The Muddle that is Macro
Meanwhile, today’s Washington Post has a story with a typical headline:
Economy’s Fate Hinges On Shoppers’ Stamina
This is what I call “folk macroeconomics” or “folk Keynesianism.” I think that it ultimately derives from what my co-blogger has documented as the make-work fallacy, the popular belief that jobs are inherently scarce.
In general, I think that the economy’s fate hinges on its ability to adapt to changes in relative prices. If there are few large shocks, then full employment will not be disturbed. With large shocks, then people need to respond to incentives to exit some occupations and industries in order to enter others.
My daughter who is a freshman left a message that she wants me to explain macro to her. I can do that, in the sense that I can teach what is in her textbook. In reality, however, macro is a muddle that no one can explain. The undergraduate textbook, a graduate textbook, and macroeconomics as practiced by policymakers (what Mankiw calls the “engineering approach”) have nothing in common with one another.
Every macroeconomic pronouncement should be accompanied by a disclaimer that says, “This is just my opinion. We don’t really know.”