Should-Read: Robert Waldmann: Buchanan, Smith, and Krugman

Should-Read: Robert Waldmann: Buchanan, Smith, and Krugman: “There is no reason why macroeconomists can’t work on empirical microeconomics while also using old Keynesian models for forecasting and policy advice…

…Now one might argue that it would be better not to give advice until we have decent models based on empirical microeconomics. This would be true if macroeconomists’ forecasts were reliably worse than those of non-economists. (Indeed, I am glad that Prescott, who said that the then current problems were no big deal in early 2009, and Lucas, who claimed to know that public investment couldn’t cause increased nominal aggregate demand, are not actively contributing to the policy debate). [But that] is not a sensible criticism of Krugman. I think it is clear that old Keynesian models are useful, because they give better forecasts and conditional forecasts than the judgment of non economists.

I have nothing against empirical micro research. Trying to understand price setting, hiring, firing and saving decisions is worthwhile as pure social science in any case. But the idea that macroeconomists should be microeconomists for a while (how many decades?) ignores that fact that policy makers are making horrible mistakes, and that (some) macroeconomists have reliably warned in advance that they are mistakes.