Professors don’t feel the economy’s pain

Comfort with status quo has to do with their relative insulation from economic shocks

In the eight months since I returned to academia from a six-year stint at the Federal Reserve, I’ve noticed a strange inertia: Despite the shocking experience of a global financial crisis and prolonged economic slump, most macroeconomic research is guided by the same paradigms years ago.

The last great transformation of macroeconomics happened in the late 1970s and early 1980s. Known as the rational expectations revolution, it was founded on the notion that people make decisions much as a statistician would, weighing the probabilities of various possible futures in order to make optimal choices today.

Although the revolution occurred in part for purely intellectual reasons, it also came amid the stagflation of the 1970s. Yet as bad as that time was, the experience that prevailed 10 of the past 10 years has been worse. As of June 30, real US economic output was just 5 per cent higher than it was a decade earlier. In mid-1983, it was up 11 per cent from mid-1973.

So why are macroeconomists more complacent? Like people everywhere, academic macroeconomists’ views about the world are shaped by their own circumstances. And the 1970s and early 1980s were disastrous for them in a way that the last ten years have not been. In inflation-adjusted terms, the average compensation for full professors fell by more than 20 per cent from 1970 to 1982. By contrast, it’s been pretty much flat since 2007.

Academic macroeconomists offer various intellectual reasons for the discipline to stick to its existing, now 40-yearold, paradigms. I suspect, however, that their comfort with the status quo has something to do with their relative insulation from the economic shocks of the past decade.

The writer was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.