Wednesday, January 22, 2014

Academic Macroeconomics is Useless

It is a great irony that John Maynard Keynes is the father of modern macroeconomics.  Keynes was a very practical man and his economics was informed by his real-world experiences.  Modern practitioners of macroeconomics think real-world experience is useless.  That's probably one, among many, reasons that modern macroeconomics is useless.

Which brings us to the American economy and its historically sluggish recovery from the 2008 recession.   Keynes would never have assumed that massive increases in regulation would have zero impact upon the economy.  But, in modern macroeconomics, even a law that outlawed private enterprise would have no effect on model predictions -- it's all about government spending, deficits, and other aggregates.  Employment is treated in the same way.  If Congress suddenly passed a law that taxed employers $ 1 million for every employee that they hired, such a law would have zero impact on the kinds of models that the Fed uses to predict employment.  Krugman's predictions would be unfazed by such irrelevancies as well.

Thus, sledge hammer regulations crushing the banks and other financial institutions, regulations intended to eliminate entire industries (think about the coal industry), massive mandates that penalize employer's with the temerity to hire anyone are assumed to have zero effect on the economic recovery.  Indeed, the Obama administration is now proposing to make it a crime for an employer to offer a low skilled employee a job that pays less than $ 9 per hour.  And, administration economists think that this won't effect aggregate employment!  This suggests that taxing cigarettes will not effect cigarette consumption -- but administration economists argue just the opposite on that one.

Modern macroeconomics of the Bernanke, Yellen, Krugman variety is really little more than a religion, not to be confused by the facts on the grounds.  John Maynard Keynes focused on the facts on the ground and wrote eloquently about the everyday facts of the economy.  He would never have ignored the economy-crushing policies of the Obama administration in an analysis of where the economy might go.

No comments: