Must-Read: Noah Smith: The New Heavyweight Macro Critics

Must-Read: Noah Smith: The New Heavyweight Macro Critics:

[Paul] Romer’s harshest zinger… is this:

In response to the observation that the shocks [in DSGE models] are imaginary, a standard defense invokes Milton Friedman’s (1953) methodological assertion from unnamed authority that “the more significant the theory, the more unrealistic the assumptions (p.14).” More recently, “all models are false” seems to have become the universal hand-wave for dismissing any fact that does not conform to the model that is the current favorite. The noncommittal relationship with the truth revealed by these methodological evasions…goes so far beyond post-modern irony that it deserves its own label. I suggest “post-real.”

Ouch…. Meanwhile, a few weeks earlier, Narayana Kocherlakota wrote a post called “On the Puzzling Prevalence of Puzzles”. The basic point was that since macro data is fairly sparse, macroeconomists should have lots of competing models that all do an equally good job of matching the data. But instead, macroeconomists pick a single model they like, and if data fails to fit the model they call it a “puzzle”. He writes:

To an outsider or newcomer, macroeconomics would seem like a field that is haunted by its lack of data…. In the absence of that data, it would seem like we would be hard put to distinguish among a host of theories…. [I]t would seem like macroeconomists should be plagued by underidentification…. But, in fact, expert macroeconomists know that the field is actually plagued by failures to fit the data–that is, by overidentification. Why is the novice so wrong? The answer is the role of a priori restrictions…. The expert knows how to build up theory from a priori restrictions that are accepted by a large number of scholars…. [I]t’s a little disturbing how little empirical work underlies some of those agreed-upon theory-driven restrictions–see p. 711 of Lucas (JMCB, 1980) for a highly influential example of what I mean.

In fact, Kocherlakota and Romer are complaining about much the same thing: the overuse of unrealistic assumptions… the habit of assuming stuff that just isn’t true…. What… Canova and Sala paper says too, in a much more technical and polite way…. What seems to unite the new heavyweight macro critics, besides a lingering annoyance with Bob Lucas and his associates, is an emphasis on realism….. They’re not saying that economists need 100% perfect realism…. But if Romer, Kocherlakota, etc. are to be believed, macroeconomists aren’t currently close to that optimal interior solution.