“Measuring” the impact of the stimulus

by Russ Roberts on July 30, 2010

in State of Macro, Stimulus

John Taylor on the Blinder-Zandi attempt to analyze the impact of government intervention.

Taylor vs. Zandi on the PBS NewsHour.

Arnold Kling critiques here and here.

My take is summed up the by the quotations marks I’ve put around “measuring.” Blinder and Zandi don’t really measure the impact of government intervention. They measure what the model says is the impact. The model is based on past relationships that were unable to predict where we are now. This quote from the CBO explaining why their estimates of the impact of the stimulus on employment did not actually look at the actual data of the economy after the stimulus passed sums it up best for me:

CBO has also examined incoming data on output and employment during the period since ARRA’s enactment. However, those data are not as helpful in determining ARRA’s economic effects as might be supposed, because isolating the effects would require knowing what path the economy would have taken in the absence of the law. Because that path cannot be observed, the new data add only limited information about ARRA’s impact.

In other words–we don’t have a reliable model of the economy in its current state. The CBO concludes that we should instead look at previously estimated relationships in the economy (holding everything else constant) and that’s the best we can do. I conclude we’re incapable of holding everything else constant and therefore the CBO’s results are fake science.

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