On the Failure of Macroeconomists
For the past month or so, I’ve made it a habit to ask fellow economists how the response to the financial crisis has been improved by the past few decades of macroeconomic theorizing. Dozens of conversations later, I don’t have much to report.
Today’s big question is whether government spending can pull us out of this recession. We want to know what sort of oomph to expect from fiscal policy. In technical terms, this is a question about the multiplier: if the government starts spending more today, how much more spending will that stimulate tomorrow? And how worried should we be about government investment crowding out private investment?
If you took your first economics class 50 years ago, you’ll recognize all this talk about marginal propensities, multipliers, and crowding out. Fifty years later, it’s still the same debate, and it’s still unresolved. Why are we so reliant on mid-century macro for understanding our current predicament? And why haven’t we developed better answers?
Unfortunately, fiscal policy has largely disappeared from the research program of modern macro. Here are some facts, courtesy of my research assistant who searched Econlit (the guide to published economics). We searched for the number of papers published each year that mention monetary policy versus fiscal policy, in either the title or the abstract.
The rise in both lines reflects the increasing production of economic research, and the widening scope of the EconLit database. But the main point is evident throughout this period: there are about three papers written on monetary policy for each paper mentioning fiscal policy. And there are only a few dozen papers written on the multiplier each year.
The N.B.E.R. working-paper series has a similar flavor: you have to comb through a decade of yellow books to find 40 papers written on fiscal policy, while the past two years have generated an equal number of monetary policy papers.
I’m not sure why fiscal policy is the ugly stepsister. Perhaps the problem is ideology, and pro-market economists don’t like any discussion that gives government a greater role. Or perhaps there are just too many temptations for young economists — monetary policy research pays off because there’s a comfortable career path running from monetary research to the money markets.
Another possibility is research funding: there are 12 regional Federal Reserve banks subsidizing research on monetary policy, and almost no one provides similar subsidies for fiscal research.
Whatever the reason, the failure of macroeconomists to speak to this critical policy issue undermines our claim to relevance.