A world without macroeconomists?

Miles Kimball, myself, and some other folks were having a discussion on Twitter the other day about the question of "What would happen if there were no economists?" So we decided to do some blog posts on the topic.

Of course, the definition of "economist" is fuzzy; if you make a chart of past GDP growth rates on your home computer just for fun, does that make you an "economist"? So I'll assume that "economist" means "academic economists, or economists working at government research institutes." In other words, paid econ researchers.

Anyway, the question is much too hard! There are a LOT of kinds of economists, and they do lots of different things. Tax economists study tax policy. Labor economists study individuals as they make their way through the economy. Decision theorists study how individuals make decisions. Applied game theorists study how people bid on auctions, and lots of other stuff like that. Financial economists study financial markets. Econometricians do statistics. Development economists study how countries get rich. Trade economists study patterns of trade. Industrial organization economists study...um...Well, anyway, there are a lot of different types of economist. The question of what would happen if they all vanished is fun far-out speculation, but I'll leave that task to somebody else.

Instead I thought I'd just stick to the type of economist everyone hears about: Macroeconomists. What if universities, and the Fed, stopped hiring people to do macroeconomics?

Well, for one thing, universities probably wouldn't save any money. The demand for econ profs is based mainly on the demand for undergrad econ classes, which probably wouldn't much change if one subfield of econ research were abandoned. Econ classes would just focus more on micro and on subfields of micro, and would be taught by micro researchers. As for the U.S. government, it would save a tiny bit of money, but not much, since macroeconomists have tiny research budgets.

Would we lose the ability to forecast the macroeconomy accurately? It's tempting to conclude "No," since macro models of the type overwhelmingly used, created, and studied by modern macro researchers (DSGE models) haven't really proven better at forecasting than the non-structural spreadsheet-type models used by most private firms, or than consensus individual forecasts (actually one DSGE model has performed slightly better in recent years, but this might just be data mining and publication bias). It's telling that private firms don't hire people to make DSGE models, but do hire people to make forecasts with much simpler tools.

However, here's an interesting thing about research, and about science: Past discovery is no guide to future discovery. Chemists were basically a joke for centuries before they stumbled on a few key principles, and rapidly turned into the most reliable discovery-factories in all of science. Biologists had an even longer history of uselessness before they became incredibly useful thanks to new technologies. So someday, macroeconomists might learn how to forecast the economy extremely well. We really just don't know. A breakthrough in forecasting power would yield huge payoffs to society.

OK, what about policy? Macroeconomists will gladly tell you that modern models are not a lot of use in forecasting - that their main use is in giving policy recommendations, conditional on your assumptions (i.e. "If for whatever reason you believe that the economy works this way, here's what you should think you can do with policy.") But as I've often griped, I don't think they really do this particularly well...it's too hard to choose which one to use, even if you know your own general priors about how the economy works. And people have silly priors anyway. Not to mention that even if you choose a model, its output may be incredibly hard to interpret and use. And when the world seems to hit on a consensus policy that seems to work well - the Fed using interest rates to lean against fluctuations in inflation and GDP, for example - the models seem to follow the policy rather than the other way around.

So does this mean that macro research is useless for policymaking? No! Not at all!! Because here's an interesting thing about policymaking: No matter who advises the policymakers, policy is going to get made. That includes economic policy. So if there were no academic and Fed macroeconomists around to advise policymakers, who would policymakers listen to on economic matters?

My guess: Some very dangerous people. 

For all the talk of academic macro being politicized, it's much less politicized than the macroeconomic discussion outside of the research community. My own experience is that most macroeconomists are pretty apolitical, and research supports that...but even if my sample is biased, macro's interventionist and laissez-faire schools are pretty close to each other ideologically, compared to, say A) armchair-theorizing politicians, B) TV commentators, C) the denizens of internet forums. It really is a jungle out there. You have David Stockman. You have Ron Paul and his followers. You have David Graeber and his followers. And worse. You have "Austrians" who think all of economics can be deduced from some vague derp. You have Marxists who think - well, I'm not sure, because they tend to denounce and vilify you if you even ask them what they mean, but it sounds nuts. In short you have a cavalcade of vast unending wackitude, often with a proven track record of wrecking economies and societies.

So it's possible to see macroeconomists as doing plenty of good, simply by sitting there not being absolute wackaloons. A million DSGE models from which it is impossible to select sounds a lot better to me than three or four totally nutcase worldviews, the selection of any one of which is likely to cause human tragedy on a vast scale. (Note: This idea, of macroeconomists as a vaccine against macro-lunacy, was first suggested to me by Justin Wolfers.)

(Update: In the comments, Robert Waldmann writes:

A world without macroeconomists wouldn't be a world without economists who talk to journalists about the macroeconomy. The risk is that the voice of the economics profession will be trade theorists, economic historians, behavioral economists and finance economists such as Krugman, DeLong, C Romer, Goolsbee, Fama and Cochrane. 

I think Waldmann is right, and the danger from having zero dedicated macroeconomic researchers is not as great as I'm making it out to be; other economists could still hold back the crazies, they'd just have a harder time doing it with no empirical research or macro theory to back them up. So the crazies might not immediately take over, but they might gain more clout and respect.)

And actually, there's a huge area of macroeconomic research that I haven't even mentioned yet: macro empirics. Empirical macro is fundamentally constrained by the limitations of time-series data ("history only happens once", i.e. ergodicity and stationarity are near-impossible to verify) and cross-country comparisons. But within those limits, macro empiricists can tell us a lot, just by quantifying things and noting seeming regularities. That's enormously helpful both for policy and for forecasting. You need controlled experiments to create a reliable predictive theory of the world, but there's a huge amount you can know without controlled experiments, just by watching the world go by and keeping careful track of what you see. And macro empiricists can certainly do the latter. It's thanks to them we know things like Okun's Law, which tells us that fast growth is consistently associated with low unemployment. It's also thanks to them that we know that investment is much more sensitive to the business cycle than consumption. Or that slightly less than half of people seem to be "hand-to-mouth" consumers who don't obey the Permanent Income Hypothesis. Etc. Without macroeconomists, we just wouldn't know these things, and reasonable people would argue about them.

Also, I didn't even mention spinoff products. Macro empiricists, struggling to wring some insight out of terrible data, often come up with truly remarkable innovations that may be useful in many disciplines. I'd put Chris Sims' work with structural vector autoregressions in this category.

So, in short, from macroeconomists we get at least the following benefits:

1. Quantification of macroeconomic phenomena.

2. Observation of correlations between macroeconomic variables (and between macroeconomic and microeconomic variables).

3. The creation of "spinoffs" like sVARs.

4. The unknown potential for big breakthroughs in forecasting methods.

5. An "anchor" that keeps policy away from the dangerous extremes urged on us by various politically-motivated fringe groups.

So without macroeconomists, it seems to me that we would lose quite a bit, actually. And since macroeconomists are very cheap, all in all, it seems we should keep them around.

That doesn't mean we bloggers have to stop complaining about them, of course. ;-)