"I feel a responsibility as a scientist who knows the great value of a satisfactory philosophy of ignorance...I feel a responsibility...to teach that doubt is not to be feared."
- Richard Feynman
A few posts back, I blogged about a Hoover Institute panel organized by John Taylor, in which eminent macroeconomists were invited to give their thoughts on how to restore America to robust growth. Now, via David Glasner, I have found a transcript of John Cochrane's remarks at the panel. Given Cochrane's polemic tone in past writings, my hopes were not exactly high. But I went ahead and read the whole thing, and what I found left me (mostly) pleasantly surprised. Cochrane spends much of his time talking about how macroeconomists really don't understand that much about the economy:
Why are we stagnating? I don’t know. I don’t think anyone knows, really...Nothing on the conventional macro policy agenda reflects a clue why we’re stagnating...
This conference, and our fellow economists, are chock full of brilliant new ideas both
macro and micro. But how do we apply new ideas? Here I think we economists are often a bit arrogant. The step from “wow my last paper is cool” to “the government should spend a trillion dollars on my idea” seems to take about 15 minutes...
Compare the scientific evidence on fiscal stimulus to that on global warming . Even if you’re a skeptic, compared to global warming, our evidence for stimulus ‐‐ including coherent theory and decisive empirical work ‐‐ is on the level of “hey, it’s pretty hot outside.”...
There are new ideas and great new ideas. But there are also bad new ideas, lots of warmed over bad old ideas, and good ideas that happen to be wrong. We don’t know which is which. If we apply anything like the standards we would demand of anyone else’s trillion‐dollar government policy to our new ideas, the result for policy, now, must again be, stick with what works and the stuff we know is broken and get out of the way.
But keep working on those new ideas!
These quotes, in my opinion, are spot on. If there's one point I've consistently tried to push since I started writing about macro on this blog, it's that we don't really know that much about how business cycles work. Sure, we are reasonably sure of a few things, like that most recessions, and the biggest recessions, are driven by demand shocks (as is high unemployment). And it seems that having the government spend money boosts GDP growth during recessions. But in general, we are just very ignorant. We don't have a really good (i.e., quantitatively predictive) model of how aggregate demand works, or why stimulus has an effect.
Given this ignorance, the appearance of precision and "sciency-ness" offered by modern business-cycle models seems pernicious to me. It biases the field toward making minor modifications of the existing paradigm (Olivier Blanchard's "haikus") rather than exploring blue-sky ideas that might lead to real leaps in our understanding. I can't offer a ready alternative to the DSGE paradigm (maybe someday I will), but I think that in the absence of something that works, the best alternative is to adopt a "satisfactory philosophy of ignorance."
So I like what Cochrane is saying about our ignorance. And I think there is a powerful case to be made for policy inactivity - the idea of "first do no harm." If you are a doctor and your patient is in critical condition, but you don't know how to save him, you don't just pump him full of every drug you have. If I were an opponent of fiscal stimulus, that is exactly the argument I would make - that the burden of proof is on the proponents of stimulus, and that the evidence is too muddled to risk making the situation worse.
Unfortunately, stimulus opponents typically make far bolder claims, like "stimulus can't possibly work." And in doing so they throw away their natural advantage, because instead of a "satisfactory philosophy of ignorance," they reach for a false certainty and end up overstating their claims.
This is also where John Cochrane, in my opinion, stumbles a bit. Even as he points out how ignorant macroeconomists are, he goes ahead and offers his own positive theory of the recession:
So what if this really is not a “macro” problem? What if this is Lee Ohanian’s 1937 – not about money, short term interest rates, taxes, inadequately stimulating (!) deficits, but a disease of tax rates, social programs that pay people not to work, and a “war on business.” Perhaps this is the beginning of eurosclerosis. (See Bob Lucas’s brilliant Millman lecture for a chilling exposition of this view).Yes, Cochrane says "perhaps" and "what if." But it certainly seems as if he leans toward the Ohanian view. The problem is, this view is pretty easily debunked by a casual reading of history. Tax rates have not gone up since 2007, and social programs are not currently more generous than in the past. There is much we don't understand about the true causes of recessions, but at least we understand that much!
But then Cochrane comes back and says this:
Our (microeconomic) garden is full of (policy) weeds. Yes, it was full of weeds before, but at least we know that pulling the weeds helps. Or maybe not. (emphasis mine)This is great! Not only does Cochrane move away from Ohanian-land and back toward the "first do no harm" critique of stabilization policy, but he admits that even that might not be right!
So basically, even though it includes a number of substantive points with which I'd argue, I really, really like this Cochrane talk. Now there's a sentence I didn't expect to see myself writing when I first followed the link!
It has always been my opinion that the neoclassical revolution hit its high point with the Lucas Critique. It was a great thing to expose the inadequacy of the macro models then in use. But when the neoclassicals went ahead and replaced those models with RBC and Rational Expectations, I feel like the revolution really overreached. The inability of RBC (or DSGE in general) to explain our current economic woes has led some neoclassical-minded folks to reach for Ohanian-style explanations (it's the socialists' fault!). Instead, I think that they should go back to where Lucas started, and embrace a "satisfactory philosophy of ignorance." Even as someone who is very dubious of the neoclassical worldview, that is a perspective with which I would heartily agree.