A macro guy defends macro theory by telling us all we’re not smart or trained enough to “get it”

My colleague Richard Green commented on the Kartik Athreya’s critique of economics bloggers. He writes:

But George Akerlof did, way back in 2006, during his American Economic Association Presidential Address. which was entitled “The Missing Motivation in Macroeconomics.” I remember finding the piece enthralling (I know, we economists aren’t supposed to use such emotion laden words), because in made the very simple but devastating case that when the foundations of modern macro (the independence of consumption and current income (given wealth); the independence of investment and finance decisions (the Modigliani-Miller theorem); inflation stability only at the natural rate of unemployment; the ineffectiveness of macro stabilization policy with rational expectations; and Ricardian equivalence) are tested against data, they generally fail the test. I remember at the time that some economists thought that Akerlof had taken leave of his senses (and some friend of mine thought I had taken leave of mine because I so admired the address).

link: Richard’s Real Estate and Urban Economics Blog: One more take on Kartik Athreya’s critique of economics bloggers

Athreya’s essay may be found here. My favorite quote is:

So far, I’ve claimed something a bit obnoxious-sounding:that writers who have not taken a year of PhD coursework in a decent economics department (and passed their PhD qualifying exams), cannot meaningfully advance the discussion on economic policy. Taken literally, I am almost certainly wrong. Some of them have great ideas, for sure.But this is irrelevant.The real issue is that there is extremely low likelihood that the speculations of the untrained, on a topic almost pathologically riddled by dynamic considerations and feedback effects, will offer anything new.

Nope, Athreya, that’s not the issue. You might want to make it the issue, but that’s not the issue. The issue is, as Akerlof pointed out in his manuscript, whether modern macro theories have any predictive value at all, and if not, whether the profession legitimately merits a privileged position as a consultant to institutional power. The dribbling bit at the end about how the topic is “pathologically riddled by dynamic considerations and feedback effects”? Welcome to social science, cupcake. Do you really think deriving a verifiable theory of culture or society or cognition is a picnic?

Yes, economics is hard. So is driving a bus. Most of us can’t drive a bus, in fact. But most of us, when we are riding on a bus, can tell when there is an incompetent driver. So if Athreya wants to blame the traffic and the potholes and the sun in his eyes, that’s fine, but:

The New Federalism v. 4.0 in transport?

Over dinner the other night, a political scientist and an economist dismissed my financial worries about HSR. “The government wastes money all the time” one said said. “It might as well be on trains rather than military spending.” The political scientist, in particular, said that Congress can just appropriate more to transportation to cover HSR; I was making a faulty assumption that the money for HSR will displace other transportation funding needs like the Big Dig did in the state of Massachusetts.

I’m still not convinced that the US Congress is ready to pull out their checkbooks for HSR any time soon, and I’ll be really interested to see the day that military spending gets cut in favor of infrastructure spending (or anything else)–but I am not holding my breath. The $2B allocated to California is hardly chump change, but it’s still $7B short of what the HSR says it expects the Feds to kick in (which means it will probably need closer to $10B to $12B of additional federal sources).

As early as 1974, comments on the “the New Federalism” began emerging as the Federal role in transportation began change from what it had been after the mid-1950s. The easy part of the interstate system had gotten built; the rest was becoming increasingly more nightmarish to implement as urban neighborhoods resisted being paved on. From there, the federal involvement in planning for transport became much more associated with “fiscal federalism” for just about everything, and Reagen’s “New Federalism” was ostensibly about a diminished federal responsibility in domestic programs. As Brian Taylor noted, however, it’s nearly impossible to argue in transport that finance is separate from projects or planning. Nothing gets implemented without resources, and the resources usually comes with strings. ISTEA was also noted as break from the previous round of fiscal federalism, where localities, MPOs and states got much more discretion and block-grant funding. Nonetheless, there were real variations in how much discretion and control over funding MPOs had from state-to-state.

It has been widely bandied about that the Obama administration and the economic crisis he’s got on his hands has worked to re-Federalize policy across the board, from banking to housing to urban policy more generally. We have for years had persistent calls for Federal funding for walking and biking projects, which I have to say I’m not sure I can get behind: why, exactly, can these not be paid for out of local taxes sources and, in particular, property taxes given all the studies that want to show me how TODs and New Urbanism, etc increase property values? Ditto with street projects, btw.

More compelling, the inter-city nature of HSR suggests the same type of Federal role it had during the Interstates. Yet with the Interstate we had a new Federal tax that went straight into a trust for that system. And that’s where I am pausing before I can call HSR or ARRA the new New Deal.

By contrast, the 30-10 plan from Los Angeles, recently passed, does promise to be a very new approach to Federalism in the US–one where the states are largely bypassed in favor of local fiscal capacity hedged against US federal financial capital and risk reduction. The feds are paying up front, but are being paid out of a dedicated local revenue source; it’s an infrastructure banking plan. That is a lot different than a simple act of appropriations, and my suspicion is that if states want their piece of the HSR pie, that’s the direction they are going to have to go. How far they have to go in will depend on how powerful their Congresspeople are.

References that informed this post:

Blumenberg, E. & Schweitzer, L. (2002). Devolution and the new federalsim: The role of the federal job access program in improving the mobility of welfare recipients. Planning Theory and Practice.

Dinan, J. & Gamkhar, S. (2009). The state of american federalism 2008-2009: The presidential election, the economic downturn, and the consequences for federalism. Publius: The Journal of Federalism.

Gage, R. W. & McDowell, B. D. (1995). ISTEA and the role of mpos in the new transportation environment: A midterm assessment. Publius: The Journal of Federalism, 25(3), 133.

Pagano, M. A. (1986). Old wine in new bottles? An analysis and preliminary appraisal of the surface transportation assistance act of 1982. Publius: The Journal of Federalism, 16(1), 181.

Mertins, H. & Jr. (1973). The “new federalism” and federal transportation policy. Public Administration Review, 33(3), 243-252.

Taylor, B. D. (2000). When finance leads planning: Urban planning, highway planning, and metropolitan freeways in california. Journal of Planning Education and Research, 20(2), 196-214.