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What Economists Still Need to Learn

More than a decade after the global financial crisis, macroeconomists have failed to absorb three crucial sets of lessons. Their models are still struggling – and mostly failing – to cope with disruptive change, and with the fact that both balance sheets and inequality matter.

AMSTERDAM – Macroeconomics was one of the casualties of the 2008 global financial crisis. Conventional macroeconomic models failed to predict the calamity or to provide a coherent explanation for it, and thus were unable to offer guidance on how to repair the damage. Despite this, much of the profession remains in denial, hankering for a return to “normal” and in effect treating the crisis as just a rude interruption.

That needs to change. Although an economic recovery has taken root, its structural fragilities suggest that macroeconomics is still in pressing need of an overhaul. Three sets of lessons from the past decade stand out.

First, the presumption that economies are self-correcting, while tempting in good times, is unfounded and can have catastrophic consequences. The recovery of the past few years has lulled many into a false sense of security, because it was the result of unconventional policy responses that transcended mainstream “general equilibrium” thinking.