There has been much discussion recently of the “problem” with Macroeconomics. See Nick Rowe, Noah Smith (who may have been punked by a self-selecting sample—or may not have), Mark Thoma, Brad DeLong, RDan’s collection here a while back, and the rest of The Usual Suspects.
Let’s ignore for the moment that the problem with Macro is Micro. I think I have figured out the other problem with Macro, and I have Victor Matheson to thank for it.
In the midst of a post last week, I noted that there are perpetually claims from economists and that “chained CPI” is a “more accurate” measure of inflation. (Not coincidentally, Chained CPI runs below CPI.) That not being enough I continued—in the calm, rational manner for which I am known (think a combination of Scipio Aemillianus and William Tecumseh Sherman)—by highlighting Professor Matheson’s otherwise rather innocuous comment chez DeLong that he remembered being told the same thing.
I gave Professor Matheson a “most notably,” when he was hardly the most extreme representative. Indeed, anyone following the link to his comment would wonder why he was chosen. It was mainly from this:
While I teach intro to macro, I am not an expert in the minute details of the CPI calculations, and I do remember the talk in the 90s was that the CPI overestimates the true costs of inflation by something like a percentage point or two every year.
But it is my misreading of that. Note that, while Professor Matheson teaches Introduction to Macroeconomics (presumably Econ 301 or 302), he specifically does not say that he teaches that CPI overestimates the true cost of inflation.
But he does say that he heard it in the 1990s, and does not say he has heard that those claims are bollocks.
Before going further, I want to apologize to Professor Matheson for making him the poster child and putting words into his mouth that his fingers didn’t actually type. (And, in direct answer to his question chez DeLong, Nancy Ortiz in comments to the previous thread, lays out the biggest problems with “chained CPI” specifically as a measure for Social Security [or generally for anyone without legacy wealth].)
PJR, again in the previous comments thread, correctly sends us to the Boskin Report, and is not impressed:
I conclude that the C-CPI probably answers the wrong question, consequently measures the wrong concept, and conflates inflation with behavioral responses to inflation.
To I trust no one’s great surprise, I consider that a generous interpretation. Yet the myth persists. Which is another reason we have a problem with Macro.
Chemists don’t teach Phlogiston Theory. None of the biologists, biochemists, or biophysicists I know talks about the glories of Lamarckism when differentiating between 3’ and 5’ DNA. But economists still pretend, as they did a decade ago that Gary Becker proved that economics means that discrimination does not exist; that Real Business Cycle Theory can actually explain any significant portion of Business Cycles in either direction; that NAIRU is a workable concept, even as “skill shortages” cause it to be severely discontinuous in a world that claims to have continuous functions (and does not work if it doesn’t).
A world where CPI is a bad measure because people will choose dog food when they cannot afford Hamburger Helper (which we call “chicken-steak,” as if it were Patrick Stewart and Steve Martin negotiating [link will be understood by rjw’s students]) and that the IBM ThinkPads I bought three months ago costs about 1/10th what it did when it was new in 2001 (and I can probably sell it for…bupkis) means that “computing costs” have gone down for consumers.
Not to mention a world of “rational expectations” (“micromotives,” as it were) being generalized so that networks, social interactions, cliques, and indeed governments are treated solely as if they are the sum of the parts.
The problem with Macro remains Micro, and the problem with my previous post remains that I was more than a bit unfair to Professor Matheson of Holy Cross, for which I apologize to him and our readers.
(Discussion of the paper referenced yesterday is deferred to another day.)