Friday, January 23, 2009

Robert Barro's WSJ Op-ED on Fiscal Spending

There he goes again...
Robert Barro is nothing if not an accomplished economist with a penchant for skewing stats in his favor. His recent WSJ article, he once again plays fast and loose with some data and purported facts on the way to trashing the use of fiscal policy...

Let's remember that one of Barro's most memorable opuses on this WSJ Op-Ed page came in 1993 when he trashed Clinton's pick to head the CEA (Council of Economic Advisors), Laura Tyson. Tyson was selected and Barro was incensed that one his more favored (male) Ivy League counterparts was not selected -Paul Krugman had been widely mooted as one of the front runners for the job). Barro proceeded, in the best spirit of the fable of the sour grapes, to show 'statistical evidence' that the CEA position was so unimportant that it did NOT matter who was there. He produced statistical results that demonstrated that the economy did best when the office of the CEA was VACANT.

Well, gee there' a real boost for economics, Robert- thank Yoouuu for that.

Barro's CEA fantasies
There are several points here. One is that no one thinks the CEA head runs or sets economic policy to begin with. It is mostly a platform to make ideological points. Few CEA heads seem to have influenced policy all that much. You work for the President after all - not the other way around. The Administration's economic implementation team is at Treasury or in the White House (recently) as the NEC (National Economic Council). Treasury Secretaries are powerful. The CEA position is a bit above ceremonial but is not the economic juggernaut Barro seems to contend with his statistical analysis. Still Barro was angry enough that 'his guy' or someone similarly credentialed did not get it that he lampooned Tyson then produced the study that the WSJ ran in its Op-Ed page.

Figures lie and liars figure
With econometrics, a little time, and playing with lag structures there is no end to what you can find...maybe even a a cure for cancer, but one that wouldn't work ex-post.

Barro's sin du jour...
In the January 22 Op-Ed section of the Wall Street Journal Barro opines on fiscal spending and the size of the multiplier for government spending. He makes one particularly egregious and obnoxious statement after noting how difficult it is to make these estimates correctly. He goes back to the US WWII (1943-44) expenditures on the war and finds that the multiplier was less than unity, at 0.8. That means government spending caused other spending to fall so that the net result was that GDP increased by only 80% of the government's outlays. While the military spending did raise GDP dollar for dollar, as any accountant knows, the economic impact was to reduce spending elsewhere in the economy. The net impact was a MINUS not a plus!

Don't prove or justify but ASSERT!
Before making this point Barro goes on to take this amazing assertion, saying that he thinks that large expenditures on military goods by the government make a particularly good example of fiscal stimulus. He then says (I suppose with a straight face) " I think that most macroeconomists would regard this case as a fair one for seeing whether a large multiplier ever exists.' And that is the brilliance of assertion. Assert your study to credibility.

Wow! I For my part, doubt any good macroeconomist would agree with that!

How statistics works or fails...
For one thing there is the matter of statistical association. In the war period, consumption dropped and rationing was in effect. People were dishoarding, donating scarce metals for the war effort and planting victory gardens. People were consuming less of everything as goods were pulled out of the private sector to serve the war effort. Women could not get silk stockings, since silk was used for parachutes. All sorts of things were rationed but Barro runs his regressions, not mindful of these facts...numbers, t-statistics, R-squared to run regressions....

Losing track of causation
I have not seen his model or statistical results other than what he presents in his OP-Ed. But forget the data and think. If private sector consumption was falling and you start increasing something else (whatever- call it government spending) you are going to get a negative correlation (and probably a causation link) between this thing that is expanding and the other thing that is falling. I don't even begin to believe that war spending had a negative impact as we might construe it in a modern fashion. It may have contracted private investment and consumption by monopolizing ('mobilizing' would have been the term used in its day...) all the available resources for the war effort. But that is stimulus with scarcity (not with plenty of idle resources) - it's not the same thing Robert baby. Sure unemployment was high but there were product constraints BECAUSE OF THE WAR. Consumption fell BECAUSE OF THE WAR not BECAUSE OF GOVERNMENT SPENDING - post hoc ergo proper hoc, Mr Barro.

THIKN! err think?
Thought experiments serve us better here. Even if there was some negative impact from government spending due to imposed rationing or the military soaking up most of the natural resources the objective of the day had been to WAGE WAR not to stimulate the economy. All those war time jobs did help to put people back to work. Unfortunately many of them were 'working' in Europe and in the Asian Theater and their 'efforts' were not doing much to stimulate those economies either. Are we to believe that all the military spending in the US had no positive impact? How would you ever measure that and control for war? War. Ugh! What is it good for?

Face value? About face!
In short Barro, in carting out this result, has showed us how unreliable and capricious empirical economics can be when it is mis-applied to a set of data to which it is not suited. His results should stand as warning as to why you never EVER take this stuff at face value.

Application to current events--coming full circle
Barro's warning about runaway fiscal stimulus still seems to be on the right track. Barro is often on the right track but then let's his ideology sidetrack him. I am skeptical of so much fiscal stimulus. But you still have to look at the facts on the ground. You have to look at what is wrong and what the government (and Fed) actions are trying to fight off. History will not necessarily have a kind view...but that does not mean it was a wrong thing to do, but it may not prove to be the best thing to do.

A prospective retrospective
The government is now borrowing when the private sector won't. If you, in 20 years, were to go back and run regressions you'd find there had been 'a crowding out' in the credit markets. You'd find that public borrowing 'pushed out' private borrowing. But, in reality, nothing could be further from the truth. The Fed's lending survey tells us the real story. Banks are cutting back and tightening standards. Statistics could find causation running from more government activity to less private sector activity in the credit markets. But we know that would muddle the true cause and effect here. We know which is the cart and which is the horse.

Think critically!
So regardless of some one's high confidence estimates on some economic estimates do not forget to subject it to the old fashioned scratch and sniff and cranial crunch tests. If it seems an odd ball conclusion it probably is. It helps to know the bias of the economist doing the empirical work, too. You can be sure that there are few conservative economists coming up with work saying more regulation is good and fiscal stimulus works. And few (If any) liberal economists will find the opposite. Why is that? Just the luck of draw on empirical work or bias?

Bias is as bias does
Just a thought: there are many different kinds of bias. Just because you can't find any of the statistical sort does mean there is not any of the other sort present: personal bias.

What it all means for us now
Obama's plan remains as the political football it has been from the start. Let me also warn of all the 'democrat' economists whose studies are showing how much stimulus is needed. Those saying (like Christine Romer- head of the CEA!) that the crises will not have passed even in four years time are looking for more excuses to spend even more now. Beware of this too.


Anonymous said...

People don't care if Obama is right or wrong but only care if you question him. Americans are so desperate, they want anything Obama produces to work and do not care if he proposes everyone go naked to save money. If Obama says it, it must be true.

Mass of sheep don't care to hear any criticism of a president elected under so much fanfare and with little substance. I mean, no sane company in the world would hire somoene with 3 years experience to run the company.

Instead of looking at criticism as sound logic prose, Americans only see you as an Obama hater if you question why our president is spending som much time in Congress battling how a piece of legislation should be written rather than doing HIS job as PRESIDENT of the EXECUTIVE branch and dealing with the war in Iraq, relationships with foreign countries, etc... Obama is using his presidency to say and do all the things he couldn't as a junior congressman. Instead of seeing this as a fact, Obama supporters forget the Constitution, forget separation of powers and forget checks & balances form of gov't and support Obama the president, the congress and soon, the supreme court. Dictator in the making in most other countries, but in the US, it's called "change."


Fiscal control is needed.