The first and most important thing to know about macroeconomics is that a strong negative shock to demand — a sudden decline — in other words — usually leads to a loss of production and employment. Nominal wages are contagious, due to complex social factors, so employers do not always respond to low demand for low wages for workers. Instead, they fire some and it leads to recession.
That may seem too easy. But it was one of the most important discoveries in history. This was especially true during the Great Recession, the inflation of the 1970s and ’80s, and the post-2008 financial crisis.
The second thing to know is that well-functioning central banks can significantly reduce such demand shocks — or prevent them from arising in the first place. The bank may engage in complex financial transactions or print more currency to stabilize nominal demand and restore some measure.
The third thing to know is that if the central banks increase the money supply, the result will be higher price inflation. There is one exception, which was evident in 2008 and 2009, when the US Federal Reserve paid interest on reserves: if central banks simultaneously acted to slow down the pace of money — that is, if they took steps to reduce lending and debt, price inflation would be limited accordingly.
The fourth thing to know is that non-monetary shocks, if they are large enough, can also create depression or frustration. Consider the global oil price shock of 1973, the current pandemic or bad crops in agricultural societies. Central banks can partially stabilize such shocks, but they cannot eliminate them.
I believe a high percentage of macroeconomists will agree with these proposals, even if they put their importance differently. These four proposals are sufficient to elevate macroeconomics to the required field.
While there is still consensus on discipline, things are becoming more controversial. Consider the question of how large a modern economy can run a federal budget deficit without facing a financial crisis. No one really knows. However, there is an agreement that government investments with high debt will strengthen the country’s financial position even if it is financially aided by government debt. Those returns increase both output and tax revenue, at least in the medium term, and markets in general can see those gains.
If economists disagree about the optimal scope of economic policy, it depends on the return on government investment. Those on the left believe that high returns are too low, and that the government chooses to invest poorly. This is an important and real disagreement, but it is about economic policy and government quality, not about macroeconomics. The underlying analysis is consistent.
After you cross those proposals and this disagreement, I have my doubts about macroeconomics. I don’t know if the price inflation rate should be 1.7% or 2.0%, and the discussions on this subject read to me like mumbo-jumbo. I’m fine with 2.0%, though, or 2.2%.
I don’t think macroeconomists know how to measure investment well, especially when the relevant corporate assets are incomplete, similar to tech companies, or if America is in an ‘investment drought’. It is also not good for us to estimate or understand the exchange rates or real interest rates or the movements in total stock prices which are the three major sectors of macroeconomics. I think you can learn something by listening to all sides of the discussion on these topics, but at the end of the day, it’s good to be agnostic. I also think that measures of price inflation are almost useless in the long run, because today a person consumes many different commodities than one in the 1950s.
Finally, allow me to add one more fact, although it has not been confirmed or unanimously found: a growing population is good for the economy, other things are stable and a declining population is bad.
Undermining macroeconomics is an old-fashioned pastime, yes, there are a lot of things we don’t know or understand. What could be worse than living with macroeconomics or macroeconomics, even if my wife asked — trying to live without it.
Tyler Cowen Bloomberg Opinion Columnist.