Krugman’s blog, 4/25/16

There were two posts yesterday.  The first was “Economics and Self-Awareness:”

Noah Smith has another interesting piece on methodology, inspired by the Friedman-Sanders economic projections controversy. His bottom line — don’t let your economic analysis be dictated by what you want to be true, or what you think would be good for people to believe — is exactly right. But I think there’s a bit more to be said about the process of using economic models, and why — in my experience — they can be especially helpful on politically or emotionally charged issues.

You might say that the way to go about research is to approach issues with a pure heart and mind: seek the truth, and derive any policy conclusions afterwards. But that, I suspect, is rarely how things work. After all, the reason you study an issue at all is usually that you care about it, that there’s something you want to achieve or see happen. Motivation is always there; the trick is to do all you can to avoid motivated reasoning that validates what you want to hear.

In my experience, modeling is a helpful tool (among others) in avoiding that trap, in being self-aware when you’re starting to let your desired conclusions dictate your analysis. Why? Because when you try to write down a model, it often seems to lead someplace you weren’t expecting or wanting to go. And if you catch yourself fiddling with the model to get something else out of it, that should set off a little alarm in your brain.

Let me give a personal example. Some of the best work I’ve ever done, I still believe, is my late-1990s analysis of the liquidity trap, inspired by the troubles of Japan. The thing is, the origin of that work was an attempt on my part to prove something I believed at the time — namely, that Japanese monetary authorities were just falling down on the job, that they could end deflation if they would just try harder. At the time, I was very much part of the mainstream consensus that viewed fiscal policy as old stuff, and saw monetary policy as all we needed for stabilization; I had been making fun of people like William Greider, who saw us facing inadequate demand forever thanks to automation. I wanted to show that Japan posed no big challenge for that consensus, and offered no comfort for Greiderish thinking.

Now, I was aware that IS-LM analysis didn’t support my complacency — but I was sure that this was just a limitation of that analysis, which after all was ad hoc about a lot of stuff, indeed didn’t necessarily honor all budget constraints. Surely if you stuffed money into the system it would have to go somewhere. All I needed was a simple model with all the i’s dotted and t’s crossed, and it would show that the liquidity trap was a myth.

Except that the model didn’t say that; it said that unless current monetary expansion raised expectations of future inflation, it wouldn’t have any effect at the zero lower bound. That is, it was saying that the liquidity trap was real.

I guess I could have thrown out the result and gone in search of another approach that told me what I wanted to hear — but what I did instead was rethink my preconceptions. The more I thought about it, the more sense the result made.

Oh, and the model also said positive things about fiscal policy — actually, a multiplier of one even with full Ricardian equivalence, although I bobbled that in the original paper, because I didn’t use the model carefully enough. That was definitely not what I was looking for at the time.

And it seems to me that the worldview I reached after going through that process stood me in very good stead after 2008, when we all turned Japanese, and the predictions of that kind of model about inflation and deficit spending were vastly more accurate than the scare stories so popular on CNBC etc… It was kind of funny if annoying to have right-wingers insisting that all this Keynesian analysis people like me were doing was just an attempt to invent reasons for government spending; actually it came out of an attempt to show that this spending *wasn’t* necessary, but the discipline of modeling led me to revise my views.

Am I always and everywhere innocent of motivated reasoning? Surely not — no saint, me. But I try to fight it. And I have no patience for people who are eager to assume that what they want to believe is true.

Yesterday’s second post was “A Note on the Soda Tax Controversy:”

So Sanders and Clinton are arguing about soda taxes — Clinton for, as a way to raise money for good stuff while discouraging self-destructive behavior, Sanders against, because regressive. I have no illusions that rational argument will make much difference in the short run; we’re in that stage where anything Clinton supports is ipso facto evil. It’s like that point in 2008 when Obama supporters hated, hated the individual mandate that eventually became, as it had to, a central piece of Obamacare.

But anyway, it does seem worth pointing out that progressivity of taxes is not the most important thing, even when your concern is inequality. Notably, Nordic countries — very much including Denmark, which Sanders has praised as a model — rely heavily on the VAT, which is a regressive tax; but they use that revenue to pay for a strong social safety net, which is much more important.

If we add in the reality that heavy soda consumption really is destructive, with the consequences falling most heavily on low-income children, I’d say that Sanders is very much on the wrong side here. In fact, I very much doubt that he’d be raising the issue at all if he weren’t still hoping to pull off some kind of political Hail Mary pass.

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