Monday 30 July 2012

Which (macro)-economists are worth listening to?

This post relates to the ongoing blog debate on "the state of macroeconomics", which I contributed to here, and which has drawn in a whole host of economics bloggers who know far more about modern macroeconomic theory than I do.  However, here I want to address a related, more mundane question, but one which is perhaps more relevant to most non-economists' concerns.   That is,  when economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to?

This question was prompted by a recent exchange I had with Ed Vaizey and Simon Hughes on the BBC's Daily Politics: I pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite".

This is a fair question.  My answer to it is that policymakers and the public should listen to economists who fulfill two critera: first, they have made empirically testable predictions (conditional or unconditional - see Krugman here) that have proved, by and large, to be broadly consistent with the data; and second, they base those predictions on an analytic framework (not necessarily a formal model) that is persuasive.  In other words, getting it right alone is not enough; it should be possible to show your workings - to explain why you got it right. Otherwise, your predictions may be interesting, but they tell you little about how to formulate policy. 

My shortlist (apologies in advance to those I've omitted) of economists commenting on macroeconomic policy who I think qualify is something like the following:
  • Krugman, Delong and Wren-Lewis on fiscal policy when interest rates are at the zero lower bound;
  • Adam Posen on monetary policy when interest rates are at the zero lower bound;
  • Martin Wolf on private sector savings and public sector deficits (the financial balance approach);
  • Richard Koo on the implications of a "balance sheet recession"
Not all of these economists agree with each other on everything, nor do I necessarily agree with them about everything; for example, Krugman and Wren-Lewis have recently been debating the usefulness of microfoundations in macroeconomic models.  But they each have clear analytic frameworks for thinking about the economy, and have used them to make empirically testable claims; and have largely been vindicated.  

In each case I've provided links to typical examples of what each was saying a couple of years ago; in each case the analysis stands up well in retrospect.  You understand what they are arguing and why, and events since have been consistent with their arguments.  

This in turn generates an obvious list of economists or those commenting on economic issues who got it completely wrong, usually because they were using analytic frameworks that were incoherent or lacked empirical evidence.  I won't name individuals here, so I leave that to readers, but a short list of influential bodies that should have known better includes those responsible for writing editorials at the Financial Times, macroeconomic forecasters at the OECD, the European Department at the IMF (up until recently - their recent stuff on both UK and eurozone has been pretty good) , the senior leadership at the Bank of England and the Treasury, and probably worst of all senior economic policymakers at the ECB and European Commission.  Oh, and the credit ratings agencies, but that goes without saying. 

It is worth mentioning two economists who I respect, admire and find interesting but do not in my view qualify for inclusion on my shortlist. They are Nouriel Roubini and Ken Rogoff. In both cases, I - and maybe this is partly my fault - don't understand what, if any, analytic framework they are using, so I find it difficult to impossible to evaluate their advice. Nouriel's predictions, while often accurate, seem to be based largely on instinct and a sense of which data matters and which doesn't. That's fine - and having an instinct for the data is invaluable - but I just don't know how to evaluate the plausibility of articles like this.  

With Ken, I am even more confused; one of the finest theoretical macroeconomists of the last two decades has staked much of his reputation on a hypothesis - that there is something magic about a 90% debt to GDP ratio - which as far as I can see has no analytical or theoretical basis.  If Ken has an explanation, his paper doesn't let us in on it.  I don't see why we should regard this arbitrary number, based on a relatively small number of country examples in varying economic circumstances, as having any useful predictive power for individual countries in the future

Finally, let me just point out that this is not
 hindsight on my part.  Most of those mentioned above were on the list of economists I read and, whenever possible, consulted when I was still a civil servant involved in policy advice on these issues (2008-11).  And I put this specific list together more than a year ago now in preparation for a talk I gave to a group of government economists.   And this matters.  I don't think there's any doubt that if policymakers, both in the UK and elsewhere (especially in the eurozone) had, during the intervening period, listened to these people rather than their own economic advisers, the state of the UK and world economies would be significantly better than it is now. 

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