Arnold Kling  

Old-time Macro Religion

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Greg Mankiw talks about analysis by Ray Fair which says that Bush Administration economic policy kept the recession that he inherited from being much worse.

Fair assesses the impact of monetary and fiscal policy during the recovery from the recent recession. An excerpt:

  • Had there been no tax cuts, employment would have been 2.2 percent lower by 2004:3 than it actually was; had there been no large increases in federal purchases of goods, employment would have been 1.2 percent lower; and had there been no fall in short-term interest rates, employment would have been 2.5 percent lower. These effects are roughly additive in the model (fourth experiment), and the combined estimate is that employment would have been 5.6 percent lower in 2004:3 than it actually was.

  • Without the quantitative estimates, I offered this traditional Keynesian perspective in the macro chapters of Learning Economics. However, I retain my basic skepticism about macro-econometric models. Ray Fair is sort of the last true believer in them.

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    CATEGORIES: Macroeconomics

    COMMENTS (3 to date)
    Bill writes:

    Wasn't it the ridiculously low Fed rates that kept the economy afloat with the housing inflation and HELOC ATM allowing credit to keep up consumer spending?

    IMO, this was bad policy that we will all pay for in the (maybe not too distant) future.

    Wouldn't it have been better to take our lumps and allow creative destruction to lead us to a more efficient allocation of resources?

    There's no reason to conflate neo-keynesian, synthesis models with the post-Lucas-critique dynamic general equilibrium, explicit maximization problems of representative agents, new classical macroeconomics models.

    Old-School, pre-Lucas Keynesianism is in many ways ad hoc, but new classical stuff can claim to satisfy the same standard that most micro. stuff does. For now, it's all good (Except maybe the overuse of representative agents and the shoehorning of "imperfections" into the picture: habit formation, stickiness, etc.)

    Forecast success is another matter. What qualifies as "success" is for each to judge.

    So, if you mean that (neo-)keynesianism is over and we have a bunch of Taliban left over, that's true, but if you mean that macroeconomics or econometrics is passe, new classicals (e.g.: Sargent, Prescott, Lucas) and new keynesians (e.g. Mankiw) will certainly disagree.

    Other than Macroeconomics being fine and well, there's the point that science is testing quantitative hypothesis. A body of tentative knowledge is built by systematically testing the quantitative implications of theory in the most coherent way possible (statistical methods and significance standard). Nothing in economics can be achieve by purely "a priori" means (I put my asbestos suit on.)

    RogerM writes:

    I've used Fair's model a few times and it's interesting. I have a couple of reservations about it. I wonder how much of the results are due to Keynesian assumptions built into the model, such as the multiplier for government spending and the emphasis on consumer spending. And how much of the results are due to forecasting the GDP, which measures consumer spending, as opposed to the GO, which captures more capital expenditures. I think any model that tries to predict GDP will automatically favor factors that influence consumer spending.

    Without the emphasis on consumer spending and the multiplier effect, what results would Fair have come up with?

    Also, has anyone attemped macro models using Austrian assumptions? I realize that Austrians don't like econometrics, but it would be an interesting exercise.

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