Earlier this week I spoke at an Equitable Growth conference on 'Fighting the Next Recession.' It was one of those wonky-econo events that I always find interesting ... a mix of academic and policy economists trying to make sense of the world ... what we know, what we've learned. Trying to give good economic advice. And yet, just a week after the election I found it difficult to know what to say ... and even difficult to listen to those economists with years of experience on me who were also speaking. Economists have many tools and insights to offer, but we also have so much to learn and work to do. This post summarizes the broader points I tried to get across in my panel on fiscal policy and some general reactions to the conference. I may be overdoing it with my concerns ... humility should not tumble into futility ... but this feels like a conversation we need to have.
1. We (economists) cannot rely on the 'laws of arithmetic' to vindicate us.
I won't be shy about this one. I am not and never have been a fan of comparing economics to physics. People are more than particles ... they do not always behave (or think) in similar or predictable or even stable ways. On balance, that is a great thing!! But it leaves tons of room for people to draw their own (non-economist) conclusions. Reality does impose discipline ... for example, in some way a budget constraint has to hold and opportunities usually do have costs ... so I am not throwing arithmetic out the window. But it is foolhardy to think when folks run up against those constraints that they will turn to econos and say "oh yeah, you were right." (Btw this guy in the Atlantic is one of my "favorite" examples of a defiantly non homo economicus.) Larry Summers made many valid points in the keynote address ... going through the current "arithmetic," but I worry that this does not turn out well for status-quo economists.
2. We (economists) cannot focus solely on the tools we like to use.
A concern that I raised on my panel (and again on Twitter today) was that the technocratic tools (the models, the quantitative guidance) for discretionary fiscal policy in recessions are not as well developed as the tools for monetary policy. Yes, this is an area of renewed study (see the 2011 JEL symposium and this recent paper by Jason Furman) BUT the disconnect between the real world and the macroeconomist world is still striking. Using fiscal policy to fight recessions has a long and pretty much uninterrupted history (with or without cutting-edge econo tools) ... but don't tell that to the "modern macro" DSGE models. Even well-established empirical results, such as spending out of tax rebates, are assumed away in most macro models with forward-looking, homogeneous consumers. Outside of the zero lower bound, monetary policy tends to win out as the optimal stabilization policy, at least the way most economists define optimal. Interesting how monetary policy is also the policy implemented mainly by technocrat economists, independent from messy political processes. It could be that research underway on economic policy will remedy this deficiency (for example, weaving the micro results better in the macro models, showing the usefulness of multiple tools, and acknowledging the political economy) but let's not forget what a lack of technocratic tools can mean. Since the Great Recession, we've seen fiscal policymakers rely heavily on rough approximations like the 60- to-90-percent debt-to-GDP threshold and struggle to operationalize the mantra of timely, targeted and temporary.
3. We (economists) have to better communicate. Or be irrelevant.
To be a good writer, you need to read. To be a good communicator, you need to listen. Last weekend I re-read (and read for the first time) a lot of empirical studies of fiscal policy since the Great Recession. Clever identification, careful micro data work ... tons of useful results on state-dependence and how the details of policy matter. And lots of well-placed academic publications. But I know from forecasting the effects of fiscal stimulus in real time at the Fed that much of this falls on deaf ears. Economic policy is judged by the overall economy ... not by deviations from a counterfactual reality that no one experienced. (And quite frankly a counterfactual that economists even can't agree on.) I cannot prove that the tax rebates added to spending with even with compelling identification ... but see how the saving rate spiked! Nor can I prove that economic policies saved us from the second Great Depression, that is simply not how most people think. Not to pile on but the tools of economists ... the numbers, the charts, the abstract models, the "arithmetic" ... are not super compelling to non-economists. It is unclear how to address this deficiency but I doubt economists shouting louder (or receding into an econos-only bubble) is the way forward.
YMMV on my post so I encourage you to watch the videos of the conference. I found the Blanchard's remarks to be thought provoking, especially on the limits of fiscal redistribution, but really there is something in each panel for anyone interested in economic policy. And thanks to Equitable Growth for setting up the event.
**Opinions here are mine and should not to be attributed to anyone with whom I work.**