How Would We Know If a Bail-Out Worked? Take Your Stand
By Bryan Caplan
We’re still likely to see a bail-out in the near future. So here’s a question: If the bail-out happens, how will we know if it prevented disaster? If unemployment stays under 8%, proponents will say that the bail-out prevented a recession. But if unemployment hits 8% or higher, proponents will say that things would have been even worse without the bail-out. Opponents, of course, will flip things: Good conditions mean the bail-out wasn’t necessary, bad conditions mean that the bail-out made things worse.
Ex ante, though, basic Bayesian reasoning doesn’t allow us to claim that whatever happens confirms our position. If the occurrence of X raises the probability of A, then the occurrence of not-X must reduce the probability of A. See Eliezer’s classic essay.
Unfortunately, if you let people see whether X happens before they update, you can’t show that they’re being bad Bayesians. You only see how they updated, not how they would have updated if the news had been different.
So here’s my request: Tell us how you’re going to update in advance. Assume the bail-out happens. If unemployment stays below 8%, does that make you more or less confident that the bail-out prevented disaster? If unemployment rises to 8%+, does that make you more or less confident that the bail-out helped prevented disaster? If you’re a good Bayesian, you must give opposite answers to these two questions.
I’ll bite first. If the bail-out happens, and unemployment stays below 8% for the next two years, I’m going to become less confident that the bail-out prevented disaster. After all, even a near-miss with disaster should look pretty ugly. Alternately, if the bail-out happens, and unemployment hits 8% or higher during the next two years, I’m going to become more confident that the bail-out prevented disaster. I still won’t be convinced, but I’ll be less skeptical than I am now.
You can easily argue with my judgments. My point is that you can’t reasonably get more confident no matter what happens. One good way to make people believe reasonably is to get them to explain their updating procedure before they update. So who wants to go on the record? Anyone who does rises in my eyes; and you know what that means about everyone who doesn’t, right? 🙂