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Sometimes it seems that economists—especially macroeconomists—just don’t understand economics. But Emi Nakamura, a professor at the University of California, Berkeley, is pioneering ingenious ways to unravel some of macroeconomics’ deepest mysteries.
Genevieve Shiffrar/Emi Nakamura
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Genevieve Shiffrar/Emi Nakamura
Sometimes it seems that economists—especially macroeconomists—just don’t understand economics. But Emi Nakamura, a professor at the University of California, Berkeley, is pioneering ingenious ways to unravel some of macroeconomics’ deepest mysteries.
Genevieve Shiffrar/Emi Nakamura
When it comes to the big questions about the economy, we’re still in the dark ages. Why do some economies grow so much faster than others? How long will the next recession last? How do we curb inflation without destroying the rest of the economy? These questions fall within the realm of macroeconomics. But even some macroeconomists themselves admit: While we have a lot of theories about how the economy works, we have few satisfying answers.
Emi Nakamura wants to change all that. She is a superstar economist and a pioneer in the field of “empirical macroeconomics.” She deftly uses data to unravel some of macroeconomics’ oldest mysteries, including the invisible hand, the consequences of government spending, and the inner workings of inflation.
We called her up recently to ask her why economics is so hard to understand and how she’s trying to find answers. In this episode, she talks about all of those questions and how Jeff Goldblum shaped her career as an economist.
Interview highlights (edited for clarity)
On the question of whether macroeconomists “really know nothing”:
I think the humble answer is to highlight the fact that the macroeconomic environment changes quite rapidly. The current monetary environment has really only been around since the 1950s. For most of human history, the world has been on the gold standard. There have been other monetary systems in history, but they were not the same as the one we have today. So an important answer to your question is that, unlike physics, macroeconomics faces the challenge of a constantly changing environment.
So once you realize all that, you realize that if you want to think about things like recessions, the effects of fiscal stimulus, or the effects of monetary tightening, we generally only have to think about a few major events. Fortunately, events like the Great Depression or the financial crisis don’t happen very often, but it does mean that we’re in the position of trying to extrapolate from a relatively small number of events.
It is important to study how companies price:
You have to realize that this is what we think of as the invisible hand that makes markets work. How does supply balance demand? The way it works is that prices adjust to increase supply and decrease demand, and if prices don’t do that perfectly, maybe they’re just a little off, maybe that leads to something that’s far from the ideal efficient outcome that we imagine in a market economy where the price mechanism is largely a buffer. But once you get into a situation where prices aren’t that flexible, then it’s probably even more important for the Fed to get policy right. Because if its policy is wrong, then the invisible hand can’t solve all the problems.
I think sometimes people forget how amazing monetary policy is. You can give a simple analogy, if you double the amount of money in the economy, but all prices immediately double, then absolutely nothing will happen. It’s like saying if we measure your height in centimeters or inches, your height is still the same: no effect. Monetary policy really only controls units. So how can you make units work? That’s where you have to go back to where prices adjust. Because, in my little example: “Suppose you double the money supply, all prices double, then nothing will happen.” Well, that’s an example where we think about perfectly flexible prices. So a lot of studying prices in the context of macroeconomics is thinking about where we are relative to this very flexible invisible hand.
On being described as an “empirical macroeconomist”:
I’m really excited about this phrase. I see it more and more, and other people are using it. I think to me, this is a field that clearly should exist. I think it’s a bit of an exaggeration to say that no one has been doing this before, but I think it’s growing, and I think it makes sense because we live in a world where the amount of data is increasing, and there’s no doubt that we still need to make progress on these macroeconomic issues.
The show is hosted by Jeff Guo and Nick Fountain. It is produced by Dave Blanchard and assisted by Sam Yellowhorse Kesler. It is designed by Josephine Nyounai and fact-checked by Sierra Juarez. Keith Romer edits the show. Alex Goldmark is our executive producer.
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