Saturday, February 28, 2009

Christina Romer: Following in the Tobin Tradition

Like the late James Tobin, Christina Romer argues for the efficacy of fiscal policy to pull us out of a recession. But that is not the motivation for my title – rather it is something Paul Krugman noted about Dr. Tobin:

He was a great economist and a remarkably good man; his passing seems to me to symbolize the passing of an era, one in which economic debate was both nicer and a lot more honest than it is today.

Let’s focus on the following from Dr. Romer’s paper:

The first issue is what it would mean for the policy to work. The President gave a very concrete metric: he wanted a program that would raise employment relative to what it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric meaningless: they complain that because we never observe the outcome under the no stimulus baseline, it isn’t verifiable. But it is, in fact, the intellectually sound and appropriate metric to use. Exactly what any macroeconomist would ask of a policy is what are its effects, holding constant all the other forces affecting the economy. I feel the strongest evidence that the President’s metric is a good one is that it has focused the debate on the right issue. Numerous forecasters, from Mark Zandi to Macroeconomic Advisers to CBO to the Federal Reserve, have looked at what they expect the Act to do. Rather than fighting over the differences in the no-stimulus baselines, which are substantial and largely outside the control of policymakers, the debate has centered on what the policy would accomplish. Of course, one can also debate the baseline and the question of whether creating or saving 3 to 4 million jobs will be enough to fully heal the economy. But, it is important to acknowledge that creating or saving that many jobs would be a tremendous accomplishment.

She was referring to this:

The expression "create or save," which has been used regularly by the President and his economic team, is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus.

Romer could taken the approach that Brad DeLong took to this line:

Greg, Greg, Greg, Greg, Greg, Greg. Setting fire to your own credibility to please your political masters is a very myopic intellectual strategy. It is doubleplusungood to say: "It's bad when a Democratic president and his economic advisors do it, but it was just wonderful peachy when a Republican president and I did it."

To be fair, Greg Mankiw did update his post with the following:

A regular reader of this blog (who deserves anonymity) misinterpreted my meaning, so let me clarify: The 4 million job number is a counterfactual policy simulation of what the stimulus will do based on a particular model of the economy. As such, I have no objection to someone citing it in a policy discussion. In fact, macroeconomists use models to generate figures like this all the time. I have even done it myself.

And most economists draw up counterfactual policy simulation as Dr. Romer so politely points out. As Brad earlier noted, Greg Mankiw has unfairly gone after Christina Romer before:

Is there any way to interpret Greg Mankiw's Sunday New Yotk Times other than as an elbow to Chtistie's ribs while he thinks the ref's eye is elsewhere? Christie certainly does not believe that tax multipliers are twice the size of spending multipliers.

Had she gave an elbow to Mankiw’s rib in reply, she would have been well justified. But hers was a very polite and professional reply. Let’s return to what Paul Krugman said back in 2002:

Why do I feel that Mr. Tobin's passing marks the end of an era? Consider that Kennedy Council of Economic Advisers, the most remarkable collection of economic talent to serve the U.S. government since Alexander Hamilton pondered alone. Mr. Tobin, incredibly, was only one of three future Nobelists then working at the council. Would such a group be possible today? I doubt it. When Mr. Tobin went to Washington, top economists weren't subject to strict political litmus tests -- and it would never have occurred to them that the job description included saying things that were manifestly untrue. Need I say more? Yesterday I spoke with William Brainard, another Yale professor who worked with Mr. Tobin, who remarked on his colleague's ''faith in the power of ideas.'' That's a faith that grows ever harder to maintain, as bad ideas with powerful political backing dominate our discourse. So I miss James Tobin, and I mourn not just his passing, but the passing of an era when economists of such fundamental decency could flourish, and even influence policy.

Bad ideas with powerful political backing may still be leading to some rather sharp elbows being thrown – but it would seem Christina Romer represents a return to fundamental decency.


Shag from Brookline said...

"(such as the best man at my wedding, Greg Mankiw)"

Mankiw may have been the "best man" at his own wedding. Just ask him.

TheTrucker said...

I am very fortunate in that I do not understand nor appreciate calculus and am thus not afflicted with "models" that have nothing to do with reality. But I can't understand why otherwise seemingly intelligent people can be so enamored and misled by "models" that leave all the important factors out of the mix. So often we see the monolithic monotonic "tax" word; as though there was some sort of flat tax on production and spending (and this happens fervently with Republican apologist "economists"). And from the Keynesian corner we have the "multiplier" people who are guilty of the same presumptuousness and seem to believe that whether government spends money on machine guns, condoms, or lollipops, or just hands out money to the rich by bailing out the banks then there will be this exchanging of dollars among the folks and they will "pump up" the economy. Of course, giving money to rich people who will supposedly "invest" it in production while the people who would buy all the produced stuff are all broke is idiocy on steroids. But this is the idiocy that prevails among the Republican stalking horses for the rich.

There is no such thing as "economics" other then "econometrics". There is instead this stuff called "political economy" where we ask the questions about "What should society/government do to facilitate the prosperity of the vast middle class". It is a utilitarian question. If tolerating rich people actually increases the prosperity of the middle class more than non tolerance then rich people are tolerated because it is "good for the economy/society". Otherwise such tolerance has no real economic basis.

To tax carbon and redistribute the proceeds to the bottom of the economic ladder is probably one of the most sane proposals to come along in a very long time. This is also true of import tariffs (and similar redistribution of that money) in that the offshoring would cease very quickly. Yet in the latter example we have the non reality based community that would claim an analogy between the trades between regular folk and the trading that occurs between nations that have something close to chattel slavery (China) and those that are simply trying to "catch up" in the race toward such slavery (the Republican/conservative United States).

When will common sense ever return to economic discussion? The Chinese need to fix their problems and so too do the Mexicans. Many of us will be pleased to send guns and tanks and whatever to help the people liberate themselves from their oppressors. But this is sort of hollow in that we don't seem to be able to do it right here at home where it can be done politically and without all the guns (I am not a violent sort of fellow). Yet I find myself wondering when will we return to witch burning in the case of pretentious "economists"? OOPS! That would be violent... Of well.