How Effective Are George Bush’s Tax Cuts? Don’t Ask the Economists

Here’s heartening news for all those who believe that economists not only can’t predict the economic future, but can’t even describe the economic past. Daniel Altman, for his Economic View column for the New York Times, e-mailed the 177 members of the National Bureau of Economic Research who concentrate on economic fluctuations and growth. He asked them a seemingly simple question: “Which factor was most important for the economy’s growth from mid-2003 through the end of 2006?”

You might immediately argue, of course, that the question isn’t really that simple. Especially when you see that Altman offered only multiple-choice answers:

a. The tax cuts signed by President George W. Bush.

b. Pent-up demand following the recession, the corporate scandals and the invasion of Iraq.

c. Both (a) and (b) were important.

d. Neither (a) nor (b) was important; it was the regular business cycle.

e. There’s no way to tell now.

Altman acknowledges that his proposed answers “didn’t include anything having to do with monetary policy, including the Federal Reserve’s actions, global interest rates or the refinancing in the home loan market — factors that could have been important.”

Of the forty-nine economists who replied, five chose (a), three chose (b), three chose (c), and “the majority,” Altman wrote, “30 economists, answered neither or supplied an answer not listed.”

What follows in the article is a very interesting discussion and sampling of various views, crowned by this gem from Paul S. Willen of the Boston Fed: “[I]f we hold ourselves to the highest standards of scholarly rigor, we could not answer anything but (e).”

Altman, btw, has a new book out, which I’ve only glanced at but which seems intriguing: Connected: 24 Hours in the Global Economy.


welkerjason

I sympathize with jpez's skepticism, and it amuses me to see among 49 leading economists at least 10 various theories regarding the source of growth. Interestingly, those mentioned cover just about all the possibilities taught in a principles course, so this should make my own AP students feel pretty good, being as any one of them, when posed with Mr. Altman's question, choosing randomly from the "sources of growth" section of our text, could find at least two or three Ivy League PhD's who would agree with them! (never mind the 46 with their own different theories!)

egretman

...you can sort of explain what psychology is...

If only.

jpez

...

giromide

jpez... I think scholars like the authors of Freakonomics might be on the right track with economics. A psychological or sociological element needs to be added. After all, advertising, a tool widely used to sell goods, has a large psychological component built in.

Here's an exercise: Can you explain the success of the iPod with economics alone? I don't think you can.

Mack

@jpez -

Micro is, for the most part, scientific (consists of testable / falsifiable axioms and theorems).

Macro, which is what's being talked about here, is to put it kindly a 'soft' science. There have been many useful broad-brush theories, but nothing with any rigor, or as you say, meaningful predictive power.

giromide

Mack... jpez is likely learning macro if he's taking AP Econ. Micro is certainly more rigorous, but I think there are some elements in reality that don't quite follow the models.

mathking

Mack, I am not so sure I would agree about that micro/macro divide. Far too many of the "testable" axioms of microeconomics rest on assumptions that are, for practical purposes, the economics equivalent of the frictionless surface. And macroeconomics really brought the power of statistics to the fore in economic analysis. (Because the pretty but not necessarily realistic mathematical models of micro were too hard to create.)

As for the iPod's success, way too may people offer a puzzled "Why is it so popular, my _____ MP3 player is just as good and $50 less."
1. Good marketing campaign - TV/Web/Print ads look cool
2. Make it easy to use
3. Good marketing campaign - Generate word of mouth
4. Make it reliable
5. Good marketing campaign - Make it look cool
6. Try to address problems quickly, to avoid hurting #3
The iPod phenomenon is particularly interesting because it is not like people were looking for someone sell them a music player. Apple basically had to construct the market. Basically, Apple has done a good job keeping demand for the iPod high. Whenever it has looked as though demand would lag, Apple has come up with some new iPod or new service on iTunes to get people excited again. When demand is high people will pay more for a product. So what is the better product, the Zune or the iPod? Can two rational, intelligent, informed human beings look at the same information and come to different conclusions about what to buy?

Which comes back to microeconomics. There is a whole lot about how microeconomic systems operate that is dependent on how human beings make decisions. And very rarely are those decisions based on purely numeric considerations and perfect information. So of course it is going to be hard to make predictions.

A question for jpez: Are meteorologists scientists?

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frankenduf

as a wise woman once said- the correct answer to almost any question you encounter in life is: it depends

synapticmisfires

How is it failure of Economics to not answer that question. Frankly, I think that neither or "no way to tell known" is the only responsible answer.

I'll admit that Macro sounds like a lot of hand-waving, i.e. I've never liked lectures that go something along the lines of "real business cycle theory requires completely flexible prices, this doesn't exist. Now let's learn how to apply real business cycle theory."

But it's inevitable. There are some ideas in the physical and natural sciences once in a while too, the thing that holds Economics back from getting definitive answers is ironically that it is so much MORE tied in to the real world than most of science. I mean you can't duplicate monetary policy changes in a lab, you have to use a real world where even a naive interpretation would have your results varying in response to 30 variables, and the truth has infinitely many variables. I'm young too, like jpez, I took AP Econ last year, and am a freshmen this year, and for those of you losing faith, it gets a lot more definitive with econometrics, but at some point you have to admit that economics and the social sciences have a far more difficult job than other sciences.

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synapticmisfires

(2nd paragraph) *I meant to say there are some _odd-sounding_ ideas in the physical...

chesapean

I agree with jpez. You can sort of explain what physics is and you can sort of explain what psychology is, to just about anyone you meet. But you can't explain what economics is to anyone at all!

Should be doable, though. My own interest in it started with the question: When bubblegum went from a penny a piece to five cents, did the value of a dollar drop from 1 to 0.20?

NumberCruncher

Reminds of that old adage:

In physics there are 3 theories that explain 97% of the data. In economics, it's the reverse. ;)

baiano8

If any of you are interested in science, I suggest checking out:

http://beyondbelief2006.org/

Video#4 (after clicking on the "Watch" link on the left) is especially interesting. Enjoy.

Jeffery Faulk

First off, I don't believe the economy improved during that period of time. Only the very top earners enjoyed an increase in wealth. The rest of us (better than 80%) took it in the shorts.

synapticmisfires

Physics? String theory.

Psychology? Freud.

Believe me, every discipline has unanswerable questions, or things that don't quite add up. It's our job, to pick a discipline and make those questions a little less numerous.

dreck

First of all, jpez, you're in AP economics, so you're just beginning. Contrast it with AP physics, where you assume frictionless surfaces, no air resistance, and all kinds of controls for variables you don't know what to do with yet. The thing about the real world is (especially with macroeconomics) there are a LOT of variables at work. Economic models account for only a few at a time, just like in every other science. This is what makes economics a science, the presence of things we don't completely understand. So instead of complaining about the endless supply of doubt and questioning and arguing. That stuff happens in any scholarly field.

dreck

Oh, and the choices were terrible. I would have left that blank too.

welkerjason

I sympathize with jpez's skepticism, and it amuses me to see among 49 leading economists at least 10 various theories regarding the source of growth. Interestingly, those mentioned cover just about all the possibilities taught in a principles course, so this should make my own AP students feel pretty good, being as any one of them, when posed with Mr. Altman's question, choosing randomly from the "sources of growth" section of our text, could find at least two or three Ivy League PhD's who would agree with them! (never mind the 46 with their own different theories!)

egretman

...you can sort of explain what psychology is...

If only.

jpez

...