Wednesday, March 31, 2010

What's wrong with macroeconomics

Really, you could start anywhere.

But let's take this, from VoxEU:

In a recent paper (Laibson and Mollerstrom forthcoming), my co-author David Laibson and I make further attempts to assess whether the saving glut hypothesis fits with reality. We build a model where one country (the US) receives exogenous capital inflows which are calibrated to match the US current account deficits for the period that Bernanke was focusing on.

Our model shows us that such a course of events should indeed lead to increases in US consumption. However, we also find that the investment rate should have risen by at least 4% of GDP. Intuitively this makes sense; if the Chinese government exogenously loaned US households a trillion dollars, those US households should have chosen to invest a substantial share of those funds to help make the interest payments.

What's missing here? Businesses, one, and the financial system, two. Investment decisions are supposed to be made directly by households. Of course writers like this (a grad student and professor at Harvard, natch) know that firms and banks exist; they just assume that there are no important differences between an economy with them and one without them -- the standard approach, despite its seeming self-refuting quality, to macroeconomics today. This will seem trivially obvious to anyone who's taken a macro course, and astonishing to almost anyone who hasn't; it's still a bit astonishing to me. It's nice to be reminded, though, of why post-Keynesian and Marxist approaches to macroeconomics are still essential.

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