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.…