Poking Macroeconomists with a Stick

In one small part of a longer discussion Scott Sumner says something interesting:

Macroeconomics is the study of policy failure. Once an issue goes away the field loses interest.

Leave aside for now whether or not that is strictly true, or whether it was inadvertent. When I read the first of those sentences I immediately thought "then why not study why the policies fail, dammit!" After a bit of reflection I've realized that macroeconomists think that's what they're doing. They have models, to which they are wedded ideologically and/or reputationally, which are internally coherent but externally invalid.* When they try to explain why they are invalid they claim that policymakers aren't doing what the models tell them they should do. That's what Sumner means by "policy failure". And they explain why policymakers aren't doing what the models tell them they should do by either demonizing them, calling them ignorant, or claiming that they are members of cults believing in confidence fairies, bond vigilantes, the hive mind of the Borg, or some discredited or otherwise objectionable ideology.

The assumption here is that policymakers are, or should be, utilitarian Philosopher Kings whose goal is to maximize output and employment while minimizing inflation. But maybe, just maybe, that assumption is false. If we get rid of it then we don't have to appeal to superstition or metaethics to explain the behavior of policymakers. Instead we can treat policymakers as being interested in gaining or retaining office, and that the best way to do that is not necessarily to bring unemployment down to its natural rate as quickly as possible.

In other words, we can treat macroeconomic outcomes not as "policy success" or "policy failure", but as things that benefit some groups of people and harm others. From the viewpoint of a policymaker a policy success is one in which the policymaker retains office, and a policy failure is one in which she does not. To remain in office she must appease some number of people (what we often call a "minimum winning coalition") and that's all. In advanced democracies that coalition is largely comprised of relatively affluent people who own some type of equity whose value is more sensitive to inflation than whether the marginal unemployed worker gets her job back. So when policymakers set policy to win over that person it isn't a "failure"... it's the whole purpose.

This is what Steve Waldman was driving at in his "choosing depressions" posts. This is the dynamic that I blog about in almost every post. This is what I was writing about in a prior post, "The Problem with Macroeconomics Is the Macroeconomists". If the world doesn't work the way that macroeconomists think it should, then maybe that's because macroeconomists don't understand how the world works.

That doesn't mean that macroeconomists, or anyone else, can't have their own preferences. Krugman's blog and associated book is titled Conscience of a Liberal, not Explaining How the World Works. But that's quite a different thing from saying that "macroeconomics is the study of policy failure". To acknowledge that different groups have different preferences over outcomes is to acknowledge that the definition of "policy failure" is a not a constant but a variable, and macroeconomics has nothing to say about that.

That's why we need political economists.

*Of course they will all protest that their pet model is not externally invalid, only everyone else's is. However no macro models have performed very well in this crisis. No macro models can explain the global nature of this crisis, why countries with similar characteristics have had vastly divergent outcomes, etc. The best argument that most macroeconomists can put forward in support of their preferred model isn't "it worked" but "it hasn't been sufficiently tried".