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Why macroeconomics is not a science
The housing sector is down twenty percent and the price of oil is flirting with $90 a barrel, maybe $100 to come. Yet the quarterly growth rate was just reported at 3.9%, led by surges in consumer spending and exports. It is wrong to think we have turned the corner, but it is also wrong to think the doomsayers have been giving accurate predictions.
Posted by Tyler Cowen on October 31, 2007 at 11:39 AM in Current Affairs | Permalink
Comments
Your observation that macro economics is not a science is an undisputable point. But I take issue with singling out of the doomsayers. Over the last quarter the optimists have been shown up as much as the bears.
I don't think that the last quarter was as bad as the bears thought it was going to be. But I also think part of the surprise on the up side comes from the fact that the government is not properly accounting for inflation.
There has never been a time in my life when the headline inflation figures have been so different from the cost increases that the people around me have to deal with. If there is someone out there whose cost of living has only gone up by the headline inflation figure I would like to meet them.
Posted by: The Chieftain of Seir at Oct 31, 2007 12:06:19 PM
it would be natural to expect a surge in exports 'thanks' to the weak dollar.
for the same reason, i think europe has a much more negative outlook than the US.
Posted by: israel at Oct 31, 2007 12:07:54 PM
I think Roubini Inc, will be proven right sooner than later although their magnitude of catastrophe is probably off by an order of magnitude.
Posted by: sa at Oct 31, 2007 12:36:30 PM
I think the headline inflation number is a pretty accurate reflection of the cost increases I've seen. Granted, I live in a city (Houston) that didn't have a housing bubble, and I don't drive very much...but there are a lot of Americans who fit one or both of those descriptions. And for that matter, retail gasoline prices haven't risen much at all. Food prices are up, for sure, but the CPI detail reflects that (something like half of overall inflation this year has come from food). Then there are electronics...we recently bought a new TV, and it's bigger, flatter (LCD vs. rear-projection), and has better resolution (1080p vs. 720p) than the one my parents paid 70 percent more for a year ago.
Posted by: Amber at Oct 31, 2007 1:08:08 PM
An older guy was just telling me the story of the uproar when Coke went from a nickel to a dime. People like to complain, but how many of them actually make a budget and know how much they spend every week? Individual price increases can be very visible, but they might not even matter that much. To wit, I read an article on Bloomberg recently in which an analyst said materials prices would have to rise 150% or so to generate 1% of CPI.
Both P&G and Kraft said higher costs are eating into profit however, and P&G will raise prices from 3 to 12%. Therefore I don't discount the argument and I think gold, oil, and the dollar exchange rate have all signaled inflation for some time. But I've heard the recession argument for two years and it has yet to be correct. There are plenty of economists and analysts predicting higher inflation AND higher growth who have been proven correct. The doomsayer arguemnt may be the correct one in the end, but in the real world, missing forecasts for 2 straight years is expensive.
Posted by: 8 at Oct 31, 2007 1:12:54 PM
I tend to agree with the post. Isn't it the case that traditional metrics used as leading indicators are not measuring what is really happening in our economy? I know the old rub about manufacturing and the business cycle, but none of our indicators pick up much of the service sector, or account for the strong global growth we are seeing and the fact that lots of US firms are diversified globally, and on and on.
I'd like to see two things. First, someone to go and do an Arthur Burns and Wesley Mitchell study of business cycle indicators all over again. And two, for someone to start from scratch and redesign the NIP accounts.
Even if we did those things, I think it is folly to cleave macro-analysis from its microfoundations, which is what I view all this business-cycle modeling as doing.
Posted by: wintercow20 at Oct 31, 2007 1:41:13 PM
Way to crush some poor soul's Geocities page beneath the weight of MR traffic. ;)
Posted by: Jason Briggeman at Oct 31, 2007 1:48:24 PM
Everyone's macro predictions are right if they keep the timelines loose enough. Yes, there will be a recession someday. Yes we will rebound higher eventually. It is hard to imagine not believing both of these propositions.
Posted by: JasonL at Oct 31, 2007 2:00:22 PM
Well, one of the odd things going on here (or more accurately, not going on here) is that there do not
seem to have been substantial increases in gasoline prices recently, despite this pretty impressive
surge in crude oil prices. The usual channel on that one involves gasoline and related prices going
up and then impacting the economy, but so far that has not happened recently anyway, although it is
legitimate to point out that we have had some substantial increases over the last few years that have
not yet tanked the macro engine of the US.
Posted by: Barkley Rosser at Oct 31, 2007 5:39:40 PM
Am I the only person who thinks that lower cost of commodity inputs is a GOOD thing? Why then, should we be whining about the drop in real estate costs? Now it's cheaper for everyone to afford a home or office.
The "Wealth Effect" is one of those macro gems that turns a good event into a negative. But, sayeth the Macro, the real estate downturn triggered a credit crisis! No. Stupid lending practices is the root of the credit crisis. The real estate downturn was merely the outgoing tide that revealed the crud.
I've always felt that macroeconomics was not economics the way astrology is not astronomy.
Posted by: M. Hodak at Oct 31, 2007 9:26:07 PM
M. Hodak, that is a legendary quote.
Posted by: Matt Nolan at Nov 1, 2007 1:27:32 AM
Yes the macroeconomists always (and economists generally) always remind us that our genius at competition, innovation and
public policy will assure us of nothing but growth and good times.....Now it appears according to our
friends at the fed and macroeconists in general that the faling value of the dollar and the increase in the
price of oil really do not matter it will all be fine. We were also told by the best and brightest
that there was no tech bubble or housing bubble. Even if such bubbles exist they will be trivial
given our outstanding productivity and new miracle advances in technology. In effect macroecomics
and most economists are the Candide of our age--its all going to be allright. If not, we will just
make sure inflation measures do not include fuel and food........
Posted by: Robert at Nov 1, 2007 4:15:00 AM
Do you mean to tell me that the 3.9 rate emanating from the dreary cubilcle hell
for gs 13 PhDs is something we should trust?
Posted by: Data Guy at Nov 1, 2007 6:10:07 AM
Methodology note
When you say that economics is not a science you, obviously, mean that your activity is not a science. However, simple logic says, that one (or any finite number) negative example does not indicate the absence of a phenomenon (subject) and the possibility of its scientific description.
Therefore, you statement is too strong and you try to take too large responsibility. You should better say, I and my colleagues failed to make economics a science. That would be more appropriate.
By the way, many physicists contemporary Einstein denied his work as a science and he failed to obtain the Nobel prize at first attempt because on of Swedish professors gave very negative recommendation
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