This description of the academic macroeconomic consensus is wildly off the mark. It’s just a description of the “freshwater” rational expectations (or real business cycle) school associated with the University of Chicago, and completely ignores the “saltwater” school prevalent at Harvard or MIT. Freshwater views are stil, I’d guess, narrowly the minority among academic economists, and have essentially no adherants in the policy world (e.g., the Fed, ECB, IMF, World Bank, BIS, etc.) or among Wall Street economists. Brad DeLong, Paul Krugman, Simon Johnson and a variety others have been arguing in a various fora that the RE school has proved its uselessness in the current crisis. (Larry Summer’s takedown of real business cycle theory in the Minneapolis Fed Quarterly Review still says most of what needs to be said.) The school’s preeminence in academic macroeconomics probably peaked a few years ago. Alex Tabarok and Alex Cochrane are showing their intellectual insularity, not accurately summarizing the academic consensus. It’s ironic that the freshwater view would receive such strong expression on this website, where biases and heuristics in decion-making are key themes. The now abundant literature on behavorial economics and finance has taught us that people simply don’t make decisions as idealized rational agents optimizing an intertemporal objective function. (Even if individuals did, additional strong assumptions are needed to move to statements about the behavior of the macroeconomy.)

But, I thought this was the more important part of the post:

The US has a finance and policy elite defined by college ties and related social connections, an elite with a strong sense that only people in their circle can really be trusted, and that their institutions must be saved at all cost at taxpayer expense if necessary.

I am fairly confident that the average policy maker has little to no background in economics and finance. I am sure of this because I have seen the debates on the floor of both house and senate and all but one or two members have a significant grasp on monetary policy – let alone macroeconomics or price theory.

Agreed. For example, the concept of “opportunity cost” is unknown in American political debate.

Why should they? Their constituents don’t know enough about how economies and policy to realize that they should look for these things in a representative.

I wrote a post about this on Less Wrong called Mechanics without wrenches.

The financial crisis has given is insight into a blindness bias that affects the elite. Ask yourself: How furious were you to learn the details of the bail outs? Unless you’re reading this blog from a Goldman Sachs server, you were likely outrages. Ho…

Some narrow affiliation beliefs may be arbitrarily bad for broader affiliations. Some may be bad for broader affiliations but may help the narror in competition with other narrows.

Keynes should not be so associated with the New Deal either. He wrote to FDR advising against some destructive policies that lowered output.

sincerely and self-interestedly assume that what’s best for their most narrow affiliation is also what’s best for their broadest affiliation
Sounds about right, and I think also applies to the neoconservatives. They don’t just echo the Israeli government, and in the case of policy toward Serbia they thought they knew better. They’ve got a vision which they think must be in the best interests of the U.S, Israel, and most of the world and would rather not even consider that there could be tension among those different interests. It’s the halo-effect where the things you like are just plain good by nature without drawbacks.