By Kevin J. Delaney & Allison Schrager
Bill Gates takes a dim view of economists’ ability to know what’s going on in the economy.
“Too bad economists don’t actually understand macroeconomics,” the Microsoft co-founder noted during a recent interview with Quartz. Asked what he meant by that, Gates continued:
“It’s not like physics where you take certain inputs and you predict certain outputs. Will interest rates ever return to normal, and why aren’t they returning to normal? You won’t get a consensus between economists quite the way that if you dropped a ball out your window and called up physicists and asked, ‘What the hell happened?’ There’s so many factors including what [economist John Maynard] Keynes called ‘animal spirits’ in the economic equation that we don’t have predictability. Even today, people are still arguing about what happened in 2008. So it’s even harder to look forward. [Look at] the role of the bond rating agencies in 2008, which is completely unreformed. Why would that be? Well, there must be a lack of consensus.”
Gates is right, in a way: Economists don’t understand much about the macroeconomy. No one does. Any responsible economist is the first to admit that.
As opposed to microeconomics, which looks at the economy at the level of individual businesses and consumers, macroeconomics aims to explain the interaction of different factors that affect the economy as a whole, such as how interest rates impact macro variables like unemployment, inflation, and economic growth.
As Gates points out, the economy is complex and ever changing. Economists try to make sense of it by developing mathematical models that describe how the different factors relate to each other, and test the accuracy of those models using past data. But the macroeconomy has millions of moving parts that affect each other. Knowing what to include or exclude, and if the economy has changed from when data were collected, is never straightforward—which is why economists tend to disagree on almost everything.
Economic models are always incomplete, but it’s hard to argue that we’d be better off without them. Economists’ research has contributed to fewer people living in poverty, low predictable inflation, and less risk and uncertainty. Macroeconomic models offer a logical, consistent framework to help policymakers understand how people and different factors may respond to a new tax, benefit, or regulation.
Gates’s critique of economists follows several decades of rapid expansion in the field’s influence on policymaking and popular culture. His comment came during the interview as he discussed concerns about a global recession:
“The idea of negative 10-year rates, or now in Germany’s case, negative 30-year rates, this is macroeconomically uncharted territory. As Warren Buffett says, go through any economics textbook and find a reference to negative interest rates—you won’t find it. And yet, almost half the government debt in the world today, if you take out US debt, the majority of government debt bears negative interest rates. And there are certain reasons why that should not be the case, but it is the case. There’s always the risk of an economic recession, and trade wars increase that risk, and the [recent] macroeconomic figures increase that risk quite a bit. But I’m not in control of that. I get to pick which HIV scientists to fund and I get to pitch which malaria drugs to go after, or new ways of killing mosquitos. I don’t have some global economic levers up here in my foundation office.”
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