Friday, August 10, 2012

Some Points Just Aren't Debatable

The policy paper issued by the Romney campaign has received a rather harsh reaction since its release.  Brad Delong provided the most well-researched and in-depth response (which should probably be called a very thorough smack-down), but there were others (see here and here).

Most telling, a reporter contacted the economists cited in the report as in one way or another supporting the Romney camp's claims, who responded like this:

Each of these sections include supporting documents from independent economists. And so I contacted some of the named economists to ask what they thought of the Romney campaign’s interpretation of their research. In every case, they responded with a polite version of Marshall McLuhan’s famous riposte. The Romney campaign, they said, knows little of their work. Or of their policy proposals.

The real point of controversy for me was this assertion by the four idiots:

The negative effect of the administration’s ‘stimulus’ policies has been documented in a number of empirical studies. Research by Atif Mian of the University of California, Berkeley, and Amir Sufi of the University of Chicago showed that the cash-for-clunkers program merely moved new car purchases ahead a few months with no lasting effect.

DeLong responded thusly:

Such policies are supposed to shift demand forward in time into periods where the crisis is acute from future periods in which, it is hoped, demand is less slack. When Mian and Sufi present their work, they characterize it not as showing the failure but rather the success of programs like CFC.

In actuality, of the studies done on the effect of the stimulus, 13 of 15 found it worked.   Put another way, "a number of empirical studies" does not support the conclusion that the stimulus didn't work.  In fact, the exact opposite is true.  And for God's sake -- the textbook written by one of the authors of the study (Greg Mankiw) argues for stimulus in the event of recession (Mankiw's place in the study has been criticized by Professor Marc Thoma, who asked, "Why would someone undermine their professional reputation defending Romney's indefensible economic policies? What's the expected payoff?). 

 But more to the point, I'm still amazed at the continued existence of the "stimulus doesn't work" argument because it does -- clearly and effectively.

How do we know this?

First consider that the effect of fiscal stimulus during the great depression:

You'll notice that GDP returned to 1920 levels by 1937.  That's a very positive effect.

Then there is the experience of China during the last recession, which spent about 1/3 of their GDP on stimulus, leading to strong growth rates.

And as for the countries that are in the middle of an austerity program right now?  They're all slowing down or in recession (see the UK as a prime example).  And about the "Baltic miracle" -- you might want to look at the data because the US economy is actually performing better than they are.

Here's the deal: counter-cyclical stimulus spending works.  It worked in the Depression.  It worked for the Chinese in 2008.  The vast majority of  studies (13 of 15 or 86.7%) say it worked.  The opposite fact pattern -- austerity programs -- leads to contraction.

How much more data do you need? 

Simon Wren-Lewis has this to say:

 Now the quote comes from a paper prepared for the Romney presidential campaign. It is clearly political in tone and intent. As both academics are Republican supporters, it may therefore seem par for the course. But it should not be. The Romney campaign publicised this paper because it was written by academics – experts in their field. It allows those who oppose fiscal stimulus to continue to claim that the evidence is on their side – look, these distinguished academics say so.

It is one thing for economists to disagree about policy. It would also be fine to say I know the evidence is mixed, but I think some evidence is more reliable. It is not fine to imply that the evidence points in one direction when it points in the other. I say here imply, because the authors do not explicitly say that the majority of studies suggest stimulus is ineffective. If they chose their words carefully, then you have to ask whether ‘intending to mislead’ is any better than ‘misrepresenting the facts’. Was that the intent, or just an isolated unfortunate piece of bad phrasing? All I can say is read the paper and judge for yourself, or this post from Brad DeLong.

This is sad, because it tells us as much about economics as an academic discipline as it does about the individuals concerned. In the past I have imagined something similar happening in physics. It actually stretches the imagination to do so, but if it did, the academics concerned would immediately lose their academic reputation. The credibility of their work would be questioned.  Responding to evidence rather than ignoring it is what distinguishes real science from pseudo science, and doctors from snake oil salesmen.