Some Further Comments on Blinder-Zandi
By Arnold Kling
The Kling post goes a bit far. Plenty of respected macroeconomists still use macroeconomic models, which is in itself a refutation of the idea that “the profession has decided that this macroeconometric project was a blind alley.” Alan Blinder, for instance, is part of the profession, and so is the president of the Minneapolis Fed, who wrote this paper on macroeconomic modeling.
This is an issue on which I have a bit more background and experience to share with Klein. I will put my discussion below the fold.
Modern macro models can be traced back to a revolution that began in the 1980s in response to a powerful critique authored by Robert Lucas (1976).
…these newer models do imply that government stabilization policy can be useful. However, as I will show, the desired policies are very different from those implied by the models of the 1960s or 1970s.
By Kocherlakota’s definition, the Moody’s model that Blinder and Zandi used is not modern. It is a model from the 1960’s or 1970’s. Kocherlakota’s generation of macroeconomists would reject the approach used in that model.
Kocherlakota would say that modern macro methods are better. I would say that they are different, but not better.
Robert Solow disapproves of the “representative agent” found in modern macro models. So do I. There is no specialization and trade in a representative agent model. Since I think that economic activity consists of sustainable patterns of specialization and trade, in my view these models contain no economic activity. Consequently, they capture none of the characteristics that I think are important for explaining macroeconomic outcomes.
However, the same criticism applies to the older generation of macroeconometric models. They are effectively representative-agent models, also.
The difference is that the older models impose habit-based expectations, while the newer models impose model-based expectations. For an explanation of the difference, see Installment 9. Kocherlakota’s generation of macroeconoimsts think that model-based expectations represent a big improvement. I think that insurmountable problems remain, as explained in my lost history paper.
It’s also worth noting that the private sector relies extensively on these models, and it would be odd for them to give Moody’s all that money if they thought there was no predictive value.
If you took away Mark Zandi’s government contracts, could he still support his operation? Don’t be too sure. When I was Klein’s age, there were more companies in the modeling business, and I believe that they were more profitable. The industry has shrunk for a reason. In the 1970’s, people learned that you can forecast macro data more accurately and much less expensively using pure time-series statistical techniques.
Elsewhere, Klein interviews Blinder, who says,
I was surprised, and I think Mark was too, by the very large effects we got from the compression of interest rate spreads, which is how we modeled the effects of the financial policies.
Again, Blinder and Zandi are very opaque about what they did here. But:
(a) they attributed the decline in interest-rate spreads to a change on the supply side (government intervention) rather than a change on the demand side (less demand for loans). John Taylor, who tried to use event-study methods to determine the effect of financial policy on spreads, vigorously disputes this.
(b) They proceed to start from a baseline in which interest-rate spreads are low, supposedly due to policy, and then simulate an alternative scenario in which interest-rate spreads remain high. They then mechanically crank through the impact of these higher spreads. As low as spending on consumer durable goods and investment was in 2009, the simulation would say that spending would have been even lower. We cannot gauge the plausibility of this extrapolation, because Blinder and Zandi do not report any sectoral results. For all we know, the model cranked out a negative number for housing starts, and they just took that at face value.
In another part of the interview, Blinder advocates
a WPA-like program of temporary, direct, public hiring. People could work in parks, in maintenance, the many paper-shuffling jobs there are in government. You could save a lot of state and local jobs that would otherwise be terminated.
He is advocating what I would call the creation of unsustainable patterns of specialization and trade. The Keynesian multiplier idea is that people engaged in unsustainable jobs will then spend money that will lead to the creation of sustainable jobs. This is what happens in macroeconometric models, because that is how they are constructed. However, such models do not even recognize the difference between sustainable and unsustainable patterns of specialization and trade.
In macroeconometric models, spending is spending, and spending is good, regardless of where the spending goes. If you think that captures reality, then you might buy into the models. If not, then you would prefer a different model.
I would prefer a different model. However, I am quite pessimistic about the statistical properties of macroeconomic data for the purposes of undertaking a modeling exercise. Again, see my “lost history” paper.