Microeconomics is easy. We look at individual markets or policies in isolation (ceteris paribus) and much of the time these markets behave the way the models say they will. Macroeconomics is hard (I sometimes refer to it as fiction) because the world economy is a chaotic system where billions of actors and institutions are anything but ceteris paribus and a butterfly can flap its wings and create problems.
Perhaps Tolstoy can offer a summery: "Happy families are all alike; every unhappy family is unhappy in its own way." Understanding small changes in the economic performance of a healthy economy is what economic models are (relatively) good at. Since collapse can come from one of 1,000 sources, predicting it is difficult. But that gets me back to micro. Almost all of the issues that led to the collapse were micro issues. That mortgage brokers could create mortgages designed to fail because they got their commission no matter the outcome is a micro incentive problem. That investment bankers didn't case about the quality of debt because they got their cut no matter how investors fared later is a micro problem. That ratings agencies blindly rated junk as AAA because they would loose market share if they rated things appropriately is a micro problem. Now, that Greenspan ignored all the warning of a housing/debt bubble because his Randian view of economics led him to take it as an article of religious faith that free markets never fail is an ideological failure. That is,he ignored signs of micro failures.
I taught for years in my Urban Economics class that a housing price growth curve steeper than the income growth curve is not sustainable. Sadly, unlike the subjects of "The Big Short" I had no idea how to make billions from this.
So here is the crux. The macro models assume that the world economy has enough if its micro ducks in a row so that nothing gets too out of whack. That is probably the best we can do on the macro side. What we need to do is ensure that our micro policies are are good as they can be.
Economics in Denial
Microeconomics is easy. We look at individual markets or policies in isolation (ceteris paribus) and much of the time these markets behave the way the models say they will. Macroeconomics is hard (I sometimes refer to it as fiction) because the world economy is a chaotic system where billions of actors and institutions are anything but ceteris paribus and a butterfly can flap its wings and create problems.
Perhaps Tolstoy can offer a summery: "Happy families are all alike; every unhappy family is unhappy in its own way." Understanding small changes in the economic performance of a healthy economy is what economic models are (relatively) good at. Since collapse can come from one of 1,000 sources, predicting it is difficult. But that gets me back to micro. Almost all of the issues that led to the collapse were micro issues. That mortgage brokers could create mortgages designed to fail because they got their commission no matter the outcome is a micro incentive problem. That investment bankers didn't case about the quality of debt because they got their cut no matter how investors fared later is a micro problem. That ratings agencies blindly rated junk as AAA because they would loose market share if they rated things appropriately is a micro problem. Now, that Greenspan ignored all the warning of a housing/debt bubble because his Randian view of economics led him to take it as an article of religious faith that free markets never fail is an ideological failure. That is,he ignored signs of micro failures.
I taught for years in my Urban Economics class that a housing price growth curve steeper than the income growth curve is not sustainable. Sadly, unlike the subjects of "The Big Short" I had no idea how to make billions from this.
So here is the crux. The macro models assume that the world economy has enough if its micro ducks in a row so that nothing gets too out of whack. That is probably the best we can do on the macro side. What we need to do is ensure that our micro policies are are good as they can be.