Sunday, May 15, 2016

How Do You Know Macroeconomists Have a Sense of Humor?

From a Kyle Petersen WSJ discussion with Russell Roberts:
The models have been run and the numbers crunched: Bernie Sanders’s presidential platform, if enacted, would create 26 million jobs and 5.3% growth. An economist has done the calculating, and there’s no use arguing with mathematics. CNN’s headline reads: “Under Sanders, income and jobs would soar, economist says.”

When I run that line by Russ Roberts, he replies with a joke: “How do you know macroeconomists have a sense of humor? They use decimal points.”

Mr. Roberts is a fellow at the Hoover Institution, a University of Chicago Ph.D., and the gregarious host of EconTalk, a weekly podcast that celebrated its 10th anniversary in March. He is also an evangelist for humility in economics. “The world’s a complicated place,” he says. “We demand things from economics that it can’t provide, and we should be honest about that.”

What’s striking is Mr. Roberts isn’t talking only about politically contrived agitprop. Nobody believes that stuff: One of President Obama’s former economic advisers stirred ire from Sandernistas earlier this year when he said that getting Bernie’s agenda to add up requires assuming “magic flying puppies with winning Lotto tickets tied to their collars.”

The deeper question is: How much better—more credible, or reliable, or falsifiable—are the economic forecasts pouring out of respectable think tanks, the White House and Congress? Mr. Roberts’s answer: not all that much.

He cites the Congressional Budget Office reports calculating the effect of the stimulus package—for instance, one in late 2009 suggesting it had increased employment by between 600,000 and 1.6 million. Leaving aside the incredible range of the estimate, how did the CBO come up with those numbers? Did it somehow measure employment in the real world?

Nope: The CBO gnomes simply went back to their earlier stimulus prediction and plugged the latest figures into the model. “They had of course forecast the number of jobs that the stimulus would create based on the amount of spending,” Mr. Roberts says. “They just redid the estimate. They just redid the forecast. And you’re thinking, that can’t be what they really did.”

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