Monday, May 6, 2013

The Problems Econometricians Have to Face

As I pointed out yesterday:
There is no need for empirical proof of economic theory. In fact, it can't be done, given the nature of acting man and the fact that there are no mathematical constants in the world of economics. Economics is a deductive science, more like mathematics than physics.
Any given economic environment is simply different, with regard to specifics than any other.

Here is an example of the problems econometricians face, as reported by Michael Bordo in WSJ:

There's a belief among policy makers that serious recessions associated with financial crises are necessarily followed by slow recoveries—like the one we've experienced since mid-2009. But this widespread belief is mistaken[...] 
The mistaken view comes largely from the 2009 book "This Time Is Different," by economists Carmen Reinhart and Kenneth Rogoff, and other studies based on the experience of several countries in recent decades. The problem with these studies is that they lump together countries with diverse institutions, financial structures and economic policies. They also conflate two different measures of speed—how long it takes a country to get back to its previous business-cycle peak, and how fast the economy grows once the recovery has started.
Bordo then goes on to construct his own empirical models, based on diverse data from various countries. Go figure.

Economics is not that difficult or complicated, follow the logical deductions and you will understand the big picture trends within a very complex world. For example, if a government institutes a  minimum wage above where it makes sense for businessmen to hire some workers, those workers will become unemployable, basic logic, no data is needed to prove this, the proof is in the logical argument.

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