(Bloomberg View) -- 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 that prevailed ten years ago.
I think this might have more to do with professors' salaries than with the state of the broader economy.
The last great transformation of the field 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. It led researchers to stop looking at the economy as a series of snapshots in time, and engendered skepticism about the ability of governments to systematically improve economic performance (because people with rational expectations would respond to policies in ways that undermined their effectiveness).
Although the revolution occurred in part for purely intellectual reasons, it also came amid the stagflation of the 1970s -- what many economists saw as a disastrous period that called for change in the way economic policy was made. Yet as bad as that time was, the experience of the past ten years has been worse. As of June 30, real U.S. economic output was just 5 percent higher than it was a decade earlier. In mid-1983, it was up 11 percent from mid-1973.
So why are macroeconomists more complacent about the last ten years than they were about the 1970s? 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 declined by more than 20 percent from 1970 to 1982. By contrast, it's been pretty much flat since 2007, and even reached a historical high during the recession year of 2009.
Academic macroeconomists offer various intellectual reasons for the discipline to stick to its existing, now 40-year-old, 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.
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To contact the author of this story: Narayana Kocherlakota at nkocherlako1@bloomberg.net.
To contact the editor responsible for this story: Mark Whitehouse at mwhitehouse1@bloomberg.net.