Monday, June 28, 2010

The Use and Misuse of Models

Numerous others have picked up on this essay by Kartik Athreya which argues that bloggers are uninformed loons.

I think this suffers from the problem of conflating the person who writes something, and the medium they use. After all, there are plenty of highly trained economists who choose to blog--Gary Becker, Paul Krugman--as a medium of reaching their audience. It seems what Kartik really has a issue with are non-credentialed economists, who use new platforms to reach readers.

But there is another problem here, I think. It's that economists of all stripes prove unwilling to endorse their own models when engaging with the public, and instead resort to folk wisdom. Unfortunately, economists are no better at folk wisdom than anyone else.

What I'm primarily thinking of here--and I steal this entirely from Scott Sumner--is the repeated mention of stimulus programs as having a "delayed" effect. You see this in numerous Paul Krugman posts, which implicitly assume that the stimulus will have an effect proportionate to the amount of government spending in any given month.

Yet in the New Keynesian models which have dominated macroeconomic thinking--which Krugman has contributed to--this should not be the case. Fiscal stimulus, in these models, has an effect purely through the change in expectations among market actors, and so should have an effect on the economy the moment it is announced. The 2009 stimulus should not work with a "lag" over time, but should have had the entire effect in the first quarter of that year--at least, if you believe New Keynesian models.

Krugman, as academic, is skeptical and careful. Here he is on Japan:

But anyway, as a practical concern the main point about fiscal policy in Japan is that it is clearly nearing its limits. Over the course of the past 7 years Japan has experienced a secular trend toward ever-growing fiscal deficits; yet this has not been enough to close the savings-investment gap. One need not claim that fiscal policy is completely ineffective: as Adam Posen has emphasized, fiscal expansion has pushed up Japanese growth when tried. But how much fiscal expansion can the government afford? Between 1991 and 1996 Japan's consolidated budget went from a surplus of 2.9 percent of GDP to a deficit of 4.3 percent, yet the economy was marked by growing excess capacity. When the Hashimoto government, alarmed by the long-run fiscal position, tried to narrow the deficit in 1997 the result was a recession; now fiscal stimulus is being tried once again. But projections already suggest that Japan may be heading for some awesome deficits - say 10 percent of GDP next fiscal year - with no end to the need for fiscal stimulus in sight. Given that Japan is already in far worse fiscal shape than, say, Brazil on every index I can think of - not just current deficit, but debt to GDP ratio and hidden liabilities arising from an aging population, the need for bank and corporate bailouts, etc., one has to wonder where the fiscal-expansion strategy is leading.

Yet replace "Japan" with "America"; and Krugman the blogger will call you a dangerous Republican lunatic (Yes, I know there are differences between Japan and America, but still). When he blogs, Krugman is implicitly throwing out his academic experience, and is relying on a hydraulic view of the world, in which expectations don't exist; GDP = C + I + G + X; and so government spending automatically boosts GDP.

You see this everywhere you look. Ben Bernanke, when advising the Japanese government on how to deal with slow growth and deflation in the aftermath of a banking crisis, advocated higher inflation targets and better monetary handling. Now, as America faces similar conditions, he believes that there is this enormous looming problem of inflation that prevents these same policies from working.

This isn't limited to blogging. Christina Romer, in her research, has emphasized the role of monetary over fiscal stimulus in the Great Depression; and has found that tax cuts have a large effect on economic recovery. Yet in her policy-making, she is much more willing to endorse fiscal policy; based on "multipliers" that are estimated on an ad hoc basis, rather than coming from rigorous models.

I don't want to commit too much to these cases, as there may be excellent reasons that these brilliant people have different views in different cases. And I don't want to pick on left-wing economists too much either--there are plenty of lists like this out there for Chicago-school economists too, if you're interested. My point is only that it's very difficult to see what sort of model prominent economists are using for the policy pronouncements.

For right-wing economists, this means an urge for "austerity" and "policy moderation"--not because they have much evidence for these views, but because these seem intuitively plausible as gut impressions. Left-wing economists similarly promote government spending because that, too, seems reasonable. In both cases, academic credentials are used to bolster views held on op-ed pages, in policy positions, and on blogs: yet those views are in many cases simple folk wisdoms that economists are not better at commenting on than anyone else.

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