Interview with Greg Mankiw: New Keynesian Macro, Growth, and Economic Policy

Jon Hartley interviews Greg Mankiw on topics including New Keynesian macroeconomics, growth, and economic policy more broadly at his Capitalism and Freedom website (August 20, 2024, video and transcript available).

Here are a few of the comments that caught my eye.

On big models and small models in studying the macroeconomy:

[O]n the issue of micro versus macro, I have long thought that microeconomics has the better answers, but macroeconomists have the better questions. And so I don’t think macroeconomics is ever gonna die because the questions that macroeconomists address are just too important, even if we’re not gonna have the clean, natural experiments that micro people love. …

Let’s flash back to when I was entering the economics profession at the time. There were these big models like the NPS model, the DRI model, these huge macro econometric models that were run by policy institutions and academics and some private firms. And a lot of macroeconomic research was of that sort. And at the time I remember being, at the time I remember being skeptical about a lot of that. And if you go back to the rise of Lucas and the Lucas critique of these models, part of the reception to Lucas critique was all the stagflation and the events of the [19]70s. Part of it was, I think people were getting a little tired of these big models because they were large, non intuitive. They seemed very black boxy, so you didn’t really know what was happening in them. And so I think that people, I think they started losing credibility, in these big models.

I think that a lot of the DSGE [dynamic stochastic general equilibrium] models are suffering from the same fate now, they’re getting large and complicated and lots of equations and you don’t know exactly what’s driving what result. And I do think at some point people are going to get tired of them for that reason.

[I]if you’re an actual practical central banker, you listen to your staff, present the results, but you don’t take it as God’s truth. And a good central banker takes a healthy dose of skepticism. When I was in Washington, I watched Alan Greenspan up close, and I think Alan, more than most, had a deep, healthy skepticism of the macro econometric models.

I should note, by the way, in my own research I tend to focus not on big models that purport to be realistic. But rather smaller models that are more illustrating points than trying to say, this is a real replication of the whole economy. I never really want to go back to those huge models.

We’ll get better at these, but I think macroeconomics is so complicated that actually saying I have a model that really replicates the data, we can take it seriously for policy alternatives. I think that's a very hard task.

On endogenous growth theory and the earlier Solow-style growth models:

I think now we’re in a situation where endogenous growth theory has made a big contribution, and I think it coexists happily with sort of more neoclassical models, and both provide insights for different questions, and I think they can coexist. I don’t think we need to sort of throw out one or the other. My most recent publication … was basically putting market power into neoclassical growth models. So I take that as some indication that you can still make progress and get some insights, even with neoclassical growth frameworks.

The sad thing is, I don’t think either set of models give easy policy prescriptions for what poor countries can do. I mean, if you look at Sub Saharan Africa, you can point to a variety of elements they have that prevent them from growing. But saying, this model of endogenous growth, of this model of neoclassical growth, gives me an easy recipe for what Sub Saharan Africa can do to join the developed world.

It doesn’t. It brought you maybe a framework for thinking about those issues, but there’s no easy answers. Or similarly, why has productivity been slower since 1972 than it was before ’72? We don’t think we have any easy answers to that. You can say sort of general things about the importance of institutions, importance of savings and investment.

On the length of the working day at the Council of Economic Advisers:

One thing I’ll say about being Chair of the Council, which I did from 2003 to 2005. And I worked harder those two years than any two years of my life, by far, because the days are long. In the Bush administration, every day started with the 7:30 AM staff meeting in the Roosevelt room, which is the conference room right next to the Oval office. In all my years at Harvard, I’ve been in Harvard almost 40 years, nobody’s ever called a 07:30 AM meeting. While I was at the White House, every day it was at a 7:30 AM meeting. It’s not like you take off early at the end of the day, you work long hours at the end of the day too.

So they are very, very long days. I left my family behind in Boston, my wife was a saint and took care of my three small kids. And I basically moved into a hotel just a few blocks from the White House because I knew I wasn’t going to have much time to travel, basically, it was extremely long. And by the end of two years, when I was required to come back to Harvard or give up my chair, it was not a difficult choice, I was exhausted after two years. So I was happy to come back to academia, where life is much more relaxed.