In a complex system, bias reigns

by Russ Roberts on June 11, 2012

in Hubris and humility, State of Macro, Stimulus

E. J. Dionne writes (HT: Leigh Harrington):

Why don’t Democrats just say it? They really believe in active government and think it does good and valuable things. One of those valuable things is that government creates jobs — yes, really — and also the conditions under which more jobs can be created.

Later on, he returns to government as job creator:

Yet the drumbeat of propaganda against government has made it impossible for the plain truth about the stimulus to break through. It was thus salutary that Douglas Elmendorf, the widely respected director of the Congressional Budget Office, told a congressional hearing last week that 80 percent of economic experts surveyed by the University of Chicago’s Booth School of Business agreed that the stimulus got the unemployment rate lower at the end of 2010 than it would have been otherwise. Only 4 percent disagreed. The stimulus, CBO concluded, added as many as 3.3 million jobs during the second quarter of 2010, and it may have kept us from lapsing back into recession.

So when conservatives say, as they regularly do, that “government doesn’t create jobs,” the riposte should be quick and emphatic: “Yes it has, and yes, it does!”

I don’t know E.J. Dionne. He’s probably a nice man–that’s my default at least until further notice. But my guess he’d have trouble defending his claim that stimulus created jobs when confronted with an alternative view. His two data points are the CBO and the Booth School of Business Survey. It’s what is called “an appeal to authority.” As I have written many times here, the CBO “evidence” is not meaningful and remarkably imprecise, it is the equivalent of assuming your answer rather than discovering the answer. The Booth Survey is not a representative survey–it’s a survey of leading economists, most of whom are sympathetic to Keynesian arguments and government intervention. So 20% aren’t. So what? That’s not evidence about the effect of the stimulus–it’s evidence about the state of economics at leading universities. If you pushed Dionne some more, he’d cite Paul Krugman. But Paul Krugman is himself a biased source. Yes, he has a Nobel Prize. But he didn’t win it for his work in business cycle theory. And he’s biased. His blog is called “Conscience of a Liberal.” He’s not a reliable source for objective truth. He has no more evidence for stimulus than the CBO. Oh he has evidence of course. But it’s not incontrovertible. If it were, the 20% of the Booth Survey who are also fine scholars at first rate places would have to bow to that evidence. But they don’t. They have their own evidence.

Step back for a minute and consider the challenge of measuring the impact of the stimulus. It is one of many things that happened between February 2009 and the end of 2010. For starters, massive reforms of health care and the financial sector were passed. They were passed but the details of how they would actually be implemented remained uncertain through the end of 2010 (and remain so today.) There was an unprecedented set of monetary interventions. From the end of 2008 through the end of 2009, the Federal Reserve’s balance sheet went from around $800 billion to about $2.2 trillion. And of course a million other things happened as well. The price of housing fell steadily during this period, the price of oil rose steadily, the recession officially ended and on and on and on.

No one has a model of the independent impact of these different factors or a way of measuring them accurately and reliably in a way that can be tested and confirmed or rejected. No one. That means everyone, on the left or the right, who claims to have evidence for the impact of one of them or who cherry-picks one of those out of the myriad to choose from and blames that one factor for the lousy pace of the recovery is either fooling himself or fooling you. Don’t be a fool. So when the E.J. Dionnes of the world tell you that government creates jobs, just ask them how they know. Their answer will be that someone with exemplary credentials says so. But there are those with exemplary credentials who say otherwise. Where does that leave us? It should leave us in ignorance and doubt. No certainty. No exclamation points. More humility.

UPDATE: Matt Mitchell responds to Dionne, here. Check out the range of estimates for the spending multipliers. Science!

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