Why macroeconomists need to study history

One of the ways that macro differs from micro is that macro is essentially a branch of history.  Micro is not.  And yet today’s macroeconomists often have not studied monetary history.  Marcus Nunes and Ramesh Ponnuru directed me to a paper by White House economics advisor Jason Furman:

A decade ago, the prevalent view about fiscal policy among academic economists could be summarized in four admittedly stylized principles:

1. Discretionary fiscal policy is dominated by monetary policy as a stabilization tool because of lags in the application, impact, and removal of discretionary fiscal stimulus.

2. Even if policymakers get the timing right, discretionary fiscal stimulus would be somewhere between completely ineffective (the Ricardian view) or somewhat ineffective with bad side effects (higher interest rates and crowding-out of private investment).

3. Moreover, fiscal stabilization needs to be undertaken with trepidation, if at all, because the biggest fiscal policy priority should be the long-run fiscal balance.

4. Policymakers foolish enough to ignore (1) through (3) should at least make sure that any fiscal stimulus is very short-run, including pulling demand forward, to support the economy before monetary policy stimulus fully kicks in while minimizing harmful side effects and long-run fiscal harm.

Today, the tide of expert opinion is shifting the other way from this “Old View,” to almost the opposite view on all four points.

I think this is right, but where Furman and I differ is on the desirability of this shift.

Furman refers to the view “a decade ago” but he might just as well have said 90 years ago.  The New Keynesian consensus is actually not all that far from the views of progressive economists back in the 1920s, which favored a price level target and were skeptical about fiscal policy.  After the 1930s, opinions moved in the old Keynesian direction.  It wasn’t until the 1960s that the tide started swinging away from the “vulgar Keynesian” view that fiscal policy was more important than monetary policy.  Friedman and Schwartz started he counterrevolution, and by the 1990s it was pretty much complete.  Stabilization policy should rely on monetary policy.

And now we have still another swing of the pendulum, back toward the old Keynesian views of the post-1936 period. Here’s Furman:

The New View of fiscal policy largely reverses the four principles of the Old View—and adds a bonus one. In stylized form, the five principles of this view are:

1. Fiscal policy is often beneficial for effective countercyclical policy as a complement to monetary policy.

2. Discretionary fiscal stimulus can be very effective and in some circumstances can even crowd in private investment. To the degree that it leads to higher interest rates, that may be a plus, not a minus.

3. Fiscal space is larger than generally appreciated because stimulus may pay for itself or may have a lower cost than headline estimates would suggest; countries have more space today than in the past; and stimulus can be combined with longer-term consolidation. 

4. More sustained stimulus, especially if it is in the form of effectively targeted investments that expand aggregate supply, may be desirable in many contexts.

5. There may be larger benefits to undertaking coordinated fiscal action across countries.

Those old Keynesian views of the late 1930s were rejected for lots of good reasons.

I’m not quite sure what is more humiliating for the profession of macroeconomics:

1.  That we keep making the same mistakes, over and over again.

2.  That we change our views of macro on “new information”, which in fact is not new to anyone with an even passing interest in macro history.  (I.e., who know that the temporary QE of 1932 had little impact, just as the more recent temporary QE had little effect.)

3.  That we don’t pay attention to the empirical studies that refute old Keynesianism.

4.  That many macroeconomists are not even aware of the cyclical nature of their field.

It’s not unusual to find this sort of cyclicality in the arts.  For instance, in the arts there are swings back and forth between a more “classic” style and a more “romantic” style.  But it’s kind of embarrassing to see this in a science.

(And don’t embarrass yourself by arguing macroeconomics is not a science.  Of course it’s a science.  It’s failed science, but then so are some of the other sciences, at least based on what I’ve read about the crisis in replication.  The term ‘science’ is not a compliment, it’s not some sort of award given to a field, like a Nobel Prize.  It’s simply a descriptive term for a field that builds models that try to explain how the world works.  Saying that science must be successful to be viewed as science is as silly as saying that a work of art must be good to be considered art.)

We need a “timeless” macro.  That is, theories should not be developed to meet the specific conditions in the economy, at that moment.  And yet that’s exactly what old Keynesianism is, which is why it goes in and out of style.  Instead, theories should be developed to explain the entire history of macroeconomics—the full data set.  If your model is not good at explaining hyperinflation, stagflation, liquidity traps and the Great Moderation, then it’s not a good theory.

Old Keynesianism is not a good theory.

PS. I’d like to congratulate Ben Klutsey for winning the Great Communicators Tournament in Washington DC on Wednesday night. Some of you may know that David Beckworth and I both participate in the Mercatus Center’s Program on Monetary Policy. Unfortunately we both live some distance from the headquarters in Arlington, VA. Ben is the program’s manager, and does a lot of the behind the scenes work that readers might not be aware of. I feel lucky to work with someone who is both a very nice guy and a highly talented manager.

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Also congratulations to runner-up Charles Blatz, another Mercatus employee.



21 Responses to “Why macroeconomists need to study history”

  1. Gravatar of Jeff Jeff
    28. October 2016 at 20:34

    The weirdest thing about this is that there is no more empirical evidence that fiscal policy works than there was 20 years ago, when there wasn’t any. The best you can say for the Keynesian advocates is that recent monetary policy hasn’t worked very well either. But that could be because monetary aggregates and short term interest rates aren’t very good measures of monetary policy, even though most economists appear to believe one or the other of them is a good measure.

    I would submit that monetary policy couched in terms (like a Fed Funds target rate) that are poor measures of the stance of policy is actually incoherent and hardly deserving of the name. It’s not that we have bad or indifferent policy, it’s that we don’t have one at all. We have people making noises and adjusting dials, but since they don’t know what they’re doing or even what they’re trying to achieve, it’s nothing more than that.

  2. Gravatar of foosion foosion
    29. October 2016 at 01:52

    In an interview earlier this year, Richard Thaler said Chicago econ students don’t read anything greater than 20 yrs old and that he believes MIT, Harvard students are the same.

    Krugman and DeLong often cite history and complain that many of their opponents repeat arguments that were refuted decades ago. DeLong teaches economic history.

  3. Gravatar of Nick Rowe Nick Rowe
    29. October 2016 at 03:29

    Scott: all true. But there is a massive omission from the “New View” in “stylized principle 1”. The size of government matters. There are good microeconomic gounds for not wanting G (and T) to vary over time to keep AD on target, when monetary policy could do the same job.

    My old post: http://worthwhile.typepad.com/worthwhile_canadian_initi/2015/06/fiscal-policy-and-indifference-about-the-size-of-government.html

  4. Gravatar of Daniel Daniel
    29. October 2016 at 04:39

    How’s about a radical idea – economists should study biology.

    You’d learn some amazing things – productivity is mainly due to IQ, which is not evenly distributed.

    Time preferences also seem to be innate.

    People seem to care much more about relative status than about absolute wealth – and status IS a zero-sum game.

    And other such amazing revelations. Maybe then you could have a non-retarded conversation on immigration, for example.

  5. Gravatar of Jose Jose
    29. October 2016 at 08:06

    Murray Rothbard would agree with you, but he would also say that sometimes “consensus” move away from good ideas and remain astray for more than just a few years. His paradigmatic example is the the marginalist theory developed in the 1870’s by Menger, Walras and Jevons. According to Rothbard, the French liberal economists of the XVIII century were very close to arrive to the marginalist conclusion, but Adam Smith’s ascension actually diverted that line of thought, that would only come back some 100-120 years later with the three already mentioned economists above …

  6. Gravatar of ssumner ssumner
    29. October 2016 at 08:33

    Jeff, Yup.

    Foosion, Delong knows a lot about macro history–more than I do. Krugman knows more than most people, but his knowledge is more superficial.

    Nick, I agree.

    Daniel, So would we learn some of the brilliant things you’ve told us here, such as that women like it when they are assaulted by men?

  7. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. October 2016 at 13:11

    ‘…such as that women like it when they are assaulted by men?’

    Let’s hear from a woman who (according to the new literary standards) should have won the Nobel Prize(?);


    It began, well, anyway you see there was this man
    Who stopped and asked me if I knew, which way was Lexington Avenue

    He said, “I’m gone-a Bloomingdale’s”
    I said, “I’m gone-a Bloomingdale’s”
    So we hoofed it over the Bloomingdale’s
    He wanted to buy some jockey shorts

    Then he said, “Miss, would you like a cup of tea
    Or maybe some seven-up?”
    I left the tip, picked up the tab for the jockey’s shorts
    and the taxicab

    He dropped me off and I burned!
    Boy let that be a lesson to ya
    Lower the boom girl, lower the boom
    But what can you do when he knocks on your door?
    Cause they locked him out of his furnished room
    So he moves in
    He moves in with his jockey’s shorts and a paper bag
    Nothing else

    He needs toothpaste and a tooth brush
    And pajama tops
    He needs razor blades, a razor and a comb

    He needs sistering and brothering and fathering and mothering
    He needs a hat to hang up in my flat and call it home
    In no time at all
    I find we’re very much in love

    And I’m blushing like a sentimental slob
    And he’s kissing me and hugging me
    And all the time he’s bugging me to
    Go out and try to find myself a better paying job

  8. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    29. October 2016 at 13:20

    Here’s a performance of Dorothy Fields’ song;


  9. Gravatar of Saturos Saturos
    29. October 2016 at 18:24

    ICYMI: Noah Smith posted this new behavioural New Keynesian model on Twitter, which he describes as groundbreaking. Many topical factors are addressed with a single myopia parameter. It is “Keynesian in the short run and Neo-Fisherian in the long run”. http://pages.stern.nyu.edu/~xgabaix/papers/brNK.pdf
    John Cochrane agrees:

  10. Gravatar of Why macroeconomists need to study history via /r/economy | Chet Wang Why macroeconomists need to study history via /r/economy | Chet Wang
    30. October 2016 at 02:32

    […] Why macroeconomists need to study history http://www.themoneyillusion.com/?p=32052 […]

  11. Gravatar of Major.Freedom Major.Freedom
    30. October 2016 at 05:35

    I’ve been saying for years on this blog that economists who utilise the method of the natural sciences are really studying history, not economics.

    Is Sumner finally catching up?

  12. Gravatar of Daniel Daniel
    30. October 2016 at 06:30

    Spoken like a true virgin, Scotty.

  13. Gravatar of ssumner ssumner
    30. October 2016 at 09:54

    Saturos, That’s kind of discouraging. Check out my new post at Econlog.

    Daniel, If you aren’t smart enough to comment on macro posts that’s fine. But why do you feel you need to add your Neanderthal opinions to the comment section of a post that has nothing to do with gender?

  14. Gravatar of Major.Freedom Major.Freedom
    30. October 2016 at 15:57

    Speaking of Neanderthals, anthropologists have recently discovered that modern homosapiens occasionally breeded with Neanderthals.

    Neanderthal genes are present in a large number of humans today.

    The tendency and predisposition towards violence and coercion, rather than reason and cooperation, has for some humans today manifested in a desire for violence backed states interfering in money, as well as its apologists called monetarists.

    Monetarism, because it grounded on violence and not consent, is what is Neanderthal like. Sumner is a peddler of Neanderthal beliefs.

  15. Gravatar of Scott Sumner on what is a science | Meta Rabbit Scott Sumner on what is a science | Meta Rabbit
    31. October 2016 at 03:39

    […] — Scott Sumner […]

  16. Gravatar of Jeff Jeff
    31. October 2016 at 12:37

    Scott and Saturos,

    Am I the only one who finds it crazy that, as Cochrane describes it, the only way to make the New Keynesian “work” is to arbitrarily throw out the solutions that blow up and assume that all agents in the economy do the same? What if just one guy picks a different solution? Is this even possible? It seems that an awful lot of coordination between the multitude of identical representative agents is needed, with no specification as to how it is achieved.

    Maybe I’m missing something. Perhaps we can get Nick Rowe to do a post on this stuff, because I don’t think I understand it.

  17. Gravatar of Ray Lopez Ray Lopez
    31. October 2016 at 15:49

    Sumner says: “I feel lucky to work with someone who is both a very nice guy and a highly talented manager.” – so apparently being good at management but not being nice is unlucky, as is being a nice guy but incompetent manager. Sumner has high standards, too bad he doesn’t apply them to himself, constantly berating his audience for peccadillos yet consistently dodging the big questions, as MF says.

    PS–who is the token black guy? I thought Mercatus is a Pepe the frog closed shop, no? He’s probably a nice guy though…

  18. Gravatar of Scott Sumner Scott Sumner
    1. November 2016 at 05:11

    Ray, The “token black guy” won the contest. Surely you at least know how to read?

  19. Gravatar of Scott Sumner Scott Sumner
    1. November 2016 at 05:12

    Jeff, I’m not sure about how the model would change with heterogenous agents. In that case I doubt one outlier would make much difference.

  20. Gravatar of Michael Michael
    2. November 2016 at 13:12

    you may like this column by David Warsh


    He seems to care about econ history, and take it seriously, too

  21. Gravatar of ssumner ssumner
    3. November 2016 at 06:09

    Michael, Thanks, excellent column.

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