I fall on the Econobrowser side of this debate, but as I’ve said in class, I’ve been moving towards the Cafe Hayek view for about 20 years.
Anyway, Menzie Chinn (a big name macroeconometrician) of Econobrowser says that the CBO estimates of the effects of the stimulus package are believable.
Russ Roberts, a non-macroeconomist and non-econometrician of Cafe Hayek fires back:
I’m skeptical on logical grounds but I confess that I do not have strong empirical evidence on my side.
… The CBO “estimates” are not an analysis of what the stimulus actually did but rather what some predicted it would do. [emphasis added]
Yesterday, I had a headache. I took a couple tablets of aspirin. (Actually, it was ibuprofen, but the point remains.) My headache subsequently disappeared. I have no direct empirical evidence that the headache disappeared as a consequence of the aspirin, but I have a plethora of studies that suggest that aspirin (or ibuprofen in this case) can relieve headaches.
As the foregoing example suggests, it does seem to me there is empirical evidence. It's just not the direct sort Professor Roberts desires.
That brings me to my second point that seems to be difficult to make clear. The CBO estimates are not estimates. They are forecasts based on previous estimates. They are akin to a golfer who is 150 yards from the flag and asks his caddy for advice on what club to use. The caddy knows that in the past, the golfer has averaged about 150 yards with a 7-iron, so he takes one out of the bag and hands it to the golfer. The golfer swings. He can’t see the green—it’s obscured by trees. The golfer asks the caddy to estimate how far his shot landed from the hole. If the caddy replies that he estimates without looking that the ball is surely within a few feet of the hole because the average 7 iron goes 150 yards when this golfer uses a 7-iron, you don’t call that an estimate. It’s a hope. An expectation. And it might be true. But it’s not an estimate. No caddy would say such a thing. He would wait till he could see where the ball actually ended up.
Surely where the ball goes depends on the execution of this particular swing. The wind. The humidity. How much sleep the golfer got the night before. And so on. Doesn’t the impact of ARRA depend on how it’s structured, who gets the money, the mood of the country, the expectations of increases in future taxes and so on? Yes, these things are hard to measure. So is the mood of the golfer and the angle of club as it strikes the ball. But that’s why the caddy looks and sees where the ball is. Even if the stroke appears to be well-executed, his ex ante prediction of 150 yards can be way off. That’s why he looks.
In economics, we can’t look. We can’t say that because unemployment remains high the stimulus failed. We can’t say that because GDP grew a lot, the stimulus was a success. We understand there is other stuff going on. But if we can’t control for that stuff, then how can we know (or even estimate reliably) the effect of the stimulus?
What’s the takeaway from all this supposed to be? Reasonable economists disagree over whether the numbers produced are meaningful. You never hear this coming out of Washington – the politicians and bureaucrats use these numbers as facts, and then can’t figure out why their policies don’t do what they expect them to.