The quest to save macroeconomics from itself

When it comes to big questions about the economy, we're still kind of in the dark ages. Why do some economies grow so much faster than others? How long is the next recession going to last? How do we stop inflation without wrecking the rest of the economy? These questions are the domain of macroeconomics. But even some macroeconomists themselves admit: While we have many theories about how the economy works, we have very few satisfying answers.

Emi Nakamura wants to change all that. She's a superstar economist who is a pioneer in the field of "empirical macroeconomics." She finds clever ways of using data to untangle some of the oldest mysteries in macroeconomics, about the invisible hand, the consequences of government spending, and the inner workings of inflation.

Recently we called her up to ask her why the economy is so difficult to understand in first place, and how she's trying to find answers anyway. She gets into all of that, and how Jeff Goldblum shaped her career as an economist, in this episode.

Interview Highlights (edited for clarity)

On the question if macroeconomists "don't really know anything":

I think the humble answer is to emphasize the fact that the macroeconomic environment is changing pretty rapidly. The current monetary environment really has only been around since the 1950s. The world has been on the gold standard for a lot of human history. There were other monetary systems in history, but those are not the same as the system we have today. So one important answer to your question is that unlike physics, macroeconomics faces the challenge of a continually changing environment.

So once you realize all of this, you realize that if you're gonna try to think about questions like recessions or the effect of fiscal stimulus or the effect of monetary tightening, often we only have a few major episodes to think about. Thankfully, events like the Great Depression or the financial crisis don't happen often, but that does mean that we are in a situation of trying to extrapolate from relatively small numbers of events.

On why it's important to study how companies set prices:

You have to recognize that this is the invisible hand that we think of as making markets work. How does it happen that we have supply equating demand? The way it works is by the prices adjusting to make the supply increase and the demand fall, and if the prices aren't doing that perfectly, maybe if they're just off by a little bit, maybe this could lead to a very large difference from the ideal efficient outcome that we could imagine coming from a market economy [where] things are buffered by the price mechanism to a much greater extent. But once you get into a situation where the prices are not adjusting in such a nimble way, then there's potentially much more room for it to be important for the Fed, for example, to have the right policies. Because, if it has the wrong policies, it's not all just going to be fixed by the invisible hand.

I think sometimes people forget how surprising it is that monetary policy does anything at all. The simple analogy that you can give is if you double the amount of money in the economy, but all the prices instantly double, then absolutely nothing happens. It's like saying if we measure your height in centimeters or inches, you're still going to be the same height: no effect. What monetary policy is controlling is literally just the units. So how do you get to a place where the units matter? That's where you have to come back to price adjustment. Because, in my little example of: "suppose you double the money supply and all prices double then, then nothing happens." Well, this is an example where we think about completely flexible prices. So studying prices in the context of macroeconomics is a lot about thinking about where we are relative to this perfectly nimble invisible hand.

On being described as an "empirical macroeconomist":

I'm very excited about that phrase. I'm seeing it more and more, used by others as well. I think it's a field that, to me, clearly should exist. I think it's an exaggeration to say that there wasn't anybody in this field before, but I think it's growing and I think that makes a lot of sense, given the world we live in where there's an increasing amount of data and the fact that there's no question that we still need to make progress on these macroeconomic questions.

This show was hosted by Jeff Guo and Nick Fountain. It was produced by Dave Blanchard with help from Sam Yellowhorse Kesler. It was engineered by Josephine Nyounai and fact checked by Sierra Juarez. Keith Romer edited the show. Alex Goldmark is our executive producer.

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