Wednesday, October 19, 2011

My kingdom for a counter-factual

Popular Macro debates are getting so tiresome, strident and pointless. The standard of what counts as evidence has fallen to ludicrous levels, even for people who should know better.

For example, consider this common line of reasoning: Tax cuts don't work. After all, taxes were higher under Clinton than under Shrub and the economy performed better under Clinton.

Or this one: Stimulus doesn't work. After all, we spend $800 billion and unemployment just kept going up.

Both of these arguments are non-germane and virtually worthless because no reasonable counterfactual is being offered.

We are not told what would have happened under Clinton if taxes had been cut, or what would have happened under Shrub if taxes had not been lowered. The comparison offered holds no water because it is unreasonable to assume that the only factor that varied between the two time periods relevant for explaining economic outcome is the Federal Tax Schedule. We know that is not true.

The stimulus argument is even weaker. To evaluate its effect, we need to know what would have happened without its application. It is unreasonable to assume that the only factor that varied which was relevant for unemployment was the stimulus.

People, anytime you see a strong empirical claim being made and the supporting evidence is a graph or an anecdote or simple comparison of A vs. B, ask yourself: what is the counterfactual being offered? Is it reasonable?

To my mind, it is precisely because Macro is a non-experimental field (meaning convincing counterfactuals are difficult to find) that it has become so politicized. People can look at the same events and draw diametrically opposing conclusions.

Macro has all the interesting questions, but Lord is it hard to find good answers!


Michael said...

It's a shame this post didn't generate a discussion in the comment section, because I've thought of it several times each week since I read it.

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