Saturday, January 7, 2012

Why Macro Is So Hard: The One Lever Fallacy

Macroeconomics is hard, in part, because people are always looking for the one magical thing to change to make it all better.

But this is magical thinking.

David Brooks summarizes this nicely, in a piece about our fraying international financial system, and the unwillingness of the political class to wade in to the problems:

Both orthodoxies take a constricted, mechanistic view of the situation. If we’re stuck with these two mentalities, we will be forever presented with proposals that are incommensurate with the problem at hand. Look at the recent Obama stimulus proposal. You may like it or not, but it’s trivial. It’s simply not significant enough to make a difference, given the size of the global mess.

We need an approach that is both grander and more modest. When you are confronted by a complex, emergent problem, don’t try to pick out the one lever that is the key to the whole thing. There is no one lever. You wouldn’t be smart enough to find it even if there was.

Instead, try to reform whole institutions and hope that by getting the long-term fundamentals right you’ll set off a positive cascade to reverse the negative ones. …

I emphasize in my macroeconomics classes that regional business fluctuations (like recessions and financial crises) don’t have one big cause. Instead, they have a laundry list of a few dozen smaller causes. You probably shouldn’t take anyone seriously if they can’t rattle off 10 factors that contributed to the most recent recession.

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