Should Macroeconometric Models be Outlawed?
By Arnold Kling
Sometimes, people want something so badly that there is money to be made selling them a defective product. Werner Troesken’s paper (full version here) on the history of quack medicines offers an example. No matter how many of these medicines were demonstrable failures, the demand for new quack medicines was high. People who are really sick tend to cling to unreasonable hopes.
I want to suggest that decision-makers with a lot of power are desperately needy for scientific solutions in the same way that individuals with serious afflictions are desperately needy for remedies. As a result, decision-makers fall for models the way sick individuals fall for quack medicine.
In macroeconomics, the scientific basis for the sort of macroeconometric models that I learned to work with early in my career has been in doubt for thirty years. In that time, I cannot recall seeing a single peer-reviewed journal article that uses such models. And yet, those are the models that the Fed, the CBO, and private consulting firms use to make forecasts and assess the impact of stimulus measures. This paradox has been noted by Greg Mankiw in The Macroeconomist as Scientist and Engineer.
The way I see it, a question like “How many jobs will policy X create?” is not really answerable. Yet telling that to a policymaker is like telling a patient that his or her illness is incurable.
The only way to get patients to stop falling for quack medicine was to outlaw snake oil. This suggests a precedent for what to do about macroeconometric modeling.