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April 12, 2017

Macro in a state of denial

The debate about the future of macroeconomics remind us a little about the debate about the German current account surplus. Various people or institutions criticise the surpluses. But Germany thinks of itself not as the defendant but as the judge. Not guilty, says Berlin, let’s move on and talk about Greece. Donald Trump has been the first person willing and able to mount a challenge to that position.

Similarly, economists have reacted to criticism of their profession by simply dismissing it. A good example is the long paper by Ricardo Reis, which is very defensive in tone and only concedes that there is a problem with a lack of good graduate level textbooks. He bases his defence of the profession on the assertion that young economists produce a lot of novel and exciting research - which is true -  and that even macro is now gradually introducing notions of finance into its models (which misses the point of the criticism - it is not that there is no finance in them, but that there is no relevant finance in them). We cannot do justice to all points in this short review, but it strikes us that he, too, is playing both accused and judge. 

One of the sections that struck us was his defence of economic forecasts. He acknowledges that their performance has not been great, but then asks in relation to what? We can answer that question. The forecasts that showed persistent upswings in the post-crisis years were not only wrong in absolute terms, but they underperformed against a random number generator, or a monkey with a dartboard. The criticism is not that the forecasts are wrong, but that they were biased. His response gives a good flavour for the defensiveness of the macro profession:

“Moreover, the supposedly most embarrassing forecast errors come with regards to large crises. Yet, these crises are rare events that happen once every many decades. Since typical economic time series only extend over a little more than one hundred years, statistically forecasting the eruption of a crisis will always come with large imprecision.”

That's a very strange defence, given that economic analysis is needed the most during those crisis. If economists say that their toolkit does not work, then they should not be surprised by the reactions they are getting. Nor should they be surprised that the public and the media are ignoring economists' views in political debates, as happened during Brexit.

We prefer Olivier Blanchard’s more constructive approach, which at least recognise the problems though it still strikes us that he tries to combine truth-telling with an attempt to cause the least amount of offence possible. This is what he had to say about the overuse of the DSGE models:

“We need different models for different tasks. The attempts of some of these models to do more than what they were designed for seem to be overambitious. I am not optimistic that DSGEs will be good policy models unless they become much looser about constraints from theory. I am willing to see them used for forecasting, but I am again skeptical that they will win that game.”

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April 12, 2017

Where Schulz is vulnerable

Majid Sattar offers a good analysis about the strengths and weaknesses of Martin Schulz as a candidate. He notes that the SPD would not have seen the 10pp rise in the polls without him. His experience in Brussels counts as a plus in the kind of world we live in - faced with Brexit and Trump. But Schulz’ tactics of not committing himself politically cannot hold until the end of the campaign. He is going after the left-liberal voters, many of whom the SPD has lost to the CDU. These voters do not want anything to do with the Left Party, which favours exit from Nato and the eurozone, and a military alliance with Russia. At the same time, the Left Party will be effective by reminding SPD voters that the party has been helping Angela Merkel twice to become chancellor, so that by voting SPD this could happen again. Merkel has one advantage: she has categorically rejected an alliance with the AfD. But Schulz has not done the same in respect of the Left Party.

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April 12, 2017

Schäuble’s three party tricks

This is the first time we came across this blog, Lost in Europe, written by a German journalist, who in his latest entry casts a critical eye on how Wolfgang Schäuble is playing his game at EU level. The author notes what he calls three ticks. We have reported on two of those separately, but it is still useful to list Schäuble’s EU diplomatic tactics all together, and to ask what the ultimate purpose behind them might be. The blog quotes a newspaper reporting that the details of the Greek agreement last week were written in the German finance ministry the night before, and were handed over to Jeroen Dijsselbloem, who was then allowed to announce it. Schäuble’s second party trick is the constant assertion that the IMF will participate in the Greek loan, which as everybody knows is not going to happen until the EU agrees to debt relief which Schäuble himself rejects. And, finally, Schäuble is rejecting the European Commission's proposals for eurozone reform well before the Commission even announces them. This is an old EU political trick. The idea is to put the other side on the defensive. Instead Schäuble wants a strengthened ESM, with the goal to put even France under its wing. The impression people get in Germany is that there is progress over Greece, on the IMF, and on the eurozone, when in reality the opposite is the case.

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