Sigh

A third is economic competence. I would love a commonplace comprehension of modern monetary theory, but even some awareness that macroeconomics is not microeconomics grossed up would help. The trouble is, most who call themselves macroeconomists don’t get that last point and so fail to appreciate that macro us usually the opposite of micro, to which it provides the double entry in a great many cases.

This is actually one of the great controversies within economics. Do macro theories have to be based upon aggregations of micro? Or not?

This is actually important. For example, so, we have some Keynesian stimulus – and you can extend this if you like, to monetary stimulus, QE, whatever – and what’s the effect of it? We’ve not got enough actual examples of this to be sure at that “We did stimulus, therefore the effect is”. A handful of economies over a few decades, not much more than that, for detailed economic numbers. Given the complexity of economies that’s not enough data for us to be able to tease out, with any certainty, what actually happens.

Sure, we’ve got some theories but they do need to be road tested against reality.

So, think micro for a moment. Say Friedman is right about permanent income hypothesis. We’ve all got an idea of what we’re going to earn in the future, we’ll save or spend according to that idea we’ve got of what lifetime earnings will be and we’re trying to spread it over that time that we live. This is obviously true at some level – no one would save for a pension if this were not so. But how much is this true? Do temporary changes in income lead to no, small, medium, large or total changes in spending habits?

Or a refinement. If we observe that the increase in income has come from deficit spending, then we’re going to have to pay the tax to make it up (or, for QE, we’re going to be taxed through inflation, say) do we spend the money or save it to pay the future tax bill? Ricardian Equivalence that is.

The answer to the second is a very few of us yes either way, most of us a bit either way and how much changes with the times. Not all that useful an answer as a method of calibrating the effect of deficit financed stimulus but there we are, that’s just reality for us.

This whole thing is one of he great scholastic arguments within economics. Of course macro cannot be entirely inconsistent with known attributes of human behaviour at the micro level. Further, macro has some attributes – the paradox of thrift perhaps – where we know that simply summing micro isn’t quite the point. But how much is this true, when and where?

But Snippa knows and has declared. We’re all looking forward to that trip to Stockholm of his, aren’t we?