The Problem with Macro, and An Apology
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.)
You know, I’m still not feeling or seeing that monetary policy effect. The shop is down again his past year.
The only thing the chained cpi is measuring is how quickly the economy is contracting. Or, should I say the declining velocity of money.
The other – and in my opinion far more important – problem with macro is that it is joined at the hip with politics.
Thus we have elegant concepts like RBCT, DSGE, Ricardian equivalence and rational expectations which have absolutely no relationship with the real world, but all conveniently play into the hands of a wealthy elite.
Fancy that.
Phlogiston at least made sense with the data available at the time. To achieve the intellectual equivalent of modern macro, Chemists would have to go back to using the 4-element periodic table of air, fire, earth and water.
Or, coming at it another way, macro is as valid as astrology and Tarot cards – and its followers pursue it with the same religious zeal.
JzB
I’m not an economist, but I am a scientist. And I admit that I have no idea how you all can talk about this with straight faces. As I understand it, you propose to measure inflation by looking at changes in the cost of a market basket of goods, the price of which is constrained to increase less rapidly than inflation. And you say this will be more accurate. ‘Orwellian’ comes to mind, as does ‘category mistake,’ though neither arrives first.
Thanks, Ken, Definitely a class act.Q
Oh come on Bob, don’t you buy a new TV or stove or refrig at least once per week in order to live? 🙂
ken:
This made me laugh enough to heard incision. “rational manner for which I am known (think a combination of Scipio Aemillianus and William Tecumseh Sherman)—”
Lets see if I still understand this correctly, chained CPI drops food (of which 50% is imported) and gasoline (which is impacted by global pricing – I have yet to see Texas establish a lower price). In both cases, these two typically lead the charge in pricing increases. The other point to chained CPI is any product improvement (think VA/VE) is calculated to have lower costs in the longe run. This appears to be a fallacy when compared from price of old product to price of new product Ford’s mfg concept always seems to cost more in today’s world).
The price of oil would flow through to consumers at a later date when it hits other products such as food mfg and transportation months or a year later. If you drop food from the calculation, it is no longer a factor. And product improvements always seem to cost more while the calculation claims we get more for our money. I can see why some would like this; but, it seems rather nebulous and as nebulous as seasonally adjusted U3 numbers and population adjustments. The issue with chained CPI is it is tied to math models similar to what drove the financial crash. Adjustments would be made well after the impact which could mean years for SS recipients.
I’m supposed to be “generous” but why does the Boskin Commission remind me of Team B and the Committee on the Present Danger of teh 1970s? I would love to know what our BLS professionals thought (really thought) when they read it. BTW, BLS made some changes based on some criticisms within the Boskin Report, and these changes did lower subsequent inflation estimates. But not enough for Boskin Commission members and their political boosters.
Well actually chemists do talk (not teach ok) about the phlogisten theory, but only to show how it was disproved and what that means.