Miles Kimball and Noah Smith have a long piece on the shakeup at the Minneapolis Fed, where a couple of prominent freshwater macro people have been fired. Kimball and Smith carefully tiptoe about exactly what happened, and so will I — I hear stuff, but it’s second- or third-order hearsay, and not reliable.

What we can ask is what might have led Narayana Kocherlakota, the bank’s president, to conclude that he wasn’t getting value out of research economists with lots of publications in top journals. Kimball and Smith stress the broad failures of freshwater macro predictions — where’s the inflation from all that money-printing? How could something like the Great Recession even happen in a world of clearing markets and optimizing agents?

One might also want to look at some specifics. There was Kocherlakota’s speech in 2010 in which he argued that low interest rates cause deflation — presumably with some input from the research economists; this was a big embarrassment, he probably noticed, and it may have fed his doubts about whether his economists had anything useful to offer.

And Brad DeLong leads us to Ryan Avent linking to a Minneapolis Fed working paper (pdf) by Chari, Christiano, and Kehoe basically sneering at the notion that the financial crisis would sharply raise borrowing costs or have major negative effects on the real economy. Not a good call:

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By the way, Larry Summers mocked this stuff — probably this paper, but maybe more generally — during his IMF remarks:

Now think about the period after the financial crisis. You know, I always like to think of these crises as analogous to a power failure, or analogous to what would happen if all the telephones were shut off for a time. The network would collapse, the connections would go away, and output would of course drop very rapidly. There’d be a set of economists who’d sit around explaining that electricity was only four percent of the economy, and so if you lost eighty percent of electricity you couldn’t possibly have lost more than three percent of the economy, and there’d be people in Minnesota and Chicago and stuff who’d be writing that paper… but it would be stupid. It would be stupid.

Now, as I’ve tried to say on a number of occasions, mistakes happen. If you, as an economist, try to weigh in on events as they happen, you will get things wrong, and sometimes you may get them wrong in a big way. The crucial question is what you do next. Do you engage in self-analysis, trying to figure out what in your framework led you astray? Or do you double down on your preconceptions, refusing to admit that you may have gone up the wrong path (and, if you’re in an institutional position, try to shut out people with differing views)?

One thing is for sure: people who take the second route don’t add value to a policy-making institution.