Monday, March 7, 2011

Why Is Macroeconomics So Hard?

Macroeconomics is one of the harder classes on a college campus, but that isn’t anything special – there are lots of hard classes.

Macroeconomics is special though, in that it is both hard and beset by an extra set of difficulties.

The list of college classes that are both taken by a lot of students and that cover a lot of hard material is pretty short: calculus, statistics, organic chemistry, microeconomics and macroeconomics.

The list of college classes about whose subject matter non-experts have strong opinions is also pretty short: evolution, human sexuality, some education classes, and macroeconomics.

The only course that is on both lists is macroeconomics, and this can make it extra hard for you to master. Here’s a list of the pitfalls.

  • Everybody has an opinion about macroeconomic issues.
    • Most classes you take in college do not cover subjects on which everyone feels entitled to have their opinion respected.
    • For example, if you take Organic Chemistry, your weird Uncle Fester is not going to want to argue about it over a holiday dinner – but he might about macroeconomics.
    • In many ways, discussing macroeconomics with friends and relatives is like discussing primary education, evolution, religion, or human sexuality – everyone has an opinion, everyone thinks their opinion is right, many people are stubborn about their opinions, and – while most of the opinions are worthwhile – many of them have no foundation whatsoever. They may even know that their viewpoints are incorrect, but they are too wedded to them to change – a psychological condition known as cognitive dissonance.
  • Macroeconomic policies have been practiced for thousands of years – so there is a very strong element of “we’ve always done it this way” in the way government officials think about things.
  • Our Constitution was written over 215 years ago, yet macroeconomics wasn’t recognized as a separate discipline until 70 years ago – so our government isn’t designed for the timely execution of proper macroeconomic policy. We’ve stapled this to their job description.
  • We elect people to do something. In fact, those who have a need to do something are attracted to government. Should we trust them to do the right thing when it is to do nothing at all? We might get better policy decisions if we bought every policymaker a Nintendo Wii to keep them from creating new policies just to stay busy.
  • Legislative politics is about finding acceptable compromises, not making the right choices. If it’s hard to order an 8 slice pizza for 3 people that make them all happy, can you imagine trying to formulate macroeconomic policy in Congress or The White House?
  • For better or worse, a lot of politics is just adversarial grandstanding. Democrats and Republicans, liberals and conservatives, often say one thing when in power, and the opposite when out of power – kind of like a “friend” who is never hungry until you pay for the pizza.
  • The positions of political parties are a mishmash of ideas that have been cobbled together because that combination might attract a majority of the votes. This is like having to choose the better dresser between two old men on the golf course.
  • The individual policy positions of a political party are often swapped or reversed through time without consideration of whether the overall platform is consistent. This makes them act like the “mean girls” in high school – they often drop their traditional friends very quickly, and retain allies for loyalty rather than sensibility.
  • Most members of Congress and other government officials have little or no background in economics – we primarily elect lawyers to write our laws and then dump responsibility for national economic well-being on them as their primary job. Maybe we should feel sorry for them – they know not what they do.
  • Just about everyone gets their information about macroeconomic policy from people in the media who have little or no background in economics – some of them probably even went into the media to avoid economics in college, and now they have to talk or write about it for a living. That must ____!
  • The media is obsessed with presenting viewpoints that are balanced, in the sense that they try to present experts with different opinions. The problem is that they don’t tell you how much work it took to actually find a different opinion – what if there isn’t any disagreement except from crackpots?
  • Policy debates are often lacking answers to really basic questions. How much is this going to cost? Compared to what? How can you be sure? Why do we listen at all if we don’t get answers to these questions first?
  • It’s hard to believe, but there’s quite a bit of evidence that policymakers actively suppress the collection of data on controversial policies, but spend freely to collect repetitive information on uncontroversial policies.
  • The media are availability entrepreneurs: they are actively seeking out information that is available, and which fits the world view of their consumers. If the information isn’t readily available you won’t hear about, and you won’t hear about it if people won’t listen to that viewpoint. Bad news sells because that’s what we want to hear.
  • Many people focus excessively on prices, because they are easy to observe. But, the real action is in quantities: how much did people work, how much did they buy. Increasing and decreasing prices always help one party and hurt another. But, with goods and services, increasing quantities are good, and decreasing ones are bad.
  • We removed one of the checks and balances from the Constitution that kept special interest politics in check. Prior to the 17th amendment, Representatives represented people, and Senators represented state governments. Now Senators are elected the same way as Representatives, meaning that special interests only have to convince one group (the voters) instead of two (the voters and the states’ government officials). It’s not that different from kids getting more special favors when there’s just one parent around.
  • There’s what The New York Times David Brooks calls a metacognition deficit: “Very few in public life habitually step back and think about the weakness in their own thinking and what they should do to compensate.” Outside of politics, this is most commonly seen among those who apply their religious doctrine more broadly that it is applicable or even intended. Reversing that argument, it may be that those on the opposite side of the political spectrum disagree with you because they believe you are acting out of faith, and to them your faith is simply wrong and not worth discussing.
  • Many people suffer from what Bryan Caplan calls the “activist’s fallacy”. It goes like this: 1) something must be done, 2) this is something, 3) therefore this must be done. It’s a fallacy because this could be just about anything. This is compounded by the fact that most government policies don’t have any sunset provision (basically, an expiration date). For example, in the U.S., 85% of the population has health “insurance” provided as a fringe benefit of their job – this is a holdover from World War II when the Roosevelt administration didn’t want employers paying workers more in cash, and this is what managers came up with.

The upshot of all of this is that you will often hear things from friends, relatives, and the media that don’t match up with the textbook, my lectures, or the insights you are getting from them.

Trust what you’ve learned in class – by the end of the semester you’ll have learned more macroeconomics than most people ever get the chance to, and it will be fresh in your mind.

From time to time, in response to some odd observation on the world around you, I’ll say – remember that first lecture of the semester? Don’t take offense when I do!

And don’t forget – while I teach facts and uncontroversial theories about macroeconomics, this is still a dynamic and evolving field, and I might later be proved wrong.

N.B. This is a list that grows every year. Check back to this site in the coming years for new additions.

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