Macroeconomics Is Hard

[koganbot]

My guess is that macroeconomics isn't all that hard once you've mastered the vocabulary and learned the theories - not as hard as physics or biochemistry or crossword puzzles or computer programming, anyway. Maybe not as hard as microeconomics, either. But macroeconomics gives counterintuitive results, so people like me who haven't done the work and mastered whatever it is I need to master are likely to be somewhat at sea, and people who've never made even a rudimentary effort to understand are likely to be drastically wrong in their ideas. Such people comprise almost all voters and most elected officials. The thing is, if governments of countries with large economies, like the U.S., make bad macroeconomic decisions, millions upon millions of people around the world suffer and lead blighted lives as a result.

We tangentially touched on macroeconomics a couple of months ago over on Freaky Trigger, Kat summarizing a radio show she heard thusly ("I Wanna Be A Macro Man"): "The evidence shows that most female economists at this level tend to come from an industry background, with practical experience in the markets. MPC members on the other hand almost entirely have their background in academia. The MPC favours the application of macro economics, which (roughly) involves attempting to find umbrella trends throughout the entire economy. Unfortunately, the business-orientated female economists generally agree that macro economics doesn't actually work in real life," the implication being that their own "real life" business experience is needed to counterbalance the ideas of the pointy heads. Anyhow, I read a recent Paul Krugman blog post ("Macroeconomics Is Hard") that's a counterargument to such contentions:

The thing is, no amount of experience meeting a payroll helps you understand issues that are critically affected by the way things add up at a macro level. Businesses are open systems; the world economy is a closed system, with feedback effects that are crucial but play no role in ordinary business experience. In particular, an individual businessman, no matter how brilliant, never has to worry about the fact that total income equals total spending, so that if some people spend less, either someone else must spend more, or aggregate income must fall.

This is why we have a field called macroeconomics. Unfortunately, the hard-won insights of macroeconomics are being rejected right now in favor of visceral feelings. And we'll all pay the price.

I assume the key assertion is "total income equals total spending so that if some people spend less, either someone else must spend more, or aggregate income must fall." Krugman most certainly isn't someone who thinks we can ignore evidence and real experience; rather, he'd argue that people with the wrong experience are dogmatically applying their ideas without taking account of what actually happens in the - broader - real world, with potentially disastrous results when their bad assumptions become policy. (E.g., lots of people - the unemployed, those needing to pay down debt, those who fear unemployment, those who run businesses but whose orders are down, etc. - are necessarily spending less right now, and the crucial entities able to counteract this by spending more are governments, but politicians gain points by calling for tax cuts and reduced spending.)

My guess is that not every one of you who reads my lj could tell say off the top of your head what the argument was for a bailout of investment banks in late '08 or a stimulus package in early '09.

Comments

Re: An "F" for Fatalism

[talrose.livejournal.com]

Sorry, in the second paragraph: to prevent them from defaulting into bankruptcy.