What's wrong with macro?

Reflecting on my overly grumpy last post, as well as many recent Krugman columns, I think there is really a fundamental consensus here.

There is, in fact, a sharp divide between macroeconomics used in the top levels of policy circles, and that used in academia.


Static ISLM / ASAD modeling and thinking really did pretty much disappear from academic research economics around 1980. You won't find it taught in any PhD programs, you won't find it at any conferences (except the occasional lunchtime "keynote speech" where an Important Person from the policy world comes in to enlighten us), you won't find it in any academic journals (AER, JPE, QJE, Econometrica, etc. etc.).  "New-Keynesian" DSGE (Dynamic Stochastic General Equilibrium) models are much in vogue, but have really nothing to do with static Keynesian ISLM modeling. Many authors would like it to be so, but when you read the equations you will find these are just utterly different models.

Static ISLM thinking pervades the upper reaches of the policy world. "Thinking" as, sadly, quantitative modeling of that thought disappeared in the mid-1970s. But if you read the analysis guiding policy at the IMF, the Fed, the OECD, the CBO; and the larger policy debate in the pages of the Economist, New York Times, and quite often even the Wall Street Journal, policy analysis is pretty much unchanged from the Keynesian ISLM, ASAD, analysis I learned from Dornbush and Fisher's textbook, taught in Bob Solow's undergraduate Macro class at MIT about 1978.   The staffs at these agencies write nice academic general equilibrium papers, but only in their "research" activities.

Thus, if you read Krugman's columns, you will see him occasionally crowing about how Keynesian economics won, and how the disciples of Stan Fisher at MIT have spread out to run the world. He's right. Then you see him complaining about how nobody in academia understands Keynesian economics. He's right again.

Perhaps academic research ran off the rails for 40 years producing nothing of value. Social sciences can do that. Perhaps our policy makers are stuck with simple stories they learned as undergraduates; and, as has happened countless times before, new ideas will percolate up when the generation trained in the 1980s makes their way to to top of policy circles.

I think we can agree on something. If one wants to write about "what's wrong with economics," such a huge divide between academic research ideas and the ideas running our policy establishment is not a good situation.

The right way to address this is with models -- written down, objective models, not pundit prognostications -- and data. What accounts, quantitatively, for our experience?  I see old-fashioned Keynesianism losing because, having dramatically failed that test once, its advocates are unwilling to do so again, preferring a campaign of personal attack in the popular press. Models confront data in the pages of the AER, the JPE, the QJE, and Econometrica. If old-time Keynesianism really does account for the data, write it down and let's see.