Very Serious People get it wrong again...

http://www.dailykos.com/story/2016/02/20/1488065/-Very-Serious-People-get-it-wrong-again

So, Kreuger, Romer, Goolsbee, and Tyson wrote a letter… and Paul Krugman piled on, and cast some seriously nasty aspersions on an economic analysis of Bernie Sanders' economic proposals. That kerfluffle has been well-documented at huffpo, and commented on here and here and several other diaries at DKos . Not to mention that really nasty letter penned by J. K. Galbraith.

Tasty!

But (keeping in mind that I am not an economist, but I am a practicing scientist in the Earth Sciences) here are some things that are bothering me:

1) Either the standard model used in macroeconomic analysis is wrong, or Sanders’ plan is great.

Many of the critical comments, after removing the colorful and insulting “unicorns and fairy dust” invective, consist of statements about “what Friedman assumed”. He “assumed” 5.3% growth sustained over 10 years. He “assumed” 65% labor force participation rate. He assumed this and assumed that. 

He assumed no such things! According to both Friedman’s paper and Galbraith’s explanation of that paper… he assumed that the standard model of macroeconomic growth was sound within the parameters of recent experience. He input the numbers required by the Sanders economic plan, and the model processed those numbers and output the projections reported. 

Again, for clarity: The GDP growth, unemployment rates, LFPR numbers, and other values so derided by the Very Serious PeopleTM are products of the standard model when Sanders’ plan is used as input.

2) Either the model runs have produced absolute garbage numbers, unknown to have ever existed in the universe, or some Very Serious PeopleTM need to go back to Econ 101.

The naysayers and mockers say that the numbers arrived at by the model runs are “absurd” and “fantastical” and “irresponsible” and “unicorns fart rainbows” and “have never been considered” and are “so far outside the realm of the possible as to be irresponsible”… 

Except for those many times in recent US history when those kinds of numbers have been, in fact, recorded. It’s really not hard to find these numbers and trends, all you need to do is go to the Bureau of Labor Statistics or the Bureau of Economic Analysis and look them up.

GDP growth rates greater than 5% for several years running? We’ve had that...

[image]

BEA analysis of GDP growth from 1947… see all the spikes above 5%?

[image]

GDP annual percent change from the 1930’s. See all the periods of >5% growth?

Labor force participation rates greater than 65% sustained over years? We’ve had that too…

[image]

BLS

data for LFPR, 1947 to 2012. See that huge hump from 1987 to 2007? … it’s above 66% LFPR.

3) Using math and empirical tuning of models: If unexpected values are put into models, unexpected values will come out of models. If the model is useful, then the unexpected values produced are also useful.

Standard macroeconomic analysis using models is done using mathematical models that are both theoretically derived, AND (more importantly) tested using a technique called “hindcasting” (use recorded real data, input the policies implemented prior to that data being recorded, see if you can reproduce the actual measurements). This technique allows the models to be “tuned” using parameters and relationships arrived at via empirical analysis of past trends with respect to past policy implementation.

If that technique is wrong, then NONE of the models are viable and ALL of the forecasts are garbage… in which case why do these people have jobs? 

Luckily for these very serious folks, this technique (hindcasting as a means of model testing) is very commonly practiced, verified, and tested in MUCH harder sciences, such as paleoclimatology… it’s pretty powerful.

This leads to the final point, which is a reiteration of the initial point: 

4) Go Big or Go Home!

If the macro-economic models in use to evaluate policy proposals have any power or validity, then the projections put frward by Friedman, based on Sanders’ proposals, indicate a very powerful economic plan. If the numbers that come out of inputting Sanders’ proposals into the standard model are surprising, it’s because no one has thought to test these kinds of policy proposals at this scale before. As Galbraith said:

“When you dare to do big things, big results should be expected. The Sanders program is big, and when you run it through a standard model, you get a big result. “

Just remember, as has also been pointed out elsewhere: These same folks, their coterie of so-serious, so-sober, so-practical technocrats now prognosticating and proclaiming with such vigor and venom…

• failed to see the Asian currency crisis as it grew into a global meltdown, 

• failed to see what effect Neoliberal deregulation policies would have on former Soviet states

• failed to see the impact that NAFTA, GATT, WTO would have on employment, 

• failed to see what IMF Austerity policies would do to struggling under-developed economies, 

• failed to see the flaws in the Long Term Capital Management model prior to its complete collapse,

• failed to see the DotCom bubble collapse coming,

• failed to see the Enron-induced insanity on the horizon,

• failed to see the mortgage backed securities crisis looming.

Mind you, it’s not that the models or the math failed in those cases… there were MANY folks in each and every one of those crises that were crying their warning from the rooftops, in some cases months or even years before the roof came crashing down. Those folks were, in fact, using the same or very similar models and techniques to arrive at their conclusions of impending trouble. But those folks were not taken seriously, because they were not SeriousTM….

Our V.S.P.’s apparently now fail to see how the models that they claim to be so expert at making, understanding, and using could come up with a result that they never envisioned… a result that indicates that (duh) Keynesian-style stimulus predicated on infrastructural building coupled with guarantees of basic necessities (healthcare and education) enhances employment, personal income growth, and consumer demand, and growing consumer demand stimulates… more growth.

Go figure.