Sunday, May 13, 2007

Economists not agreeing

Economists are still debating the Great Depression so it is no surprise that there is little agreement on the causes of current growth. Daniel Altman reports (today's NY Times, see below) on his "Pop Quiz" sent to the NBER economists that look at macro-economic fluctuations. He finds that economics is "not an exact science."

When I first started following politics in the news, I was always intrigued that pollsters and economists hired by any candidate were routinely identified as by their party affiliation. Why was that any more relevant than, say, their religion (I thought)? Silly me. Neither can seriously be presumed to offer purely "scientific" advice. So why are they hired?

Politicians have certain instincts and they hire all sorts of advisors that might elaborate them. As is the case with all political consulting, it is easy to spot the gaffes but much more difficult to identify the successes. Politics is not an exact science.

Pop Quiz: Did the Tax Cuts Bolster Growth?

POLITICIANS from the president on down have lately been saying
that the tax cuts passed in 2001 and 2003 were responsible for the quick growth
of the economy starting in mid-2003. That growth has since tapered, but as
Republicans lobby to make the tax cuts permanent,
it’s worth asking — are they right?

I decided to pose that question to a large group of mainstream
economists through an informal survey. The answer, in a nutshell, was no — the
tax cuts don’t deserve most of the credit for the economy’s strong growth. But
there was a lot more to the story.

Here’s how the information was collected. Last week, I sent
e-mail messages to the 177 members of the National Bureau of Economic Research’s
program on economic fluctuations and growth. The bureau is the nonpartisan,
nonprofit institute whose macroeconomists conduct their own research and
ascertain the timing of the nation’s booms and recessions.
The e-mail message had just one question: “Which factor was most important for the economy’s growth from mid-2003 through the end of 2006?”

It offered the economists five possible responses:
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.

As a check of the economists’ willingness to answer beyond the
multiple choices, the options 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.

Forty-nine economists responded to my message, including many
of the best-known names in the field. Of these, only five, about 10 percent,
said that the tax cuts were the most important factor in the economy’s growth.

Two were Nobel laureates known for their conservative
views — Robert E. Lucas Jr. of the
University of Chicago and Edward C. Prescott of Arizona State University. Two other professors, Martin S. Feldstein of Harvard and Gary D. Hansen of the University of California, Los Angeles, qualified their answers by mentioning other factors.

Three economists chose pent-up demand, and three answered

But the majority, 30 economists, answered neither or supplied
an answer not listed. Robert E. Hall of Stanford wrote that “the U.S.
economy recovered from every single recession it ever had, so the growth in
2003-2006 was generally part of the normal cyclical recovery.”
Several economists volunteered other factors, among which monetary policy was the most

“I can’t believe you left off the list: superlow interest
rates caused by the Federal Reserve,” wrote Alan S. Blinder, a Princeton
professor who was vice chairman of the Fed in the mid-1990s. Paul M. Romer of
Stanford echoed Professor Blinder’s sentiments.

Robert J. Gordon of Northwestern University added: “I hope others
tell you that your question is absurd, because it leaves out the most obvious
cause — an unprecedented period of negative short-run interest rates that fueled
spending on housing, made possible consumer cash-outs through mortgage
refinance, and also supported consumer spending more generally.”
Some professors were just as adamant in supporting an alternative hypothesis, arguing
that changes in productivity had been responsible for the economy’s

“Productivity growth and financial innovation are the big
stories of the 2000s,” said Kenneth S. Rogoff of Harvard. “Innovation helped
cushion the economy during the 2001 downturn, and fueled a stronger than
expected recovery for several years thereafter.” Erik Hurst of the University of
Chicago said that “aside from the inventory correction in 2001, the growth in
2003-2006 was not that different than 1996-2000 (which had nothing to do with
tax cuts or pent-up demand).”

And one economist said that most of the factors named, with
the exception of the tax cuts, were part of the usual behavior that followed
recessions. “Pent-up demand following a recession sounds like the regular
business cycle,” wrote Robert J. Shiller of Yale. “Also, part of the regular
business cycle is the Fed and the behavior of speculative

DEBATES about the business cycle aside, most of the
respondents were unconvinced by the politicians’ claims about the benefits of
tax cuts. In fact, one actually argued that the tax cuts hurt the economy. “The
tax cuts, by increasing uncertainty about how impending fiscal imbalances will
be resolved, probably hurt growth, if anything,” said Christopher A. Sims of

That wasn’t the only point of contention, though. A similarly
contrary argument was suggested by Lee E. Ohanian of U.C.L.A. concerning the war
in Iraq. “Large increases in military expenditures are almost always associated
with rapid growth (e.g. World War II, when government spending reached about 70
percent of trend output), but the size of the Iraqi conflict spending is quite
small as a fraction of total income.”

Economics is not an exact science, even in hindsight. Indeed,
economists rarely say that they’ve proved an empirical hypothesis. Rather, they
say that a hypothesis can’t be ruled out. In that spirit, several answered that
there was no way to say for sure which factors had caused the economy to

Paul S. Willen, a senior economist and policy adviser at the
Federal Reserve Bank of Boston, said that he would answer “neither,” but added
that “if we hold ourselves to the highest standards of scholarly rigor, we could
not answer anything but (e),” the response for there’s no way to tell now.
Perhaps, for the politicians, a similar measure of caution may be warranted.