Noah Smith lets his freak/scientist flag fly. Says he can't conform to tribal thought because he has to follow scientific principals.
Sounds good, and I agree with a lot of what he's saying.
But then he lets fly with this:
"RBC models say that small government is good."
YIKES!
Where to start?
Real Business Cycle models do not "speak" with one voice.
Most people who advocate for small government wouldn't know an RBC model if it bit them it the butt.
Very few people actually use RBC models in this day and age. Virtually all models now have monetary sectors and some form of monetary non-neutrality and are thus referred to more generally as DSGE (dynamic, stochastic, general equilibrium) models. RBC theory is a useful teaching tool, but I don't know anyone using it as a guide to policy.
I have never seen in any RBC or DSGE paper I've read (which easily would be 100+ papers) a statement like "thus we see small government raises welfare". Perhaps Noah is inferring his statement from the fact that some early RBC models didn't have government in them? Or that some early RBC models argued that business cycle fluctuations were optimal? I'd be very curious to see the money quotes to support Noah's statement.
If I do think to think about some type of generic RBC model, the government could easily have a large and important role as a funder of basic research leading to improved technological progress.
Howdy! :)
ReplyDeleteReal Business Cycle models do not "speak" with one voice.
True, and I am speaking loosely of course, using "RBC" to mean "any model in which supply shocks are the main driver of business cycles". Ed Prescott would probably approve of me using the term...
Most people who advocate for small government wouldn't know an RBC model if it bit them it the butt.
Very true. And this butt-biting happens more often than one would think...
Very few people actually use RBC models in this day and age.
Not in core macro they don't. But have you taken a look at the asset pricing literature or the international finance literature lately? It's all technology shocks with monetary neutrality, not a demand shock in sight!
Perhaps Noah is inferring his statement from the fact that some early RBC models didn't have government in them? Or that some early RBC models argued that business cycle fluctuations were optimal?
Yes, in fact those are exactly the two things to which I was referring! :)
Also, in those models there is no role for monetary stabilization policy either.
If I do think to think about some type of generic RBC model, the government could easily have a large and important role as a funder of basic research leading to improved technological progress.
No argument here (I spend a lot of time saying this).
But you may notice that the crowd of people who tends to like RBC models because of the political implications (notice I'm not naming names) tends, when the public goods question comes up, to shift gears and label research and infrastructure spending as wasteful pork.