Saturday, July 15, 2006

Economic models and economic bottom lines

The Economist of July 15 includes "Big questions and big numbers ... We cannot live without big and ambitious economic models. But neither can we entirely trust them. ... But all models should ultimately be seen as pedagogical devices, their calculations a means to the end of helping policymakers think through their decisions. ..."

In a better world, the produces and the consumers of the models would heed this advice. In this world, modelers can and often do oversell while policy makers have been known to use models as window dressing to misrepresent and further their real agenda. Bent Flyvbjerg's work exposes the dark side.

Post-WW II U.S. economic growth has been impressive and without a major recession but it has piled up crushing unfunded liabilities in Social Security, Medicare and its recent expansions. Have good and/or bad models had a hand in the successes and the failures?