How the Blinder-Zandi Study Was Done
Alan Blinder and Mark Zandi used Zandi’s econometric model as the basis for a claim that the stimulus and the TARP worked. Thirty-five years ago, I was Blinder’s research assistant, doing these sorts of simulations on the Fed-MIT-Penn model for the Congressional Budget Office. I think they are still done the same way. See lecture 13. Here are some of the things that Blinder had to tell his new research assistant to do.
1. Make sure that there were channels in the model for credit market conditions to affect consumption and investment.
2. Correct the model’s past forecast errors, so that it would track the actual behavior of the economy over the past two years exactly. With the appropriate “add factors” or correction factors, the model then produces a “baseline scenario” that matches history and then projects out to the future. For the future, a judgment call has to be made as to how rapidly the add factors should decay. That is mostly a matter of aesthetics.
3. Simulate the model without the fiscal stimulus. This will result in the model’s standard multiplier analysis.
4. Make up an alternative path for what you think would have happened in credit markets without TARP and other extraordinary measures. For example, you might assume that mortgage interest rates would have been one percentage point higher than they actually were.
5. Simulate the model with this alternative scenario for credit market conditions.
6. (4) and (5) together create a fictional scenario of how the economy would have performed had the government not taken steps to fight the crisis. According to the model, this fictional scenario would have been horrid, with unemployment around 15 percent.
i) Blinder and Zandi do not spell out the details of step 1 or step 4. Thus, I have no idea how to evaluate their approach to estimating the impact of financial measures.
ii) Other than the add factors, and any ad hoc adjustments that were made in step 1, every result in the paper would have been found by simulating the model three years ago. There is no new evidence being brought to bear. What Blinder and Zandi are reporting is the Keynesian theory that was built into the model.
iii) They report model multipliers to two decimal places, e.g. 1.61 for extending unemployment insurance benefits. They do not provide confidence intervals or any other estimate of reliability.
iv) the paper has not been published in a peer-reviewed journal. The theoretical and statistical properties of the model probably would not be considered acceptable in modern practice. Even if those issues were overlooked, the intensity of the political rhetoric combined with the opacity of the exercise would cause difficulties for most editors of academic journals.
I do not think we will ever know what would have happened to the economy without the fiscal stimulus and the large monetary interventions. My guess is that the overwhelming majority of economists would agree that we will never know the answers to those questions. However, in the competition for public attention, Blinder and Zandi have two advantages. First, they support a narrative in which government experts did the right thing, which is comforting to government experts and all who believe in them. Second, at a tactical level, their use of an esoteric computer model along with those two decimals of precision, they intimidate journalists and other laymen.
I know that they think this is for a good cause. They really believe that the stimulus and TARP were good policies that got a bad rap. But in my view that does not justify this unseemly exercise in propaganda dressed up as research.