Macro: people vs. institutions

I hope Paul Krugman isn't talking about me when he writes:

The macroeconomics [centrist dodge] looks like this: a concerned writer or speaker on economics bemoans the state of the field and argues that what we really need are macroeconomists who are willing to approach the subject with an open mind and change their views if the evidence doesn’t support their model. He or she concludes by scolding the macroeconomics profession in general, which is a nice safe thing to do – but requires deliberately ignoring the real nature of the problem.

I don't want to be arrogant enough to think that people are noticing a small-time blogger such as myself, but...perhaps one of those "concerned writers" is me? I did say this, after all:

The root problem here is that macroeconomics seems to have no commonly agreed-upon criteria for falsification of hypotheses...So as things stand, macro is mostly a "science" without falsification. In other words, it is barely a science at all. Microeconomists know this. The educated public knows this. And that is why the prestige of the macro field is falling. The solution is for macroeconomists to A) admit their ignorance more often (see this Mankiw article and this Cochrane article for good examples of how to do this), and B) search for better ways to falsify macro theories in a convincing way.

Look, here I am praising John Cochrane, neoclassical stalwart and fire-breathing political conservative, for saying macroeconomists are ignorant! I'm executing a "centrist dodge", right?

Well, no, I don't think I am. It's all about people vs. institutions.

Krugman writes that good macro evidence exists, and that the reason some people have refused to accept it is because they are political conservatives:

[I]t’s not hard to find open-minded macroeconomists willing to respond to the evidence. These days, they’re called Keynesians and/or saltwater macroeconomists...But then there’s the other side – freshwater, equilibrium, more or less classical macro...rather than questioning its premises, that side of the field essentially turned its back on evidence, calibrating its models rather than testing them, and refusing even to teach alternative views. 

So there’s the trouble with macro: it’s basically political, and it’s mainly – not entirely, but mainly – coming from one side.

This seems to me to be pretty much true. Some economists are politically conservative. They don't like government intervention in the economy, so they want to reject "Keynesian" or "saltwater" theory, which says that government has a constructive role to play in stabilizing business cycles. So they want to believe in other models, models where business cycles are driven by things like technology shocks or government policy or "Great Vacations". Unfortunately, those "neoclassical" models have a very hard time getting prices to go down when a big recession hits. And they have a very hard time getting interest rates to stay low even though the Fed prints a bunch of money. So conservative economists basically tend to ignore the behavior of prices and interest rates during episodes like the current one.

So I think Krugman is right. Most of what looks an awful lot like willful ignorance of the evidence generated by the current crisis seems to come from political conservatives. Meanwhile, other macroeconomists have shown a lot of willingness to change their mind about the world since 2008.

BUT, I think Krugman fails to address a bigger question: How did things get this way? How did neoclassical macro become the mainstream in the first place? One answer is that it's all down to money - departments like Chicago, Washington University, and Minnesota, according to this argument, were funded by people with politically conservative views, and these institutions basically became political propaganda mouthpieces.

I don't know how much truth there is to that. There are certainly instances of conservatives providing funding to a department known for its outspoken political conservatism - take, for instance, George Mason University, whose econ department is heavily funded by the Koch brothers. And I know that Washington University macroeconomists get paid nearly twice what their counterparts at places like Michigan get paid (it's a pretty sweet gig!). So I don't discount the possibility, I guess.

But conservatives do not fund the Nobel Prize committee. Rich donors did not pressure a bunch of Swedish guys into giving big gold medals to Edward Prescott and Robert Lucas, the fathers of neoclassical macro. Nor do shadowy conservative gazillionaires own the AER or the JPE or the QJE. Journal editors' arms are not being twisted into publishing models based on technology shocks.

Instead, I think what happened was that the neoclassical people made an argument that sounded convincing at the time (the 70s and 80s), and the field bought it. And the field bought it because there are just no agreed-upon ways to falsify or support macro theories with data. This is not to say there exist no such ways. Data was not kind to Prescott's 1982 RBC model. But that was not considered sufficient grounds for the profession to reject the RBC idea. Macro is just not a profession where people say things like "Hey, inflation goes down in most recessions, this RBC thing can't be right!" It's a profession where people say things like "RBC is telling an interesting story that doesn't seem to explain the Great Depression, but seems like it could explain the stagflation of the 70s, but more importantly it developed a methodology that we all now want to use (DSGE), so let's give it a Nobel Prize."

And that, I think, is the bigger problem. Macro doesn't just have a bunch of conservative people running around being conservative. It also has broken institutions. Without a firm commitment to rejecting wrong theories, and without agreed-upon standards for doing so, it's very hard to overcome the politics. Sure, you can get a gang of liberal-minded people together and try to push back against the conservatives, but in the end the best you can hope for is a bitterly divided profession, resulting in a massive loss of prestige in the eyes of microeconomists and of the educated public. Which is exactly what we have now. It's not liberals' fault, there's just not much they can do to fix the situation.

If the data does not speak, bad ideas will persist. And without the proper institutions, the data will not be allowed to speak.