Arnold Kling  

On Macroeconometric Models

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My latest essay.

the Congressional Budget Office can reasonably estimate the effect of economic and policy scenarios on components of the government's budget, including taxes and spending. However, it cannot reasonably estimate the effect of tax and spending changes on the overall economy. The CBO adds value to policy makers by "scoring" the impact of policies on the budget. However, the "scoring" of policies in terms of GDP growth or jobs saved is of no value. The CBO should simply refuse to do it, and the consulting firms that purport to provide such estimates should be regarded as the charlatans they are.

My "science of hubris" paper gets into more detail. However, it is still difficult to obtain (although I recommend subscribing to Critical Review). But the essay linked above sketches some of the important problems with macroeconometric models.


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COMMENTS (7 to date)
Alex Godofsky writes:

Given that the Congressional Budget Office works for Congress I don't think there are any reasonable grounds on which they should "refuse to do it".

foosion writes:

I'd expect a critique of macro modeling to be on the lines of: models of a certain sort predicted X, then Y happened and X and Y have no reliable relation. In other words, that they have a lousy track record.

Instead, you seem to be saying that the models are based on theoretical model A, but there's theoretical model B which shows a flaw in A. But all models are imprecise and have flaws, that's why they're models and not reality.

The test of a prediction model is whether it works. You have not addressed this issue.

BTW, a general critique of macro that follows Lucas is a lack of empirical work. Your column seems to fall into that problem.

Lord writes:

Is there any greater hubris than assuming the unknown is unknowable?

bill shoe writes:

That was a really nice quality essay. Thanks.

Charles R. Williams writes:

I was in business school (Chicago) in the late 70s. The general attitude of the faculty was that macroeconomic models had no predictive power and were methodologically suspect. I agreed and nothing has happened to change that. It surprises me to see that there is any interest today in a question that was settled 30 years ago.

fundamentalist writes:

I have been reading your article in Critical Review and it is great!

It's so sad to see undergraduate degrees in economics include more math and econometrics and less history.

WhiskeyJim writes:

Private industry spends a great deal of time arranging marketing, advertising and sales campaigns so they are measurable.

It would be simple enough to do the same with policies and stimulus. Is the fact that stimulus packages can not be measured a feature rather than a bug?

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