STOCK MARKET WATCH -- Monday, 22 April 2013 -- Earth Day

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19. The end of macro magic

http://www.washingtonpost.com/opinions/robert-samuelson-the-end-of-macroeconomics-magic/2013/04/21/7408d628-a924-11e2-a8e2-5b98cb59187f_story.html

The International Monetary Fund recently held a conference that should concern most people despite its arcane subject — “Rethinking Macro Policy II.” Macroeconomics is the study of the entire economy, as opposed to the examination of individual markets (“microeconomics”). The question is how much “macro” policies can produce and protect prosperity. Before the 2008-09 financial crisis, there was great confidence that they could. Now, with 38 million unemployed in Europe and the United States — and recoveries that are feeble or nonexistent — macroeconomics is in disarray and disrepute.

Among economists, there is no consensus on policies. Is “austerity” (government spending cuts and tax increases) self-defeating or the unavoidable response to high budget deficits and debt? Can central banks such as the Federal Reserve or the European Central Bank engineer recovery by holding short-term interest rates near zero and by buying massive amounts of bonds (so-called “quantitative easing”)? Or will these policies foster financial speculation, instability and inflation? The public is confused, because economists are divided.

Perhaps the anti-economist backlash has gone too far, as George Akerlof, a Nobel Prize-winning economist, argued. The world, he said, avoided a second Great Depression. “We economists have not done a good job explaining that our macro policies worked,” he said. Those policies included: the Fed’s support for panic-stricken financial markets; economic “stimulus” packages; the Troubled Assets Relief Program (TARP); the auto bailout; “stress tests” for banks; international cooperation to augment demand.

Fair point. Still, the subsequent record is disheartening. The economic models that didn’t predict the crisis have also repeatedly overstated the recovery. The tendency is to blame errors on one-time events — say, in 2011, the Japanese tsunami, the Greek bailout and the divisive congressional debate over the debt ceiling. But the larger cause seems to be the models themselves, which reflect spending patterns and behavior by households and businesses since World War II.