by Ivan Boldyrev
In the midst of a pandemic, economic knowledge is a crucial factor in formulating meaningful policy responses both short and long-term. But what do policymakers say they actually need from macro? How do they use macroeconomic expertise and what changes would they welcome so that the discipline could help them address the challenges they are facing?
To answer these questions, instead of declaring what must surely be of policy interest, I took the unusual step of asking the policymakers themselves. My interviews with individuals currently or previously involved in economic policymaking and advisory work in the UK, were devoted to the role of economics in this work, to the success factors of intelligent policies, and to the current intellectual and policy challenges for macroeconomics. The conversations reveal that whenever the advice of economists is sought for, there is, indeed, lots to do.
Various opinions boil down to several key strategic points on the current UK policy agenda:
How to reverse a long-term negative trend in productivity?
What should be done with the effects of Brexit?
What are the optimal responses to climate change?
How to address current challenges of inequality in the UK – both in terms of individuals and regions?
These long-term issues are, of course impossible to tackle without first dealing with shorter-term concerns, namely the COVID pandemic, and second without effective monetary and fiscal policies reacting to the short-term agenda. What is expected from macroeconomists in this respect?
Policy makers report that what macroeconomists really offer is a framework, a well-informed and coherent narrative about the current events, not the best forecast of the inherently uncertain future. This is valuable and in some cases indispensable for policy. In particular, Bank of England’s policymaking is mostly defined by the work with a suite of macroeconomic models. But to be really helpful, macroeconomic expertise, both within and outside government institutions, should be equipped with more and better data. Only this, practitioners believe, can allow for a fine-grained analysis of heterogeneity both in the actual behavior of individuals and firms, and in their responses to policies. Once this data and analysis are in place, more informed and targeted policy decisions are possible.
Timeliness of informative data and the quality of empirical analysis are thus decisive for improving macroeconomic expertise; and yet, despite the extraordinary opportunities the government institutions currently enjoy in accessing the data, both leave much to be desired. Both the opportunities to get the data and the skills of working with it have to be enhanced.
What about theory? From the policymakers’ perspective, to do the job, macroeconomic models should be more realistic (even accepting the well-known trade-off between analytic simplicity and relevance). At the same time, they can never fully substitute judgement, and thus have to be taken skeptically. Finally, one interviewee envisioned some sort of an ‘open-source’ macro model for policy decisions: it has to be made publicly available, to make those decisions more transparent and to encourage participation, thus both popularizing and democratizing economic analysis.
Finally, the conversations revealed some fundamental constraints, that can only partially be overcome:
the temporal mismatch between long-term academic research and more short-term oriented daily policy work;
the perceived lack of better qualified economists in many government institutions;
the lack of incentives for academic economists to take up policy jobs.
Apart from organizational efforts that could better align the incentives of economists and practitioners, an intellectual convergence is necessary: policymakers have to become more intelligent consumers of economics. This implies more informed and critical discussion not just of technical details of models, but also an understanding of the sometimes implicit fundamental assumptions underlying those models – something necessary to improve the quality of applied economics as a broader policy-relevant intellectual field.
It is abundantly clear to the policymakers I spoke to that economics, be it micro or macro, is a social science, and as such, it is severely – and essentially – limited in its ambition to predict the future or to find the perfect solution to most policy problems. But these limits, especially when we are aware of them, also demonstrate that macro is an important intellectual resource. To better align it with policy, we need new data to on consumers, firms and regions in particular.