Does macro matter?
In the popular press, economics means macroeconomics. Politicians fear recessions. They argue about how to prevent them, what to do when they arrive, how to get out of them, etc. Much of the policy debate is shaped by short-run concerns. Why?
Why focus on the blips and bobbles--the cycle--rather than the long-run trend?
It has been many decades since we've had a recession that lasted very long. Lately, recessions have been rare and brief. We seem to have learned to minimize their length and impact through monetary policy. There has been no repeat of the Great Depression. Recessions have been so short (and the time-lag in the response to policy interventions so long) that most interventions only begin to take effect after the recession has ended. So why do we obsess about the short-run?
Poverty traps, persisitent inequality, development in the less developed world--these seem more pressing concerns than a brief but unavoidable slowdown every ten years or so. Moreover, propping up the economy in the short-run can create serious problems in the long-run (thus, the importance of central banks that are truly independent). Myopia is downight dangerous (as anyone who ever spent the rent money on beer and poker knows too well).
Edgeworth and I are micro thinkers. We haven't seen the macro "light." Unemployment goes down when inflation goes up. Or so they say. But I defy anyone to look at at the Phillips Curve (the plot of unemployment against inflation) and see anything more than a ball of yarn or a Rorschach ink blot. It's a mess. Last time I looked at the Phillips curve, I could have sworn I saw the silhouette of a goat eating a palm tree.
The short-run game is about figuring out the mood of populace. What do they expect inflation to be? How should I know? 'Mood" is not a very scientific term, last time I checked. How the hell do I know what you expect inflation to be next year? This isn't science, this is armchair pyschology.
"In the long run, we're all dead," said Keynes. These remarks make sense in the context of the Great Depression but are utter nonsense in the present environment. There is no threat of devastation in the short-run. In the long-run, we're alive. Very much alive.
And living longer all the time.
It's time we looked to the future.