Is Macroeconomics Dead?

• Position: Opinions

Has the field of macroeconomics reached a point of intellectual chaos? Okun's Law (for every percentage point the unemployment rate falls, real GNP rises by 3 percent) and the so-called NAIRU (identifying a non-accelerating inflation rate of unemployment) had provided a kind of twin-pillar support system of certainty for macroeconomic theory. Have these twin pillars been toppled and, if so, what is left to support the intellectual underpinnings of efforts to measure the macroeconomic direction of an economy? Has the macroeconomic field lost its compass?

GARY HUFBAUER Senior Fellow, Institute for International Economics.

Mainstream macroeconomists should be embarrassed. Why? Because their old wardrobe is out of style and they aren't comfortable in the new fashions. What mainstreamers do best is spew out mathematical models. Who's paying attention, besides their captive graduate students?

Mainstreamers can adeptly explain the familiar magnitudes -- inflation, employment, GDP growth -- but only after the fact. "Success" comes at a price: Their models are so numerous that they can account for almost any outcome after it has happened. But macroeconomists aren't getting better at prediction. Even if they were, flatter business cycles in OECD countries spell dwindling attention to the familiar magnitudes.

What excites interest these days are other magnitudes, many of them financial in nature. Topping the list is stock market valuation. And why not? When equity values exceed 150 percent of GDP, when equities are widely held, and when plans to rescue Social Security are linked to future stock market valuations, it's natural that everyone from Alan Greenspan to the local newscaster wants an answer. The fact that Irving Fisher mistakenly argued 70 years ago that "stock prices have reached what looks like a permanently high plateau" shouldn't consign the stock market to astrology.

Right after stock market fascination comes the exchange rate, particularly dollar/euro/yen relationships. Again fancy models abound, but where are the useful predictions? Then there are episodic financial crises in emerging markets. Finally come the really big questions: how to free poor countries from the grip of predatory economics, how to promote the drivers of total factor productivity, how to spread the "new economy" into Europe and Japan?

Who offers serious comment on these matters? A few mainstream macroeconomists, like Robert Shiller, but more often financial analysts who live and die by equity and FX markets, such as Abby Joseph Cohen, David Hale, John Lipsky, and Ed Yardeni, unsung intelligence analysts, or economic historians like Peter Jay or David Landes.

The answer given by macroeconomists for steering clear of financial magnitudes is that, if the discipline was good at forecasting, its wisdom would already be reflected in the equity and FX markets. So why bother? The answer for dodging the big questions -- predatory economics, TFP growth, and the new economy -- is that they can't be analyzed with theoretical rigor. These answers may be tight, but they point towards irrelevance.

RICHARD M. COOPER Maurits C. Boas Professor of International Economics, Harvard University.

I learned macroeconomics before either Okun's Law or NAIRU had been formulated. It was useful then, and it is useful now. Macroeconomics should be conceived as a framework of analysis, a perspective, and not a fixed set of empirical roles. Macroeconomics has no rigorous microeconomic underpinnings, and cannot have them because of the diversity of economic agents and the need to aggregate their behavior. It is nonetheless useful to look at the entire national (and, these days, the world) economy, and to measure and make generalizations about aggregate savings and investment, the overall impact of government spending and taxation, economic relations with the rest of the world, and so on.

Empirical generalizations are transitory, good ones lasting years rather than decades. They will slowly change. The NAIRU is an empirical generalization with little theoretical underpinning that can naturally be expected to change over time. This is a development that should neither surprise nor distress us. It is even malleable by policy, not a law of nature. This is similar with Okun's Law, which relates total slack in the economy to a particular measurement of unemployment. These are best considered empirical roles of thumb, not "pillars," much less "compasses," with their implication of an unchanging north pole.

MURRAY WEIDENBAUM Director, Washington University's Center for the Study of American Business and Chairman, U.S. Trade Deficit Review Commission.

Samson may have been blind in his latter years, but he pulled down the right pillars and destroyed the Philistine temple. But neither Okun's Law nor the NAIRU were the pillars on which modern macroeconomics is based. Therefore, even if those two pillars (or perhaps, more accurately, "posts") are demolished, macroeconomics will to survive, if not prosper.

As someone who works both sides of the street, I certainly do not view the matter as microeconomics versus macroeconomics. Microeconomics is, of course, a powerful set of tools to deal with a host of important cost, pricing, production, and profit relationships at the firm, product, and market levels.

Simultaneously, macroeconomics, as currently organized and practiced, provides useful ways of thinking about such aggregate -- and hardly trivial -- matters as inflation, unemployment, and economic growth. Macroeconomics permits us to examine the forest rather than the trees so we can ascertain the more general patterns of an economy. It is, in effect, a bird's eye view rather than a worm's eye view. Just as microeconomic concepts and modes of analysis are the essence of the economist's involvement in regulatory policy, macroeconomic concepts -- such as consumption, saving, investment, productivity, and money supply -- are basic in dealing with questions of monetary and fiscal policies.

On a more mundane level, the basic tools of macroeconomics provide a valuable overview or general outline of the economy and of the relationships among the major sectors that constitute economic activity as a whole. Thus, our ability to understand general trends and developments in the economy is enhanced.

Personally, I find the national income and product accounts the single most useful construct -- the compass -- for tracking aggregate economic developments, integrating a host of statistics on various aspects of economic activity, and analyzing macroeconomic issues and alternative policies for dealing with them.

Macroeconomics is not, in any of its manifestations, a cookbook for developing answers to fundamental problems facing the economy of the United States or of any other nation. But surely the tools of microeconomics do not suffice for these purposes either.

On occasion, I have felt misled by practitioners who enthusiastically preach a specific or rather narrow brand of macroeconomic thought (be it Keynesian, supply-side, monetarist, or other). Nevertheless, such disappointments have not been the occasion for abandoning the aggregative approach altogether. In the final analysis, I have found no satisfying substitute for a combination of organized judgment and good luck in dealing with important economic issues.

JEFF FRANKEL Harpel Professor of Capital Formation and Growth, Harvard University and former member, President Clinton's Council of Economics.

The current problem with macroeconomics, as it is studied by academic researchers, is an excess of theoretical underpinnings -- not a deficiency. Over the last twenty years, they have come to practice a religion in which it is considered necessary to derive mathematically all behavioral relationships from "first principles of optimization" on the part of individuals. This is now accepted as the definition of scientific rigor.

Meanwhile, the behavior of the actual economy has deviated far from the pillars of macroeconomic theory. Such deviations of reality from theory are not new. More precisely, the deviations are not new. Nor are their magnitudes - only the form they have taken. In the 1970s, the deviations were all in the bad direction. Productivity growth was lower than forecast. Inflation was higher than predicted, given weak output and employment. The demand for money was lower than expected, given interest rates. The budget was worse than forecast, and so on. Over the last seven years, in contrast, the deviations have all been in the good direction. Productivity growth is higher than projected, inflation is lower, output and employment higher than expected, the budget has improved, and so on. Those who defended existing theory in the 1970s promised that things were bound to get better, as traditional economic relationships reasserted themselves. Those who defended the theory in the 1990s warned that things were bound to get worse.

The statistical fit between the predictions of theory and the behavior of the economy has never been good. It is a myth that the numbers used to follow obediently the dictates of the equations, and that the relationships broke down only subsequently. But just because the models don't work as well in macroeconomics as they do in physics is no reason to give up the attempt. And (unfortunately) society is more interested in what we have to say about macroeconomics, as imperfect as it is, than what we have to say about microeconomics.

Where do underpinnings that are derived from the rigorous theory of individual optimization come in'? The hope is that such "microfoundations" will yield better predictions as to how the economy will behave when undergoing fundamental structural changes. Such predictions are necessary. Unfortunately, the twenty-year track record of actual delivery on this promise is poor. When a macroeconomist is faced with a familiar theoretical relationship that seems to fail the...