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Posted by: Michael Mandel on June 24
In a recent column, Washington Post columnist Robert Samuelson says that:
Our ideas for explaining trends in output, employment and living standards — what we call “macroeconomics” — are in a state of disarray.
Mark Thoma, an economist at the University of Oregon, responds by making fun of Samuelson, saying that
Yes, change in macroeconomics certainly has outpaced his comprehension…If he reflects the best and brightest in our press corps, we should be very worried.
I don’t agree with Samuelson on a lot of things. But on this question he is right on. Anyone with a bit of sense in them knows that macroeconomics has some real problems. The proof is in the pudding.
1) Year ahead forecasts of short-run growth, by and large, are terrible, because macroeconomists have developed no good way of forecasting structural productivity growth.
2) Year ahead forecasts of long-term interest rates, by and large, are terrible. On average, forecasts peg the interest rate next year as being equal to the interest rate today.
3) There’s little agreement about the magnitude of the link between wealth and consumption, and whether it matters which kind of wealth it is. Forecasts about the effect of the stock market decline on consumption were way off.
4) The estimated “natural rate of unemployment” seems to move around unpredictably, as Samuelson says.
5) Even though macro models have formally included an international component for years, economists have continued to make policy suggestions as if the U.S. was still a relatively closed economy.
Macroeconomics fails the empirical test—it missed the biggest economic events of the past ten years, including the acceleration of growth in the mid-1990s, the tech investment slump of 2000-2002, the continued strength of consumption over the past 5 years, and even the housing boom.
Not really anything to be proud of.
Michael Mandel, BW's award-winning chief economist, provides his unique perspective on the hot economic issues of the day. From globalization to the future of work to the ups and downs of the financial markets, Mandel-named 2006 economic journalist of the year by the World Leadership Forum-offers cutting edge analysis and commentary.