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Read this viewpoint to understand how investment in digital technologies can restructure the health care business to be resilient and responsive in a post-covid era.

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This white paper discusses how blockchain technology can transform public records management. A cloud-based platform enables various digital records, such as birth registrations, to be seamlessly authenticated, resulting in cost savings, faster turnaround time, and enhanced customer service.

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Alan Feeley, CIO of Siemens Gamesa, explains how the producer of clean energy standardized implementations across multiple rollouts by leveraging the cloud.

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Enterprises looking to accelerate their cloud journeys need to ensure the CISOs are part of the process of creating foundational building blocks because cybersecurity risks are at an all-time high.

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A new breed of ransomware attacks targeting even the cloud and SaaS data, is becoming a major business risk. In this article, Vishal Salvi, SVP & CISO at Infosys, discusses the impact of the current wave of ransomware attacks and how we can counter the cyber menace.

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Estimating the long-term cost of data breaches to brands and businesses for different industries.

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Estimating the long-term cost of data breaches to brands and businesses today.

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Carlos “Caloi” Santos, vice president, Corporate Services and chief information officer of JG Summit Holdings, Inc., a Philippine-based conglomerate, explains how he used risk planning and C-suite teamwork to move JG Summit smoothly to the cloud.

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Petteri Naulapää, CIO & SVP, ICT, and Digitalization for Posti Group, a Finnish postal service provider, talks about migration to the cloud, and explains how Posti’s cloud-oriented approach enabled them to serve their customers better.

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Exploring the past opens up new perspectives on the present and offers ways of navigating a challenging future, these speakers suggest, in a call to action on the occasion of Martin Luther King, Jr.’s birthday.

Susan Hockfield has been “digging into MIT’s history,” where she finds seeds for the institute’s distinct culture. One core aspect of this culture, sustained over MIT’s 150 years, is the idea of “rewarding talent and initiative regardless of social position or pedigree,” says Hockfield. However, as she describes, meritocracy has sometimes been more of an aspiration than reality. Hockfield cites examples of the grudging acceptance of women students in the 19th and early 20th century. In the 1961 centennial, there were only 155 women enrolled in a student body of more than 6,000, she says. “Today, through a conscious and sustained outreach, 45% of undergraduates are now women.”

Although MIT now boasts far more students and faculty of underrepresented minorities, Hockfield says that “opening doors turns out to be the easy part.” It is more difficult ensuring that “those who come from outside the circle of affluence or white privilege can count on a sense of full citizenship.” MIT’s central challenge must be “full inclusion,” states Hockfield, and the Institute should lead the nation in attaining this goal.

Don’t show up at a King celebration, says
Roland Martin, if you do not intend to recommit to “his cause, his ideals and vision.” Martin frets that today’s young people are waiting for the right moment “to take charge and get involved.” It was not always so. In 1955, a handful of pastors in Montgomery, Alabama chose a very young Martin Luther King to lead the city’s improvement association. It was high school and college students who frequently led the charge with lunch counter sit-ins, boycotts, and other protests that launched the Civil Rights movement.

Martin notes the sense of lowered expectations around President Obama’s administration, as if “folks voted, and then said, I’m done, did my part, when in fact, the election was the beginning of a process, not the end.” Young people must “give a damn about something” other than themselves, and understand that the work involved often lasts for years. Martin invokes the Bible’s Nehemiah, who rallied people to rebuild the walls of Jerusalem. “What’s your wall?” he asks: “Literacy? Economic development? HIV/AIDS? The point is, start where you are, then move on to the street, block, neighborhood, nation…”

Martin notes that his audience totals more than the number of those who met half a century ago in the Montgomery church basement, setting in motion a nationwide movement. There is enough “brain power, energy, passion in this room to literally change the world,” he says, and “it’s been done before, we have empirical data to prove it.” Concludes Martin, “It’s time to stop talking, meeting and start leading, whether young or old, to rebuild the crumbling walls in this country.”

In their brief remarks honoring the legacy of Dr. Martin Luther King, Jr., two students strike the theme of collaboration. They touch on the importance of humility and listening to one’s inner voice while pursuing a shared vision of justice and equality.

When she first came to MIT, Khalea Robinson was set to become a builder of bridges and skyscrapers. “Their visibility and permanence appealed to me.” But a talk she attended on some of the world’s pressing problems shook her commitment to this path. Access to clean water, and other issues, should surely count more than her own private engineering goals, she imagined.

But after taking introductory courses in environmental and civil engineering, she realized that she “couldn’t simply fall in line wherever there was a call, because there are so many calls, all of them worthy.” Robinson felt that she should instead look for a field that would “bring forth my initiative, passion, drive, insight and courage,” while also promoting justice and fairness. In a world “full of complex problems that need to be solved by many people,” Robinson believes each of us “has a distinct voice that can and must be raised.”

Pierre Fuller finds a model in Biblical scripture’s Nehemiah, who called on his people to rebuild the walls of Jerusalem one brick at a time, “each man contributing according to his ability.” Fuller recounts that when acquaintances call him a “genius” because he studies at MIT, he points to the help he received during his childhood in Flint, Michigan: his grandmother, a hospital cleaner; a barber friend with a drug record; and his mother -- “who guided me with equal doses of love and tender encouragement, and a wooden paddle and a backhand that would rival Serena Williams.”

Just as Fuller attributes his success to a collective that made unique contributions to his upbringing, he sees the project of building a better world as a function of individuals working together in humility, suppressing personal ambitions, and “replacing a savior mentality with a serving mentality.” The technological innovations MIT sees as the foundation of the future are “only a brick, a small portion of the wall that is to sustain our community.” The academic elite, says Fuller, must seek solutions for communities they serve. All of us “must humble our hearts” to work for “those who come after us, as we have been served by those who come before.”

In his keynote address, Robert Merton chooses not to focus on the financial crisis. It is clear to him there were “fools and knaves,” as well as “many structural elements that would have happened even if people were well behaved and well informed” -- risks are simply “embedded in our systems.” Instead, Merton explores how financial engineering is essential in preparing for the inevitable next crisis, and in solving critical challenges. “The world has changed; we can’t go back. Let’s talk about what we should do going forward.”

To illustrate society’s need for financial innovation, Merton uses “a live case study:” the vast problem of retirement funding. In the past decade, stock market declines and falling interest rates have hit mainstream employer pension plans hard. Municipal pension plans may be underfunded to the tune of three trillion dollars. (“It makes the S&L crisis look like nothing.”) But people seek, and are due, “the standard of living during retirement they enjoyed in the latter part of their work life.”

Generally, determining this standard of living means adding up likely medical, housing and general consumption costs, and Merton describes how to target such retirement income. The main ways to achieve the desired goal are by saving more, working longer or taking more risk. Merton would like to design a software-based tool for ordinary people, simple on the user end, complex on the provider end, which would serve as a “next generation pension solution,” offering a way to manipulate the key variables in retirement income and demonstrate potential financial outcomes. This tool would help users continuously optimize risk to help them reach their retirement funding goals.

There are regulatory obstacles now to the implementation of such a method on a widespread basis, and a gap between how managers, advisers and financial institutions think about pension assets, and what Merton has in mind. Nevertheless, he says, “What we need to do for most of the people who don’t have extra money and must do the most with their assets is deliver a simple, easy to use, and if they don’t use it still gets them there, solution.” Merton acknowledges those who think the giant problem of pension funding can be solved by what’s already available -- bond and equity markets, bank loans – and who hanker “to get rid of all the complexity, go back to 1930, ’50 or ’80.” From his perspective, this means “throwing away a lot of what you could do, because the market-proven strategies people have developed and used…can do a much better job for people.”

Stewart Myers introduces the panelists as distinguished academics and practitioners who share not only their status as MIT alums, but also their innovative application of finance theory to entrepreneurship. “They were in the middle of the action,” says Myers.

Douglas Breeden “grew up in the chicken business” so it is unsurprising that his financial path began with a classroom exercise for forecasting egg futures. His career moved eventually to analyzing the virtues of mortgage products. Models to estimate risks in asset-backed securities and their expected profits are very sensitive to such complex influences as interest rates, prepayment rates, and ominously rising loan-to-value ratios, he notes.

Breeden observes that a slight perturbation in one of these factors can have a major impact on a prediction, or even reverse the direction of the economic result. “This is why smart people have a hard time making money with these securities,” he comments. Breeden says the theories are great, yet so are the challenges of applying them. He appeals for “a little bit of sympathy for the financial application people.”

Eugene Flood emphasizes “structure” as the sine qua non to define problems and achieve results throughout a large organization. Involvement in areas ranging from international finance to proprietary trading to human resources taught him “how to think of the firm as a whole.” Thanks to this broad exposure within the investment business, Flood recognizes that a comprehensive, integrated approach goes far toward success of the enterprise. He forms multidisciplinary teams and stresses a consistent philosophy, supported by “constructive debate” and active reinforcement of ideas by management.

On systemic risk, Flood cautions “we can get very good at pulling problems apart,” but we cannot overlook the iterative, progressive effects of shifting one thing “and that affects something else and that affects something else…” In keeping with his holistic view of business operations, he advises taking account of “everything that moves when one thing starts to change.”

Bennett Golub recounts the inception of financial engineering in the traditional sense of engineering a physical object. In 1985, while at a major investment bank, he used CAD-CAM software to design new types of mortgage-backed securities. “We would grind it out, …studying all the parameters, tuning these things up, and calibrating them precisely to what the different investors wanted, trying to extract arbitrage in the process.” After a few years, he continues, “Instead of making money the old-fashioned way -- earning it -- people discovered you could obfuscate,” that is, hide the risk. “You could get people to pay you for things that they probably shouldn’t.” That led in turn to “what we call risk management…Know what you own and understand how it behaves.”

Golub acknowledges that the financially engineered models that kept him ahead of clients “had challenges along the way. From the beginning, I always tried to think about having some humility in the analytics,” he admits.

As a financial mathematician, Robert Jarrow creates and implements models to manage interest rate and credit risks. He constructed a “reduced form model” to address defaults across the business cycle. Because credit rating agencies were among the largest users of earlier flawed models, and “many other financial institutions depended upon them to get the risk measures right,” the economy suffered a disastrous cascade. He maintains faith nonetheless, saying “I believe financial engineering models are the solution” but we need better education on how to use them for risk management.

Jarrow now studies how hedging techniques should respond to asset price bubbles, and “how to include a realistic financial sector in a macroeconomic model.” He aims to develop tools that take account of actual conditions, unlike existing idealized models.

Judy Lewent brought sophisticated theories and analytical methods learned at MIT to key facets of the pharmaceutical industry. For instance, Lewent describes, in Merck’s global activities “we had a very robust framework to understand where our foreign currency risks were and what aspects of those we needed to hedge…to minimize the volatility.” This knowledge helped management allocate resources with reasonable certainty and stability.

Lewent used Monte Carlo simulations to evaluate the company’s portfolio, and to examine the questions: “How do you think about what the right level of R&D spending is, and are you returning the cost of capital to your shareholders?” She put game theory into practice “to help us with a specific pricing decision for a new product launch.” She also applied her MIT training to determine the feasibility of mergers and acquisitions; investigate the most efficient corporate capital structure; and reduce financial risk, enabling Merck to go forward when it became necessary to withdraw a major medicine from the market. Lewent declares, “Theory is great but it really does apply directly to practice.”

It’s not every day that Euclid appears in public with “Alice and Bob,” but in a lecture spanning a few thousand years, Ronald Rivest summons these and other notables in his history of cryptography. While citing milestones of code-making and breaking, Rivest also brings his audience up to date on the latest systems for securing information and communication networks, which owe much to his own research.

Rivest makes quick work of the period before mid- 20th century, but credits the ancient Greeks for prime number factorization -- essential to cryptography -- and elementary ciphers. In the 18th and 19th century, mathematicians delved into number theory and extended techniques of factoring. The twentieth century, with its two world wars and technological advances, established the significance of cryptography on and off the battlefield. Alan Turing’s Enigma machine not only helped the allies win World War II, but catalyzed development of the first generation of computers. MIT professor Claude Shannon, who worked with Turing and other cryptanalysts, went on to father the field of information science, leading to the digital age.

In the 1970s came development of public data encryption methods. Academics prevailed against U.S. government efforts to conceal means for encrypting data. In 1977, Rivest’s group at MIT, which included Adi Shamir and Len Adleman, came up with RSA, an elegant algorithm for public-key cryptography that “relies on the difficulty of factoring” primes and which is still widely used. The group was so confident of its encryption method that they offered $100 for breaking a cipher-text based on a 129-digit product of primes. Rivest thought it would take “40 quadrillion years” to solve the challenge. “It was a bad estimate,” he admits.

In fact, a combination of new algorithms and brute computing power cracked the text in 1994 (“The Magic Words are Squeamish Ossifrage”). Technological and theoretical advances have made possible improved encryption methods, and ways of authenticating and securing data. Faster computers may someday “make factoring a million-digit number easy,” says Rivest. Work is even progressing on a quantum computer (it can only factor the number 15 so far). But code-breaking is also increasingly sophisticated, Rivest warns, as the internet opens up vast new areas of data to cyber-attack.

Rivest sees cryptography blossoming into applications for anonymity, password-based keys, and crypto for smart cards. He has been looking into probabilistic micropayment systems, and techniques to enhance the security and transparency of voting. “Maybe large prime numbers have a role to play in our democracy down the road,” he says.

An unmistakable glow of nostalgia rises from this reunion of “five of the founding fathers of modern finance,” in the words of Andrew Lo. The speakers reminisce about their start in economics, and their professional lives at MIT, a decades-long era of intense collaboration and creativity that both transformed the academic field and the landscape of real-world finance.

This group of scholars believes they owe much to luck in finding their lives in financial economics. A sympathetic Stanford professor directed Stewart C. Myers to the right doctoral program, at precisely the moment when “big ideas were flowering” in the discipline: efficient markets, agency costs, and most important to Myers, new theories about valuation. A call came from MIT to join the faculty, and Myers began his critical work around the principles of corporate finance, which turned out to have great practical applications. Says Myers, “It’s really good to go out in the world now and talk to CFOs actually using this stuff.”

Raised in a Canadian family that traded in gold,
Myron Scholes was interested in “how things were valued,” but it was a summer job as a computer programmer for university researchers that set his career path. Assisting Franco Modigliani and Merton Miller, Scholes found infectious their “joy of getting results, and asking the next questions.” He came to MIT in 1968, and became fascinated with options, insurance and distributions of portfolios. He met Fischer Black his first summer, which led to the first of many intellectually profitable partnerships, some of which continue to this day.

Among other twists of fate, a switch in grad school from applied mathematics to economics, and the good sense of MIT to offer him a fellowship (following rejections by eight other schools) brought Robert Merton to Cambridge. After taking Paul Samuelson’s mathematical economics course, “the rest was history,” says Merton. “I lived in his office from the end of that class on.” He was hired at graduation by the Sloan School, and joined a “very small group, with no senior faculty. It was like all these kids and nobody to look after them.” They designed courses, did research, “had a blast. The research flowed so fast for us and the students; there was not enough time to do it all. That doesn’t happen often.” Merton’s work was also stimulated by the economic catastrophes of the 1970s, which fed an intense drive to put research around better markets mechanisms into practice.

“I can’t remember a time when I didn’t want to be a professor, and economics seemed special,” says
John C. Cox. In the mid-1970s, the pathbreaking work of Merton, Black, and Scholes offered “plenty of low-lying plums to be picked in the orchard. It seemed like a golden age for capital market theory, so much to do.” The group he joined at MIT has evolved, and the programs expanded, but Cox “has enjoyed every minute” of the past 30 years.

Stephen A. Ross discovered he loved a certain kind of math while taking a course in game theory and linear programming to fulfill his Caltech humanities requirement. But it wasn’t until he attended a mathematical economics seminar focused on MIT work that he realized he was interested in finance. “It was the most fascinating stuff I’d ever heard.” He especially liked the “science” of it, “that theory and data had to relate in some way.”

Ross defends financial engineering and its applications in the wake of the financial crisis. “Derivatives did what they were supposed to do. They spread the risk. The problem is the people who took on the risk didn’t like the fact they lost money.” Scholes wonders about rules that “let 1.5 million contracts go due in the derivatives swap market instantaneously for settlement. It sounds nuts to me.” Says Myers, “It’s true that modern finance is a powerful tool and can be misused, but it’s not a reason to discard the tool. It’s a reason to use it better.”

Given its contributions to policy and practice in such key sectors as health care, industrial organization and technological innovation, and energy and the environment, microeconomics may not be getting the kind of respect, or at least attention, it deserves, these panelists suggest.

The field helped “produce a revolution in antitrust thinking” in the U.S., says Dennis Carlton. Since the 1960s, the Department of Justice and the Federal Trade Commission have tapped the talent of dozens of PhD economists, who came up with notions like offering incentives (by way of lower fines and leniency) to those who admit participating in corporate cartels. This “simple idea” led to regulatory policy “with large payoffs,” says Carlton. Simulations and modeling help determine whether the government will approve a merger, or step in when corporations become too big. “Emerging hot topics” in antitrust and industrial organization include the use of product bundling; patent law, especially in high tech; control and use of information over the internet; and privacy issues.

Richard Schmalensee calls attention to microeconomics’ generally unrecognized impact on energy and environmental regulations. For instance, cost benefit analysis was applied to the process of making federal environmental rules, and is now “a bipartisan thing… a part of good government.” And much of the country moved away from a traditional model of regulating electric utilities, giving greater scope to competition, after some deep economic thinking about incentives. That’s the good news. Schmalensee finds it “frankly amazing” and occasionally infuriating how economic thinking has not been applied to energy and environmental policy: the idea of drilling our way to energy independence; and the pursuit of renewable energy as a way of tackling climate change while side-stepping market mechanisms to achieve environmental goals. Schmalensee says he loves “the sun and the wind, but let’s get serious.”

“We live in a time of combinatorial innovation,” says
Hal Varian, where digital age inventors can combine components in novel ways, across great distances, in real time. Even small companies “can be born global,” says Varian, becoming in effect “micro multinationals.” Varian sees a transformation of business processes, a “nanoeconomics of the firm,” where the highly networked, computerized organization “makes life more efficient.” There are hundreds of billions in savings when knowledge workers can instantly track information on the web, he says, and host master copies of work “in the cloud” rather than on paper. Another hallmark of the new organization, exemplified by his company Google, is “experimentation and continuous improvement,” accomplished by such technologies as search engines and voice recognition software that learn on the go. Varian sees econometrics as particularly useful in modeling new ventures, and believes that the increasing amount of data generated by the private sector could soon prove useful to the federal government, “enabling a better handle on what’s going on in the economy.”

Economic modeling had a tremendous impact on health care reform legislation, and as public debate rages, economic analysis remains essential in determining which policies will prove practicable, says Mark McClellan. Some key questions awaiting evidence and investigation: On the supply side, can changing the way providers get paid (traditionally fee for service) stem rising health care costs? On the demand side, will consumers accept health insurance plans designed around payment tiers intended to reduce use, with greater out of pocket costs for beneficiaries?

An instructive model for setting up a system offering choice and cost efficiencies may be the 2006 Medicare prescription drug benefit, which McClellan himself implemented. Seniors overwhelmingly switched to cheaper generic and preferred drugs offered by their plans. While government subsidized, the program “is currently running 40% below actuarial and CBO projections.”

Two speakers steeped in the ongoing crisis of the Middle East describe abominable conditions for Palestinians living inside Gaza, which has been blockaded by Israel since 2007. They demand urgent action for civilian victims, and condemn both the Israeli and U.S. governments for pursuing policies of “genocide.” An impassioned Nancy Murray details daily life inside what has become a 26-mile-long prison, and Noam Chomsky offers background on how this zone of misery came into being, with withering words for those he labels perpetrators.

Murray asks us to imagine living “in a territory which over the past four years has served as a kind of laboratory to find the breaking point of human beings.” Israel has deliberately worked to keep Gaza functioning at the lowest level possible, preventing Palestinians from repairing their war-torn water and sewer infrastructure, and severely limiting food supplies -- literally controlling calorie intake, says Murray. Israel has also blocked the reconstruction of hospitals and clinics to tend to those wounded by war, or suffering mental health trauma from years of harassment. She cites a 2006 study showing that 98% of Gaza children had been subject to violence, tear gas, or home searches.

In a long-term, calculated effort to strangle economic development, Israel has also deprived fishermen of the right to safe maritime areas, and declared the small patches of arable land “to be a no-go zone,” targeting farmers and children attempting to attend school nearby. The education system has also been hard hit, with schools in disrepair, and children “using old shipping containers as classrooms.” If the future looks grim now, Murray believes there is worse to come, with Israel preparing for another round of war, capping “a six decade- long project of destroying resistance to oppression.”

There is no surprise for Noam Chomsky in the tightening vise around Gaza. It is of a piece with years of Israeli disregard for human rights and international law, he argues. The blockade, which began soon after Hamas won the 2006 Palestinian election, is but the latest episode in a history of betrayal, oppression and outright annihilation. Beginning in 1948 and the formation of Israel to 1967 and beyond, the Palestinians have been systematically humiliated and degraded. In spite of efforts by the U.N., and rulings by other international institutions, says Chomsky, Israel, with the backing of the U.S., has been intent on preventing a Palestinian state, and breaking the will of Palestinians. The 1987 Palestinian uprising goaded the Israelis, who since then have made merely a show of peace talks and increased the pace of their settlements on former Palestinian land. Last May, Israel attacked a ship attempting to break the blockade, killing nine people, and though there was an “international outcry,” says Chomsky, Israel continued its siege, decried by Amnesty International and other human rights groups. The change in U.S. administration made no difference, he says. “The U.S. exerts no pressure, but participates actively and crucially in these crimes. The roadblock to peace remains.”

These economists, MIT PhDs all, ponder what remains in the macroeconomist’s toolkit to pull the U.S., and much of the developed world, out of recession. They discuss aspects of fiscal and monetary policy that may prove useful in spurring recovery, as well as the complicating matter of politics.

IMF chief economist Olivier Blanchard describes a “two-speed recovery” around the globe, where emerging market countries like China and India are growing at a brisk clip of around 10%, and developed nations like the U.S. are lagging behind, with growth rates 3% and below. Stronger Eurozone states are struggling to prop up debt-laden Ireland and Greece. Blanchard hopes to avoid a larger European calamity by opening up the books of European banks to allay investors’ fears and help recapitalize the banks at appropriate levels.

The U.S. and China represent another hot spot for the IMF, with the U.S. running a vast current account deficit (due to years of high U.S. consumption and low household savings), and China a large current account surplus. Both nations want to reverse the situation, but their timetables differ radically. China fears increasing domestic consumption too rapidly and overheating its economy, so is thinking in terms of years. The U.S. wants faster action. If net exports do not improve in the U.S., says Blanchard, then it will be “confronted with a difficult choice: either it does fiscal consolidation, risking slowing growth, or continues large deficits…There are reasons to think one might want to worry.”

Emerging markets “have learned lessons from previous crises,” says Pedro Aspe, and are generally rebounding from the downturn. In Latin America, they have followed the lead of Chile, adopting an independent central bank, trade liberalization, pension reforms, and flexible labor markets. When they need a stimulus, they lower interest rates and keep public debt low. Aspe also raises red flags around debt and financing in the Eurozone: “You take more financing, and then the private sector knows this game well…They squeeze economies. Face the debt overhang fast.”

Robert Gordon replaces the word overhang “with a more evocative word: hangover.” The U.S. economy is still weighed down by consumer liabilities, although the household savings rate has improved. There remains an oversupply of residential housing and nonresidential structures, and continued unemployment, only to worsen as state and local governments shed more workers. “What do we do?” he asks repeatedly. “Monetary policy is out of steam.” On fiscal policy, Gordon says, “We have to pretend we’re a benevolent dictator and ignore political paralysis.” He recommends cutting corporate income tax, extending unemployment compensation and making food stamps more generous. He also endorses a new jobs tax credit, but admits it will be “hard to design.”

Paul Krugman confesses having “nightmares for about a decade before this thing actually happened.” What is “worse than he anticipated” is the “apparent inability of policy to come to grips with this.” Our paralysis has arrived in part because “we’ve run into the limits of Samuelsonian synthesis.” The traditional levers of monetary and fiscal policy to correct minor market failures have failed. The academic consensus around Keynesian economics has broken, making it less possible to “push through the strong policies you really need at a time like this.” This leaves an opening for people “who really believe government should keep its hands off,” who don’t believe in the need for monetary policy “to be adventurous and unconventional just to avoid utter catastrophe.”

In addition, “a prolonged period of financial stability” made people careless, leading to mountains of debt. The resulting financial crisis demands aggressive fiscal policies that are politically impossible. “If you’d asked me five years ago what would happen if the U.S. had unemployment in excess of 9% and every prospect of continued high unemployment levels, I’d have said there would be overwhelming political demand for government to do something. In fact there isn’t. We have had a near collapse of the idea that government can do anything about this.”

N. Gregory Mankiw describes how times of economic crisis periodically challenge macroeconomists’ consensus of how the business cycle works, and how to fix it when it breaks. In the past few years, “the rock has rolled back to the bottom of the hill.” Mankiw believes he and fellow macroeconomists “need to be humble” and “recognize there are a lot of things we don’t know.” For instance, the conventional take was that monetary policy was the main tool for dealing with recession: cut interest rates, stimulate borrowing and investment, increase aggregate demand. But today, the Fed cannot realistically lower its interest rate below zero. If he tried to increase target inflation rates, Ben Bernanke would “soon be former chairman,” says Mankiw, who finds the long-term fiscal picture “extremely worrisome.” The administration’s last budget “has debt to GDP ratio rising as far as the eye can see.” Without major reforms on entitlements and the tax code, there must be another revenue source, and Mankiw “is expecting a value added tax.”

“In my heart, I feel deeply that actions taken in the last two years were incredibly effective and played a role in the recovery we’re seeing,” says Christina Romer, a forceful advocate for such strong fiscal policy as the administration’s $787 billion stimulus package. Legislation passed during the recent lame duck session of Congress should help blunt the loss of stimulus money. Nevertheless, the “U.S. economy is still suffering from a tremendous shortfall of aggregate demand,” with factories and workers unoccupied. She worries that policymakers’ anxiety about the long-run fiscal deficit will prevent the kind of immediate measures “we desperately need,” that would jumpstart recovery. She argues for “high quality additional fiscal stimulus coupled with a signed, sealed and delivered agreement for deficit reduction starting in 2012 or 2013.” This agreement would tackle “the true driver of the deficit, long-run entitlement … spending on Social Security and Medicare,” and “must surely raise additional revenue.”

This panel first looks inward, at the evolution of macroeconomics in the past century, and the emergence of microeconomic foundations in macroeconomics, then shifts outward, to the application of economic analysis to such issues as structural unemployment, the ongoing U.S. recession, and the best ways to help developing nations.

When he took his first economics course in 1940, Robert Solow tells us, “There was no such thing as macroeconomics.” The general framework for discussing large-scale fluctuations in economies , “born in Keynes’ general theory in 1936,” took a while to evolve. Keynes, says Solow, wanted a “macroeconomics that would keep closely in touch with data and with actual events.” From the 1950s through the 1970s, macroeconomics “was all Keynesian,” but there was “lots of room for ideology to be dragged in.” A sea change occurred in the late ‘70s, driven by stagflation. Macroeconomists could not explain the phenomenon, providing an opening “for opponents of this way of doing macroeconomics.” After the ‘70s, “paying close attention to events got to be a bad thing,” says Solow. Some economists declared it was time to erase the distinction between macro and microeconomics, but says Solow, “You can’t answer the questions macro has asked by modeling whole economies as the interaction of tens of millions of households, firms and products… It’s like trying to design an airplane molecule by molecule.”

Peter Diamond was part of a generation of researchers in the 1960s who hoped to construct a micro foundation to macroeconomics. In particular, he worked to incorporate into the basic general equilibrium model two Keynesian ideas that didn’t fit so comfortably: the significance of current income, and “the stickiness of wages.” Economists explored how the labor market functioned in the economy, and learned to model vast flows of workers moving in and out of employment. Analyzing such flows helps inform policy discussions about unemployment insurance, says Diamond. While these approaches have been incorporated into “otherwise conventional macro models,” he looks forward to “a big expansion of range of micro foundation models that will be consistent with the general equilibrium views of thinking about the whole economy, and Keynesian views … that we get events that really affect things.”

Robert Hall defends economists attacked for not predicting “the big slump.” Says Hall, “We did a lot of research that turned out to be highly material.” He boils down the financial crisis to such factors as deregulation of financial institutions, a massive build-up of consumer debt and the overshooting of housing prices. Financial fallout from the 2008 crisis continues today: credit card interest rates remain high, and available credit is extremely restricted, impeding recovery. The Federal Reserve’s hands are tied, because it can’t lower interest rates anymore; “the normal equilibrium process of the economy fails in a situation like this,” says Hall. Paradoxically, a little inflation would be good, because it might “get people to perceive that now is a great time to buy stuff instead of later.” Over the next four years, Hall believes unemployment will get back to normal, and households will work down accumulated debt. He frets that current legislation has “only scratched the surface” of correcting the regulatory lapses that triggered the crisis. Says Hall, “We need robust financial institutions with lots of capital.”

For years, people have debated the effectiveness of aid to developing nations. Development economics is trying “to move away from big questions…to smaller questions for which we might possibly have the answer,” says Esther Duflo. She studies the economics of public health aid in poor countries, where diseases like malaria are responsible for millions of deaths. Even where the benefits of aid are clear, there are still “heated arguments, ideology and passion.” Studies by Duflo and her colleagues have largely quieted concerns that people offered free health services such as bed nets for malaria, or immunizations, decline them, or after receiving them, refuse to purchase subsidized healthcare in the future. This research is changing policies: Kenya has begun distributing bed nets for free, for instance. Small investments in health pay large dividends. Duflo cites a study that school children who are de-wormed for a year longer than their peers earn 20% more each year when they are adults. “A patient step-by-step approach is a productive way of trying to understand how the poor behave … and how we can possibly help them get out of poverty traps.”