This morning I want to make a brief comment about Paul Krugman’s column for today, not because I necessarily disagree with it but in order to reflect on the use and misuse of mathematical models in economics or anything else for that matter. Dr. Krugman observes:
These days it’s hard to pick up a newspaper or turn on a news program without encountering stern warnings about the federal budget deficit. The deficit threatens economic recovery, we’re told; it puts American economic stability at risk; it will undermine our influence in the world. These claims generally aren’t stated as opinions, as views held by some analysts but disputed by others. Instead, they’re reported as if they were facts, plain and simple.
Yet they aren’t facts.
That’s quite right. They aren’t facts. They’re conclusions drawn from some combination of mathematical models of the economy, observed facts, and, probably, intuition into people’s behavior. And when Dr. Krugman continues:
Let’s talk for a moment about budget reality. Contrary to what you often hear, the large deficit the federal government is running right now isn’t the result of runaway spending growth. Instead, well more than half of the deficit was caused by the ongoing economic crisis, which has led to a plunge in tax receipts, required federal bailouts of financial institutions, and been met — appropriately — with temporary measures to stimulate growth and support employment.
The point is that running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do.
that isn’t a fact, either. It’s another conclusion derived from mathematical models, observed facts, and different intuitions into human behavior.
You may have seen the graphs, produced by President Obama’s economic team, showing what unemployment would have been in 2009 and 2010 without the spending package they supported and with the spending package they supported. Their predictions were wrong both in amplitude (how high unemployment would get) and frequency (the period over which unemployment would continue to rise). The most obvious conclusion from that is that their models were wrong.
However, continuing to refer to these models as if they were facts is even more wrong. Taking a single set of incorrect assumptions and deriving two sets of incorrect numbers from them, varying one parameter, tells you exactly nothing about the underlying reality.
I don’t know if deficit spending is an effective means of stimulating economic growth or not. It’s certainly what I was taught when I took economics. It’s not the model that determines whether it’s right or wrong but the underlying facts. It may be possible that the optimal deficit spending package implemented with perfect timing could have the predicted effect, real deficit spending packages implemented in real timeframes don’t. It’s the facts that determine that not the models.
In a few minutes the Bureau of Labor Statistics will be presenting us with more facts or something approximating facts: last month’s unemployment figures. Ignore the models and consider the facts, whatever they may be.