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Macroeconomic Forecasting and Macroeconomic Methodology: Thursday Focus

Was it Larry Meyer or somebody else who said that the Chicago turn in graduate macroeconomics in the 1980s had made him rich--by destroying the inflow into the profession of people competent to compete with him in the private-sector microeconomic forecasting business? A nice piece from Matthew Yglesias this morning:

Matthew Yglesias: Freshwater macroeconomics has failed the market test.:

One curiosity that economists seem too polite to note is that... 'freshwater' macroeconomics that focuses heavily on the idea of a "real" business cycle and disparages the notion of either fiscal or monetary stimulus... flopped in the marketplace... [but] lives, instead, sheltered from market forces at a variety of Midwestern nonprofit[s].... Stephen Williamson, a proponent of freshwater views, reminded me of this recently when he contended that macroeconomics is divided into schools of thought primarily because there's no money at stake. In financial economics, according to Williamson, "All the Wall Street people care about is making money, so good science gets rewarded." But in macroeconomics you have all kinds of political entrepreneurs looking for hucksters who'll back their theory....

It seems very important to freshwater types to contend that their saltwater antagonists aren't just mistaken or even stupid but actually fraudulent in their views (see Robert Lucas on 'schlock economics' or John Cochrane saying Robert Shiller is trying to take the science out of economics)... politically-motivated cheap talk....

I agree, it is very important to them at some level. Not just Cochrane on Shiller, not just Lucas on Bernanke and Romer, but Fama on Shiller and Summers, Topel on Card and Krueger, Murphy on Katz, Posner on Summers and Romer (at least before he became a Keynesian), Sowell on pretty much everyone. Not just that we are wrong, but that we know that we are wrong, and are lying because it somehow serves the interest of Keynesian Muslim Socialism.

I have always thought it best to pursue a hermeneutics of--relative--charity and goodwill. Thus I have always thought it best to presume that people are neither permanent slackers incapable of thought nor knowing liars, but rather fools: people who are being stupid because their thoughts have taken a wrong turn. We all find ourselves being stupid at times: we find that we have not connected the dots, have not finished our homework, are thinking foolish things. We are dealing with a complex and confused world. The right response when we discover that we are being stupid is to think harder, and so become intelligent.

To call somebody a liar is to tell others not to pay any attention to them. To call somebody a slacker is to tell them that there is no point to their trying to think the issue through. But, in my view at least, we all have a duty to help each and every one of us step up his or her game, and so we have a duty to warn people when they are being stupid.

But the people Matthew is criticizing do not take the same approach. They seem, it seems to me, to want to shut down the dialogue completely. Perhaps, at some level, this is because if they conclude that all their intellectual adversaries are liars they do not have to consider the possibility that they are the ones who are being stupid, and for some reason they find that uncomfortable. Perhaps there is some other cultural reason.

But it does make having a dialogue much more difficult.

Nevertheless, Matthew tries to break through: He goes on to point out that the market disproves the claim that our side of this intellectual debate is exclusively made up of deliberate politically-motivated liars:

But [this] doesn't make any sense. If you knew—really knew—how changes in federal budget policy or changes in the extent of Federal Reserve Quantitative Easing programs would impact the economy, you could make a lot of money.... [Thus] investment banks do in fact do macroeconomic analysis. And specifically they do broadly Keynesian types of analysis.... They don't... spend all that much money on it.... That's the market telling you that it doesn't think any macroeconomic modeling approach is all that fantastic, reliable, or informative. But... we know what kind of approaches they use and they aren't freshwater ones.