Posts Tagged ‘ Policy ’

Macroeconometrics: The Science of Hubris

Harsh words from Arnold Kling from Mercatus Center at George Mason University on Macroenomometrics.

Applying macroeconometric models to questions of fiscal policy is the equivalent of using pre-Copernican astronomy to launch a satellite.

[Macroenomometrics] give policy makers the illusion of precise control over the economy, based on methods that are no more reliable than soothsaying or entrail-reading.

 

“Macroeconometrics: The Science of Hubris” by  Arnold Kling at Mercatus Center, George Mason University published  in Critical Review, Volume 23 (1-2).
A shorter version ”The Soothsayers of Macroeconometrics”

”Applying macroeconometric models to questions of fiscal policy is the equivalent of using pre-Copernican astronomy to launch a satellite.

….

In 1976, Robert Lucas suggested that economic behavior could respond to policy changes in ways that would cause macroeconometric models to make systematic errors. Lucas was awarded a Nobel in 1995. It has since become standard in economic research that empirical work must be able to meet “the Lucas critique.” Because traditional macroeconometric models fail to do so, they have disappeared from peer-reviewed journals in economics

….

In the case of fiscal policy, I think that there is a better alternative than to pretend that macroeconometric models work. Instead, economists must be more forthcoming about what they can and cannot estimate. For example, the Congressional Budget Office can reasonably estimate the effect of economic and policy scenarios on components of the government’s budget, including taxes and spending. However, it cannot reasonably estimate the effect of tax and spending changes on the overall economy. The CBO adds value to policy makers by “scoring” the impact of policies on the budget. However, the “scoring” of policies in terms of GDP growth or jobs saved is of no value. The CBO should simply refuse to do it, and the consulting firms that purport to provide such estimates should be regarded as the charlatans they are.

Until the press, the public, and policy makers understand the utter unreliability of macroeconometric estimates of the impact of policies on employment and growth, the answers provided by the usual suspects are worse than nothing. They give policy makers the illusion of precise control over the economy, based on methods that are no more reliable than soothsaying or entrail-reading.”

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