The Pyramid of Macroeconomic Insight and Virtue By Bryan Caplan

Many of my friends laughed at Paul Krugman when he wrote:

Maybe I actually am right, and maybe the other side actually does

contain a remarkable number of knaves and fools.

Krugman continued:

The key to understanding this is that the

anti-Keynesian position is, in essence, political. It’s driven by

hostility to active government policy and, in many cases, hostility to

any intellectual approach that might make room for government policy.

At risk of sounding misanthropic, though, Krugman is entirely correct to look at “the other side” and see a remarkable number of knaves and fools. Krugman’s mistake is that he ignores the comparable number of knaves and fools on his own side. A calm assessment would reveal that the entire spectrum of macroeconomic opinion is sorely in need of self-improvement. If you had to classify everyone with a position on the subject, you’d end up with a Pyramid of Macroeconomic Insight and Virtue that looks something like this:

Tier 1, the Base of the Pyramid (50%): Partisans who loudly support Status Quo Macro Policy (SQMP) as long as “their side” is in power, and angrily oppose SQMP when “their side” isn’t in power. See all the Democrats who supported Clinton’s austerity, and all the Republicans who supported Bush II’s profligacy.

Tier 2 (30%): Ideologues who are sure that “active government policy” will work well/poorly, even though they can’t even explain “their side’s” arguments, much less the “other side’s” arguments.

Tier 3 (10%): People who can parrot some basic textbook macroeconomics to support “their side,” but who can’t answer basic objections – or even accurately parrot the parts of the textbook that conflict with their views.

Tier 4 (7%): People who understand a few Undeniable Macroeconomic Truths. For Keynesians, these include: “Nominal wages are sticky,” “A lot of unemployment is involuntary,” and “Aggregate Demand matters.” For anti-Keynesians, these include: “The safety net discourages job search and sustains unrealistic worker expectations,” “99 weeks of unemployment insurance makes nominal wages stickier,” and “Regular government spending is wasteful, and stimulus spending is worse.”

The main problems with both groups: (a) Both loathe to acknowledge the other side’s Undeniable Macroeconomic Truths; and (b) Both tacitly rely on a long list of Questionable Macroeconomic Exotica to reach their policy recommendations. For Keynesians, the exotica include: “Monetary policy has little effect on Aggregate Demand,” “Nominal wage rigidity is a good thing because it sustains Aggregate Demand,” and “No matter how much we cut taxes, people will just save the money.” For anti-Keynesians, the exotica include: “Given the labor demand shock, workers are indifferent between unemployment and employment at the market wage,” “Nominal wage rigidity doesn’t matter because firms adjust non-wage benefits and labor intensity instead,” and “The market is always right on average… except when the TIPS market keeps forecasting low inflation.”

Tier 5, the Apex of the Pyramid (3%): People who freely acknowledge the whole list of Undeniable Macroeconomic Truths, while taking all Questionable Macroeconomic Exotica with a grain of salt.

Needless to say, we can argue about the precise percentages at each tier. But can you seriously deny that most people on both sides are partisans or ideologues? Can you seriously deny that most people who marshal textbook macro to promote or attack SQMP rarely “understand” more than a few bullet points in the textbook?

Wonks’ main controversy about my Pyramid, I suspect, will focus on Tier 4 and the Apex: “You’re Tier 4. We’re Apex!” “No! We’re Apex, you’re Tier 4.” I’m not going to settle this debate tonight. Instead, I’ll simply ask: If you decry your opponents in Tier 4 as “fools and knaves,” what do you call your allies in Tiers 1, 2, and 3?