“Bad economics does not make good government”
True enough. Diana Furchtgott-Roth of the Manhattan Institute, writing in RealClearMarkets, lays out in layman’s terms the general problem with aggregate economic measurements, and it’s an important thing to think about. When confronted with numbers representing something like the “GDP,” or the “employment rate,” strange formulas said to ennumerate the entire economy, what, if anything, can we assume that they mean? In a word, not much.
(The) Congressional Budget Office issued a report showing that the American Recovery and Reinvestment Act of 2009 increased the number of people employed by between 1.4 and 3.3 million people in the second quarter of 2010 and lowered unemployment by 0.7 to 1.8 percentage points.
CBO concludes that without the Recovery Act unemployment, which stood at 9.5% in July, might exceed 10% and possibly be above 11%.
There’s just one problem. CBO’s latest figures are inconsistent with its claims of the effects of the stimulus bill when it was passed in February 2009. If its models failed to accurately predict the effects of the stimulus bill then, why should we believe the models now?
This illustrates a fundamental problem with economic modeling, and as Furchtgott-Roth says, “bad economics does not make good government.” Why is it that when the models fail, we go back to the same model to explain the failure?
By now I assume that many Americans have a instinctive distrust of economic models and the financial voodoo that emanates from CBO, yet there isn’t any internal push to change CBO’s obviously flawed methods. Quite simply, it’s tunnel vision, and it took on its modern form with Keynes. Take Paul Samuelson for example, who literally “wrote the book” on modern Keynesian macroeconomics in that he authored the macro textbooks used for decades in schools all over the country, and consider whether it’s possible to explain the economy with a raft of broad-based equations? Samuelson certainly thought so – “if only the math on my blackboard is correct, I can prove whatever needs proving.” Of course, Samuelson “proved” that the U.S.S.R. was a superior economic model to the United States. I’m sure his math was beyond reproach.
The fact is, mathematics gets us only so far. When we’re speaking in abstracts, it might indicate a direction or a possibility. But to assume that we can mathematically explain an economy, any one part of which is so far beyond our grasp as to be logically out of reach, is an arrogance of highest order. Models, such as the CBO’s, may help with planning or budgeting, but under no circumstances are they sound enough to base policy on.
Don’t think so? Maybe you could ask the millions of unemployed who, according to the models, ought to be working.