In the last three decades, the methods and conclusions of macroeconomics have deteriorated to the point that much of the work in this area no longer qualifies as scientific research. The treatment of identification in macroeconomic models is no more credible than in the first generation large Keynesian models, and is worse because it is far more opaque. On simple questions of fact, such as whether the Fed can influence the real fed funds rate, the answers verge on the absurd. . .The larger concern is that macroeconomic pseudoscience is undermining the norms of science throughout economics. If so, all of the policy domains that economics touches could lose the accumulation of useful knowledge that characteristic of true science, the greatest human invention.
Pointer from Mark Thoma. I am on board with the above passage, but soon Romer writes
To appreciate how far backwards our conclusions have gone, consider this observation, from a paper published in 2010, by a leading macroeconomist:
… although in the interest of disclosure, I must admit that I am myself less than totally convinced of the importance of money outside the case of large inflations.
Romer could be talking about me, except for the “leading macroeconomist” part.
Anyway, he goes on to argue that the disinflation that took place in the early 1980s is evidence that monetary policy matters. My comments.
1. I agree that for those (few) of us who doubt the importance of monetary policy, the “Volcker disinflation” represents the most difficult data point.
2. Still, Romer appears to me to distort things. He calculates a rise in the real interest rate of 5 percent. But I believe that a lot of that comes from inflation falling–not just the Fed raising nominal rates.
3. Long-term interest rates rose dramatically as well. Arguably, the “Volcker disinflation” should be called the “bond-market vigilante disinflation.”
4. In general, although much of Romer’s critique focuses on the identification problem and the challenge of teasing out causality, it is impossible for him (or anyone) to demonstrate that changes in the money supply are exogenous rather than endogenous.
Overall, I agree with Romer that the methodological challenges in empirical macro are daunting–I would say overwhelming. For my take, see Macroeconometrics: The Science of Hubris.
I am just quibbling over the one instance which he argues demonstrates an empirical truth.
“Suppose an economist thought that traffic congestion is a metaphor for macro fluctuations or a literal cause of such fluctuations. The obvious way to proceed would be to recognize that drivers make decisions about when to drive and how to drive. From the interaction of these decisions, seemingly random aggregate fluctuations in traffic throughput will emerge. This is a sensible way to think about a fluctuation. It is totally antithetical to an approach that assumes the existence of imaginary traffic shocks that no person does anything to cause.”
What is the difference between “seemingly random” and “imaginary”? It would seem like the cause is equally mysterious in both cases. Is he proposing that we try to understand the cause of “seemingly random” events? The thing is that traffic jams do arise out of nowhere.
https://www.youtube.com/watch?v=Suugn-p5C1M
I generally agree that Macro-economics can not explain everything as something new and different in society changes the Macro-economic reality. The greatest example is Japan the last 25 years have disproven all the Macro I learned from 1988 – 1994. However, we still need Macro and GDP stats to understand what is high level going on in the economy. For all the Macro complaints about Krugrman’s or Summer’s models, they have been 80% right on where the economy is going.
And in terms of Macro usefulness, I had a Macro Professor in 1993 who predicted Japan would have a long term economic slowdown because of low birth rates would have a large effect on the labor supply in the future. (Few in the class believed him.)
Paul Krugman has argued we’re in a dark ages of economics
.If “Science” is “an organized body of knowledge;” and,
if the perceptions of information and the perceptions of the connections of bits of information with one another are the constituents of knowledge, then assurance of the validity of that organized body of knowledge (as a “Science”) is dependent upon constantly testing for the falsity of the initial perceptions of information and for falsity in the perceptions of the connections amongst the bits of information that are assumed to constitute knowledge.
Is this done?
Please read “The four fallacies of the coming economic apocalypse” at jbhearn.wordpress.com and you will understand what is wrong with macroeconomics