Wednesday, March 3, 2010

Seeking a Good Story from Robert Barro

by Mario Rizzo

I am both intrigued and annoyed by Robert Barro’s recent opinion piece in the Wall Street Journal. He adduces empirical (econometric) evidence to support the view that the fiscal stimulus package has done very little good in the short run and will do harm in the long run. I do not want here to discuss technical data or identification problems. Instead, I want to discuss something both more elementary and more profound.

The world of econometric estimation is a world shrouded in mystery, even for some econometricians like Edward Leamer of UCLA, for example.

In my opinion this is because this attempt to make economic theory have contact with data often requires adjustments both in the theory and the application that make their relationship to real-world people (thinking as most cognitively limited minds are likely to do) very unclear. All sorts of equations are solved, knowledge is had or gained at rapid speeds, modes of reasoning unknown to mere humanity are postulated, and so forth. This is so much the stock and trade of modern macro theory that most economists don’t give a second thought to it.

Barro’s analysis, by far not the worse example of this manner of doing economics, nevetheless is presented with very little concern for a good story about how his econometric results can be rationalized in terms of human action.

Read the rest here.

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