A Depression Averted? (Part 2)

The Blinder-Zandi paper I mentioned here is now online. I think it’s an excellent paper if only for the way it brings together all of the measures taken by the Federal Reserve, the U. S. Treasury, and the U. S. Congress in response to the financial crisis and subsequent economic downturn in a convenient, single place.

In my view it, too, has the problems that are apparently commonplace is economics—measuring inputs rather than outputs and making post hoc arguments. For example, I think their demonstration that consumer spending rose as a consequence of measures in the ARRA is particularly weak. That spending can be deferred does not imply that it can be deferred indefinitely. I see no way to determine whether the increased spending would have just taken place anyway. In addition the scale of the graph they used is inadequate to determine the effects of timeshifting from potential future spending.

I would sum up the takeaways from the paper like this. According to the authors

• The steps taken (mostly by the Fed) have been effective in averting a complete meltdown of the financial system.
• The ARRA (fiscal stimulus) has been less important in producing an economic recovery but not negligible, either.
• State budgets would have been in even worse shape than they are without the ARRA.
• The tax cuts that were part of the ARRA were effective in boosting consumer spending.
• The Keynesian multipliers were highest on the additions to spending for food stamps, lowest for certain tax cuts.

Update

Arnold Kling’s reaction to the paper is “Let’s do the time warp again!”:

If macroeconometrics were a viable paradigm, we would have seen major efforts to try to bring this sort of model up to date from its 1975 time warp. However, for reasons I have documented, the profession has decided that this macroeconometric project was a blind alley. Nobody bothered to bring these models up to date, because that would be like trying to bring astrology up to date.

There are more detailed criticisms at the link.

He also says here that the reason that their study wasn’t published in a peer-reviewed publication is that its statistical and theoretical approaches would not have passed muster.

Update 2

Tyler Durden is even more critical:

Yesterday’s “paper” (more in the napkin sense than as a synonym for “intellectual effort”) by Mark Zandi and Alan Blinder, which was nothing more than a glorified cover letter for selected perma-Keynesian posts in the administration’s Treserve complex, was so outright bad we did not feel compelled to even remotely comment on its (lack of any) substance.

For substantive criticism he directs us to Stanford economist John Taylor’s Economics One:

I have now had a chance to read the paper and have more to say. First, I do not think the paper tells us anything about the impact of these policies. It simply runs the policies through a model (Zandi’s model) and reports what the model says would happen. It does not look at what actually happened, and it does not look at other models, only Zandi’s own model. I have explained the defects with this type of exercise many times, most recently in testimony at a July 1, 2010 House Budget Committee hearing where Zandi also appeared. I showed that the results are entirely dependent on the model: old Keynesian models (such as Zandi’s model) show large effects and new Keynesian models show small effects. So there is nothing new in the fiscal stimulus part of this paper.

Second, I looked at how they assessed the impact of the financial market interventions. Again they do not directly assess the interventions. They just simulate the model with and without the interventions. They say that they have equations in the model which include the financial interventions as variables, but they do not report the size or significance of the coefficients or how they obtained them.

Third, the working paper makes no mention of previously published papers in the literature which get different results. It is rather standard in research to provide a literature review and to explain why the results are different from previous published papers. For the record there are different results in papers by John Cogan, Volcker Wieland, Tobias Cwik and me in the Journal of Economic Dynamics and Control, by John Williams and me in the American Economic Journal; Macroeconomics, or by me published by the Bank of Canada or the St. Louis Fed.

He also notes that the appendix of the paper points out that policy actually performed worse than the model said it should. That reminds me of a wisecrack from an old professor of mine, Bergen Evans: “I never pay much attention to any student’s paper until the first ‘however’.”