The problem with all macroeconomic policy

This claims that monetary policy comes with certain problems:

Monetary tightening is like pulling a brick across a rough table with a piece of elastic. Central banks tug and tug: nothing happens. They tug again: the brick leaps off the surface into their faces.

Or as Nobel economist Paul Kugman puts it, the task is like trying to operate complex machinery in a dark room wearing thick mittens. Lag times, blunt tools, and bad data all make it nigh impossible to execute a beautiful soft-landing.

That is all true - it’s also true of monetary loosening of course. Our recent 12% inflation rate is proof of that.

But the big bad truth about macroeconomic policy is that this also applies to fiscal policy. Which, given that there are only two macroeconomic toolsets, fiscal and monetary policy, leaves us with something of a problem concerning macroeconomic management.

Given the tools available macroeconomic management just isn’t going to be very good. Sure, if gross events occur - GDP drops 10%, inflation rises to 12% - then clearly a gross and inaccurate tool might be appropriate. But that Keynesian dream of managing, in detail, the temperature and speed of the economy centrally just doesn’t work. Not because we cannot make an intellectual case for it, but because the ability to do anything about it relies upon those gross and inaccurate tools.

The management of the economy therefore devolves down to those microeconomic matters that we both know more about and can indeed deal with. Incentives, the fine detail of market structures and so on.

This is not to say that we must have microeconomic foundations for our macroeconomic theories. Quite the opposite in fact - it’s to insist that our macroeconomic toolbox to be able to do anything about the macroeconomy isn’t very good. Therefore use must be sparing, in extremis only.

Get the structure of markets and incentives correct and she’ll be right, the economy as a whole being emergent from those.

This is, of course, very boring for those who would get all Fat Controllerish about the macroeconomy but it does have the startling merit of being both true and useful advice.