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22 January 2023

The golden age macroeconomics has ended

Hyperglobalisation is in retreat, but this is only part of the story, and perhaps not even the most interesting part. Closely linked is a parallel tale of the decline of macroeconomics as its intellectual foundation and that of the macroeconomist as a political figure.

Their rise and decline is even reflected in popular culture. During the pandemic, I indulged in watching an old political television series from the late 1990s - The West Wing. It is still surprisingly fresh, despite the beepers and the big computer terminals. What is truly strange from today’s perspective was the depiction of the US president as a Nobel Prize winning economist. It was a thing, back then. Shortly after Bill Clinton was elected president in 1992, he assembled a group of macroeconomists to draft his economic agenda for him. It is inconceivable that such a thing would happen today. Also, no Hollywood scriptwriter would nowadays create a US president as an economist.

The closest we ever got to this fictional characterisation was Larry Summers. The Harvard economist was surely a candidate for a future Nobel prize, but abandoned his career and moved into politics under Clinton. He rose through the ranks all the way to Treasury secretary. Today, we laugh at him when he sits on the veranda in some subtropical setting, telling a TV interviewer that unemployment has to rise for inflation to come down. I could write a book on whether this claim is true or not. But it is the image of an economist, insensitive, arrogant and tone-deaf to the modern world, that is most striking.

The rise of hyperglobalisation and modern macroeconomics are intertwined. Macroeconomists supported financial deregulation and free trade agreements that have become progressively problematic. What I find outrageous, for example, is that modern trade agreements allow investors to seek compensation from governments if their profits are hit by green legislation.

Macroeconomists were also behind quantitative easing, a policy adopted by central banks after the global financial crisis. It had the primary effect to raise investment returns to stabilise inflation expectations. But it contributed to the rise in inequality. Macroeconomists were also behind the inflationary stimulus packages during the pandemic. The sum total of all these policies have led to an increase in instability and inequality. They were also a factor in the rise of political populism.

Hyper-globalisation is failing for a reason that was most succinctly stated by the political economist Dani Rodrik. Only two of the following three are compatible with one another: the nation state, democracy and globalisation. The EU was an attempt to overcome Rodrik’s trilemma, by creating a democratic structure alongside an integrated market. Readers will undoubtedly have their own views as to whether the EU succeeded or failed. But the world of hyper-globalisation does not even try. It has no parliament, no democratic accountability, yet it gives rise to permanent instability and crises. Macroeconomics got us into this mess. But as the Brexit referendum has shown perhaps for the first time, voters no longer trust macroeconomists to get us out of it.

Macroeconomists have become celebrated op-ed columnists in national newspapers and are regular guests at global junkets, likes the one at Davos this week. But their influence has been waning, even in central banks and academia. Ten years ago, Ben Bernanke and Mario Draghi were at the helm of the world’s two most powerful central banks, the Federal Reserve and the European Central Bank respectively. Both received their economics doctorate from the Massachusetts Institute of Technology, which is has one of the world’s most prestigious economics departments. It is more than a sign of the times that MIT has now now pushed macroeconomics out of the list of compulsive subjects for first year graduate students in economics. And the chiefs of the Fed and the ECB nowadays are no longer economists, but lawyers.

Central bank macroeconomists also find themselves challenged in one of their core functions, of modelling the economy. As a long-time observer the ECB, I have often poked fun at the disastrous record of their inflation forecasts. A monkey with a dartboard or an astrologer could have outperformed them. The reason for this is model bias. This is best explained by an economist friend on mine who once said: no economist has ever given up their economic model, just because empirical facts intruded. And intrude they did. The accumulation of global crises, and especially the stalling of globalisation, is bad news for models built for a fair-weather world. Remember when the Queen asked why did macroeconomists not predict the financial crisis of 2008? This is why.

There is a new generation of macroeconomists who disagree with the establishment view as much as I do. But I doubt that they will ever be as influential. The golden age of macroeconomics is over.

But don’t expect establishment macro to go quietly. Their main defence today is that there is no alternative to the present capitalist system, to hyper-globalisation and, by extension, to its intellectual creators and supporters. Be careful with this argument. History is full examples of alternatives that did not exist - until they did. I understand why economic journalists, commentators and academics feel melancholic about the thirty-year period between 1989 and 2019, the age of hyper-globalisation. It is the age where many of us have formed our basic beliefs and judgements.

My advice to the ageing, mostly male macroeconomist: enjoy the retirement on Caribbean beaches. As for us, we live in a world in which politics is once again regaining supremacy over economics, which is how it should be.

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