Perhaps the anti-economist backlash has gone too far, as George Akerlof, a Nobel Prize-winning economist, argued. The world, he said, avoided a second Great Depression. “We economists have not done a good job explaining that our macro policies worked,” he said.And yet, nearly six years into Hope and Change, there's precious little hope, and change not necessarily for the good.
Still, the subsequent record is disheartening. The economic models that didn’t predict the crisis have also repeatedly overstated the recovery. The tendency is to blame errors on one-time events — say, in 2011, the Japanese tsunami, the Greek bailout and the divisive congressional debate over the debt ceiling. But the larger cause seems to be the models themselves, which reflect spending patterns and behavior by households and businesses since World War II.That, as regular readers know, means an opportunity for further research.
“We really don’t understand what’s happening in advanced economies,” Lorenzo Bini Smaghi, a former member of the [European Central Bank’s] executive board, told the conference. “Monetary policy [policies affecting interest rates and credit conditions] has not been as effective as we thought.” Poor economic forecasts confirm this. In April 2012, the [International Monetary Fund predicted that the euro zone (the 17 countries using the euro) would expand by 0.9 percent in 2013; the latest IMF forecast, issued last week, has the euro zone shrinking by 0.3 percent in 2013. For the global economy, the growth forecast for 2013 dropped from 4.1 percent to 3.3 percent over the same period.Economics graduate students, however (and via Newmark's Door), have discovered and acted upon some of the research opportunities, with a fifth of current Ph.D. dissertations in the highly-regarded departments concentrating on macroeconomics. There appears to be a power rule in the choice of other dissertation topics, and I'm grateful not to have to assist with a macroeconomics search this year: on prior such searches I often desired a fifth of something strong after reading the packets.
Since late 2007, the Fed has pumped more than $2 trillion into the U.S. economy by buying bonds. Economist Allan Meltzer asked: “Why is there such a weak response to such an enormous amount of stimulus, especially monetary stimulus?” The answer, he said, is that the obstacles to faster economic growth are not mainly monetary. Instead, they lie mostly with business decisions to invest and hire; these, he argued, are discouraged by the Obama administration’s policies to raise taxes or, through Obamacare’s mandate to buy health insurance for workers, to increase the cost of hiring.
There were said to be other “structural” barriers to recovery: the pressure on banks and households to reduce high debt; rigid European labor markets; the need to restore global competitiveness for countries with large trade deficits. But these adjustments and the accompanying policies are often slow-acting and politically controversial.
Policy makers, however, are of a different mind-set.
With hindsight, excessive faith in macroeconomic policy stoked the financial crisis. Deft shifts in interest rates by central banks seemed to neutralize major economic threats (from the 1987 stock crash to the burst “tech bubble” of 2000). Prolonged prosperity promoted a false sense of security. People — bankers, households, regulators — tolerated more risk and more debt, believing they were insulated from deep slumps.Perhaps the beginning of understanding is to understand the limits to the span of control, either by model builders or by policy makers.
But now a cycle of overconfidence has given way to a cycle of under-confidence. The trust in macroeconomic magic has shattered. This saps optimism and promotes spending restraint. Scholarly disagreements multiply. Last week, a feud erupted over a paper on government debt by economists Kenneth Rogoff and Carmen Reinhart. The larger lesson is: We have moved into an era of less economic understanding and control.