Thursday, December 19, 2013

Freshwater, saltwater, and the econ blogosphere

Update: Noah Smith was very kind and responded on Twitter; most of the conversation is here.

In this post I raised questions about the Kimball & Smith article on freshwater vs. saltwater macroeconomics. We had a follow-up conversation on Twitter (Kimball is always very gracious, and Smith indulges my complaining from time to time). People seem to still be talking about this, so it's worth another shot.

Here's the problem: This distinction does not exist in any meaningful way, even if it did 20 years ago. Eli Dourado suggests that freshwater critics probably can't pass an ideological Turing test, but the problem is worse than that. I still haven't seen anyone define the distinction in a way that is nontrivial. These are terms without definitions; if we can talk these people into providing definitions, chances are the whole argument will fall to pieces.

I'm going to explain what I mean, but first: This has relevance for larger issues. The caricature of the economics discipline that we read about in blogs and newspapers is neither accurate nor productive. Perhaps the reason this freshwater vs. saltwater debate has caught on in the blogosphere is that anyone can participate in it without having to engage directly with the literature. As long as we stick to politically loaded caricatures and straw men, anyone can have an opinion. Figure out which team you're on--based on political preferences--then start dishing out straw men. But the distinction falls apart once we talk about specific models.

In my Twitter conversation with Miles Kimball (read most of it here), he said two important things. First, their article was focusing on the "purist" end of the freshwater spectrum. Second, most macro work is done in "brackish" waters. This is one of the issues I was trying to raise in my other post.

The distinction only makes sense if you can clearly articulate modeling approaches that characterize each side of the debate and, therefore, come up with a list of papers or researchers that fall into each category most of the time. This can't really be done. Nobody is writing papers with bare-bones RBC models. People are incorporating all sorts of frictions into those models, and the RBC types are producing remarkable economic dynamics on just a few frictions. How do we decide whether these frictions are "saltwater" or "freshwater"? How do we categorize agency mechanisms, money/labor search, or factor adjustment costs? We can't very well just say that any kind of friction makes a model saltwater, or else there would be no freshwater papers and the debate would be irrelevant. But once we admit that everyone is working in the grey area, the debate becomes, well, irrelevant. This is not a rhetorical or conceptual dichotomy with any continuing usefulness.

Instead, we need to focus on how best to incorporate realistic frictions. On that issue, the Minnesota types have some important things to say. There is a difference between frictions arising from clearly defined behavioral or institutional constraints and frictions arising only from a desire to force the model to replicate the data. That said, curve fitting has its purposes. I got hooked on macro as an undergrad when Kerk Phillips, one of my awesome mentors, made me replicate CEE; and the New Keynesian model generally is a powerful source of intuition for monetary economics. Many models without nominal rigidities have severe limitations when it comes to monetary analysis. But the NK model has some big weaknesses. It can't do meaningful heterogeneity (you'd think the bloggers who are upset about inequality would find that relevant). It assumes nominal rigidities that have nothing to do with how prices are set, not to mention a bunch of other band-aids. It is almost always solved only locally. It by no means has a monopoly on shedding light on financial crises (see e.g., here or here). The point is that we have plenty of specific modeling issues to talk about. We don't have time to resort to cliches that lost their meaning more than a decade ago.

I think the most significant thing the econ blogosphere has done is convince a lot of people that macro is really easy. Yesterday my Twitter feed was full of people wondering why the Fed couldn't see the obvious solution of doing more QE (see also this), as if we have definitively mastered the theoretical and empirical task of understanding every aspect of policy at the ZLB. Presumably there are people who actually believe Krugman's nonsense about all the important macro advances happening in blogs now. I mention this stuff because the freshwater vs. saltwater heuristic is yet another way of giving people license to treat macro as a set of easy, obvious solutions to policy problems, with no adverse consequences, that can be applied in practice by anybody in the drivers seat.

This is a political heuristic, not an economic one, and it's a bad heuristic at that. I just don't find it very productive.

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