Arnold Kling  

Lawrence Lindsey Vs. Christy Romer

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She says,


by June, before the Recovery Act could have had much of an impact, it was 9½ percent. That is, our projection turned out to be wrong even before the Recovery Act had a chance to get off the ground, which is about as clear-cut evidence as one could imagine that the problem was in our assessment of the baseline, and not in the effects of the Act.

He says,

the problem with the stimulus wasn't just the starting point--it was that the stimulus itself has been ineffective at lowering it. Chart 1 shows that the actual unemployment rate, given by the solid line, is not only above the original Romer-Bernstein projections, but also above projections that take account of the "starting point" problem. Actual unemployment has been consistently above all of the projections, regardless of starting point, because the stimulus bill has basically brought no relief in terms of lower unemployment.

All of us have our biases, obviously. And nobody likes to admit they were wrong about something. But I get the impression that serving as a policy adviser for an Administration tends to undermine one's ability to be objective. Advisers seem to get inordinately attached and committed to the policies they work on. Herbert Stein was a notable exception.

[UPDATE: I should have made it clear that in my view this hyper-defensiveness shows up in advisers of Republican as well as Democratic Administrations. Also, I should add that in macro it is almost never possible to rule out any theory based on the data, so Romer could be correct. You can generally find a way to interpret almost any path of variables in a way that supports your favorite theory. The question is how far you have to strain to make your interpretation. I was in favor of some sort of stimulus, but I did not like the design of the actual bill. Also, things worked less well than what I expected. So that is why I am a skeptic. I cannot rule out the possibility that the stimulus worked well. But I think anyone who claims to be certain one way or the other is off base. What throws me about Romer's talk is how certain she comes across.]


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COMMENTS (4 to date)
Daniel Kuehn writes:

What do you make of the fact that a lot of people who aren't in the administration at all are saying essentially the same thing as Romer?

Your position quickly degenerates into "everyone that disagrees with me isn't being objective". You can claim that, but if you really think that be up front about it and then see what readers think of your point.

Nick Rowe writes:

There's unemployment, and there's GDP. Fiscal policy is supposed to raise GDP and thereby lower unemployment. But one of the recent puzzles in the US is that unemployment increased by more than would be predicted relative to the decline in GDP. Maybe (I don't know) fiscal policy had the predicted effect on GDP, but GDP had less than the predicted effect on unemployment.

Hugh Watkins writes:

Comparing the actual outcome against the forecast is most probably not the best way of assessing the effects of the stimulus. If either the starting position is wrong, or the "no action" forecast too rosy, it would make the actual look bad.

A better approach might be to look at where we are vis-a-vis other recessions. And there the only answer can be that we are way behind where we ought to be 2.75 years after this all started.

Ted writes:

I'm going to assume that we are not working on old-style Keynesian models and that she is working in a framework of rational expectations with sticky wages and prices (e.g. some type of New Keynesian model). But if you look at the standard formulations of New Keynesian models where fiscal stimulus has been analyzed at the zero lower bound (e.g. Michael Woodford, Gauti Eggertsson) then the effects of fiscal stimulus are actually immediate due to rational expectations. You cannot blame a delay of implementation, because in models that provide support for fiscal stimulus the delay in implementation is irrelevant.

Now you could say the NK model is simply wrong and that the delay implementation matters, but then you have to re-think the case for fiscal stimulus since you can't pick and choose what features of a model you like and don't like arbitrary.

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