I take Menzie Chinn's second attack on me as a compliment, as his blog Econbrowser is probably the most sophisticated economics blog extant and has been one of my favorites and a daily read for about two years now. But I fear for Econbrowser, because Dr. Chinn has established that I am a nihilist, while at the same time endorsing all my claims, which inescapably leads me to conclude that he, too, is a nihilist.
Let's approach Dr. Chinn's latest broadside, "Politico Joseph Lawler Goes Nihilist," piece by piece:
"... I take yesterday's CBO report as affirmation both that ... the number of jobs created by the stimulus cannot be determined without making judgment calls about the underlying economic model ..."
As far as I can tell, the logical conclusion of Mr. Lawler's article is that since all models forecast poorly, we should not use any models to make any policy conclusions, regarding output, regarding employment.
Dr. Chinn could have better comprehended the logical conclusion of my article had he looked at the actual conclusion, i.e. the conclusion at the end of the blog post:
I understand that CBO has come up with the best model they can. Obviously, it is not a pointless endeavor to try to provide some estimates of policy effects.
But those estimates should be viewed with appropriate skepticism, and the authors of the stimulus should not use them to make unwarranted claims about the brilliance of their handiwork for electoral purposes.
In other words, I explicitly distinguish my interpretation of the CBO's report from the nihilist interpretation: "Obviously, it is not a pointless endeavor..." means that it is so obvious that there are benefits to a CBO-style estimation that I do not have to outline such benefits here. I presumed that the reader would understand that and interpret that my conclusion was instead that CBO-style estimates should be viewed with "appropriate skepticism" given the assumptions that go into those estimates. Unfortunately, Dr. Chinn has proved that a naive presumption on my part.
After reading the CBO report, here is Mr. Lawler's most telling indictment:
"the CBO's methods include some sweeping assumptions (which are typical in standard Keynesian models) about the economy, and anyone trumpeting the CBO's findings should include qualifiers about those assumptions.
Here's how the CBO comes up with the employment numbers. Instead of trying to count the reported jobs and extrapolate from those numbers, they look at the total amounts spent by the government so far, and then estimate the effects of those expenditures using evidence from similar policies in the past and sophisticated macroeconomic models"
At this juncture, I laughed and laughed and laughed. Aside from the fact that Mr. Lawler neglected tax cuts and rebates in the stimulus package...
I apologize for using "spent" to refer to all of the funds in the stimulus. I should have made it clearer that I was referring to spending, tax cuts, and rebates. Nevertheless, Dr. Chinn should have been able to discern my intent, since he also reported on the CBO's analysis. I would assume that in reporting on the analysis Dr. Chinn looked it over and read through its description of its methodology, including this, the sentence I was paraphrasing:
Therefore, looking at the actual amounts spent so far (where identifiable) and estimates of the other effects of ARRA on spending and revenues, CBO has estimated the law's impact on employment and economic output using evidence about how previous similar policies have affected the economy and various mathematical models that represent the workings of the economy.
Having read these words himself and understanding that I was simply paraphrasing for readers, Dr. Chinn, I would have thought, would give me the benefit of the doubt on a small ambiguity. Unless of course he is simply being tendentious.
Dr. Chinn finishes his sentence:
...the second paragraph describes how all economic analyses of the stimulus -- RBC, New Keynesian DSGEs, monetarist, and Keynesian -- would proceed.
But that's exactly my point. In fact, that is why, in my post, I took special care to note which of these models the CBO included in their analysis. As I wrote, the CBO specifically omits some kinds of general equilibrium models because "...the research results appear to be too dependent on particular assumptions for CBO to rely on them heavily." In other words, the CBO had to make judgement calls about the assumptions they utilize. No one is obligated to agree with those judgment calls.
Dr. Chinn finishes,
By the way, as far as I can recall, nonstructural VARs generally forecast output quite well. That would not necessarily mean that nonstructural VARs are useful for conducting policy experiments.
Here again we are in agreement. Nonstructural VARs (vector autoregressions) are what the CBO refers to as its "historical evidence" (Dr. Chinn can correct me if they use any other empirical methods in addition). They are one of the three kinds of sources of information on which the CBO based its February estimates of ARRA.
Now, in the CBO's most recent report, under the section titled "Updated Estimates of the Impact of ARRA," the CBO explains what they have changed since those original estimates. The only variables they have changed are the amounts the government has spent and given out as tax cuts or rebates. The estimates of multipliers based on a variety of models and VARs, the CBO writes, "have remained essentially the same...."
So if you had a priori reasons to doubt the forecast the CBO made in February (and you very well might, given the track record of parts of that forecast), those reasons also apply to their analysis of the stimulus's job creation. The CBO has not provided any further evidence that would validate or falsify the administration's predictions, or that would confirm their "jobs created or saved" claims.
In conclusion (this is both the logical conclusion and the actual conclusion of this post, by the way), Dr. Chinn and I are both nihilists. We share the same premises and similar premises lead to only one logical conclusion, which Dr. Chinn has identified as a nihilist one.
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