Has Macro-Theory Failed Economic Policy?

Abstract

In the interest of economic expansion, we need to have some combination of increased taxes and reduced government spending. Some such statement as that would encapsulate a good deal of the advice being pressed upon government in the contemporary scene. And those of an earlier era such as Alvin Hansen, listening from up there to this urgently proffered advice, might well be wondering if the celestial telephone network is producing cross talk. What they hear would tempt at least some of them to invoke the New Yorker magazine's department of: How's that again? For an intelligent and thoughtful laiety, who seem to remember that we applauded the tax reduction of 1964 as a means of stimulating output and employment, and that economists regularly include in papers or speeches increases in government outlays as a plus factor in evaluating prospects for economic conditions, it is all a bit confusing. It raises the question of whether economic principles provide a solid foundation for decisions that managers of economic policy must make. And that is a matter that I suggest we ponder a bit. I. Economists in the Establishment As we survey the last three or four decades, roughly the years since World War II, we do find ourselves looking at a period during which the theory of macro-economic policy emerged as an explicit part of our discipline, which was also a period during which the role of economists and economic analysis was established at the senior levels of government. There are some of us, though our numbers are small and shrinking, who like to assume that we are still active practioners of the profession, and who nevertheless have not even had a course with the label Macro-economic Theory. The textbooks we used as students in Elementary Economics had no neat division at the mid-point between micro-theory and macro-theory. For those of us in that admittedly somewhat geriatric group, this is dramatic proof of how recently what has been taken for granted came into being. (For the rest of you this may simply be dramatic proof of how far back into the mists of the discipline's primitive history we greybeards go.) Even so, many of us during these decades have made a