  With full transparency and the lightning-quick back-and-forth of the internet, no longer will it be possible for economics students to be indoctrinated into any particular school of thought without easily checking out what the other side has to say.  Reclusiveness is bad for science and, if nothing else, the public food fight kills reclusiveness.  So bring it on!

A few of my random thoughts about all of this:

1) In some ways the "failure" of macroeconomics has been exaggerated.  I  believe most macroeconomists are nonideological and much of the macroeconomic consensus remains intact.  The great majority still believe, I think, that monetary policy should be the main tool used to combat business cycles when we are not at the zero lower bound of interest rates.  And since we don't hit the zero-rate lower bound very often, most are mostly on the same page. To a large extent, Friedman's monetarist position stands.

2) There would seem to be more disagreement about what to do if interest rates fall to zero.  But the quality of that debate hasn't been as good as it should have been.  Part of the problem is that the freshwater side seems to be ignoring the zero-rate dichotomy (what to do at the zero lower bound).

3) I still don't think conservative economists have made enough or clear enough arguments about alternatives to fiscal policy at the zero lower bound.  I think (though I'm not a macro guy) that monetarist alternatives are still on the table, they're just really strange alternatives.  Krugman and other saltwater folks are kinda ignoring these alternatives and they're not being called on it, or at least not very effectively.

4) There have been more wild and unsubstantiated claims coming from the right as compared to the left (e.g., Casey Mulligan's argument about spontaneous laziness causing recessions--okay he didn't say it exactly like that, but what he said is pretty close and equally and obviously ridiculous; Cochrane's overly dismissive view of Keynesian ideas as "fairy tales"; multiple claims that fiscal stimulus exaggerates the size of recessions in light of substantial theory and evidence to the contrary; Posner's bad math and false claims of ethical breaches by Romer; and so on...).  The full-fledged rational-exptations-to-the-hilt, no-sticky-prices, true believers need to face up to reality.

5) I don't think Krugman is being shrill (well, maybe a little) or political to call these guys (in 4) on their unsubstantiated (and clearly political) extremism.  While Krugman has some pretty strong political views, he does a pretty good job laying out a strong intellectual basis for his position and navigating back and forth between theory and evidence.  In contrast, the other side is ignoring compelling theory and compelling evidence that strongly contradicts their positions.  And then they accuse Krugman of political hackery?  Uhm, who's the teapot calling the kettle black?

6) Following up from (3), there must be some good intellectual counterpoints to the stimulus-loving saltwater front and they should be made.  But politically conservative economists aren't making those arguments, or at least they aren't making them very well.  Ken Rogoff may be an exception, but he just doesn't seem to be drawing the wide attention of other conservative economists.  It seems to me Greg Mankiw is the one to do it.  But his posts are just too thin and oblique.  I think reality-based conservatives need to be making better monetarist arguments--inflation targeting and all that.  Maybe they don't want to offend their more extreme Ron Paul (Austrian?) followers who overly fear inflation and long for a return to the gold standard.  I'm speculating; I don't know.  Vigorous debate is good.  But substance so far has been unduly one-sided because, for some unknown reason, the other side isn't being very clear or convincing. For example, John Taylor seems to contradict his own Taylor Rule.  I think his Rule is currently screaming for the printing presses yet he seems to claim the Fed is being too loose with money.  I just don't get it.

7) I actually thought Krugman's piece was pretty balanced.  He's not simply embracing Keynesianism.  He's also saying where Keynesians and New Keynesians fall short, and that we need to bring behavioral economics into the mix and connect macro with finace.  These seem like an inescapable truths to me.  Facts are something we need to contend with.  To some conservative economists it seems the thought of bringing psychology into economics is tantamount to giving in to liberals and socialists.  I don't see that at all.  Indeed, the Austrians would seem to embrace behavioral aspects of economic behavior.

8) Like I said earlier, I think the bubbleheads (Shiller, Krugman, many others...) don't seem to be paying enough attention to the fact that asset prices appear more rational at the height of bubbles than they do during normal times or recessions.  It would seem irrational pessimism rather than irrational exuberance is the more pervasive problem.  I think that paints things in a somewhat different light than typical bubble rhetoric.  It certainly helps us to understand why many economists didn't expect such a sharp downfall (mea culpa). They call it the equity premium puzzle in finance.  Anyway, this, I think, is a key area where behavioral economics, finance and macroeconomics need to link up.  But since I'm not a macro guy I'm certainly not the one to try doing it.

Update (9/18): I agree with the comments about inflation targeting and apparent internal political conflict among conservative economists about such a position.  But that's a poor excuse for the better scholars of that crowd.  As far as I can tell, the only viable position for conservatives is to say the Fed, despite its aggressive efforts, still did too little too late.  Here is what appears like a serious attempt at this position by Scott Sumner that will be presented at Cato and Jim Hamilton's response to it.  I'm not in a position to judge the merits.

Update (9/20): Taking the snark up another notch, here's David Levine and response by Brad Delong.

Okay, I'm really beginning to see how the snark gets in the way of substance.  The problem is the opposite side latches on to some exaggerated snark and not the surrounding substance.  Each side then reacts by responding only to the exaggerated snark coupled with a little new substance.  So the more snarky things become, both the snark and substance spiral, but there's little focused debate on substance.

So, starting with Krugman's piece, his exaggerated and snarky title really hurt the egos of the predominantly freshwater folks who have done a lot of interesting and useful stuff.  It's just questionable whether those interesting and useful things inform our recent and current macro situation. So these folks who have done some useful, interesting (and often very mathematical) things are understandably offended by Krugman.  He really should have thrown a bone.  Then his broader points (which were pretty good ones, I think) might have elicited more constructive debate.

Then the snark externality just gets larger with each iteration.  So it goes...

Sigh... the pluses and minuses of the internet era...  I still think its benefits far outweigh the costs.

This more recent post by Krugman is rather pointed but I think a lot more constructive in tone.  It matches what I recall learning in graduate school in the late 1990s.  The standard justification given for rational expectations approaches was that, especially with the apparent taming of business cycles, departures from full-rationality was just small stuff.  They had a point, until...


  1. The sensible monetarist response is to call for price level targeting (and/or higher inflation targets), as Mankiw has, as a superior alternative to fiscal policy. The problem is that such targets are a non-starter politically. Krugman dismisses them for that precise reason, not because he objects to the economics. (I don't have the link off hand, but he had a blog post where he linked to Volcker chiding the Fed for abandoning the goal of true price stability.) And Mankiw reports getting more hate mail than ever in response to his op-ed about on the subject. The sensible conservatives have been driven into hiding by populist intimidation (or by their own irrational fear of inflation).

  2. Andy is onto something (though I'm more in favour of Sumner's proposal to target nominal GDP -- to target, in fact, the Fed's own forcast of nominal GDP).

    But I just want to say, that monetary policy can still be effective even at the zero lower bound, as Krugman makes clear in his work on Japan, or as Mishkin notes in his textbook -- "Monetary policy can be highly effective in reviving a weak economy even if short-term interest rates are already near zero."


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