Sunday, July 24, 2011

Much as I like fiscal stimulus, this is not evidence of its effectiveness

Jared Bernstein calls employment in the DC area compared to the nation a "natural experiment" demonstrating the effectiveness of fiscal stimulus. He writes:

"It’s not like our area is totally insulated from recession, but the countercyclical expansion of federal spending does give the region a notable edge compared to much of the rest of the country. (Though the point of my presentation was that with the fed gov’t poised for contraction, our region needs to diversify.)

Note how the jobs line for the DC region is flat while that of the nation falls steeply. It’s a bit of a natural experiment: if you actually apply some serious Keynesian stimulus, you can minimize job losses


It was wrong when the Conley-Dupor paper did it, and I said it, and it was wrong when the Feyrer-Sacerdote paper did it, and I said it (although I did think they had a nice instrument - it just wasn't an instrument that could identify the parameter they were looking to identify).

You can't look at differences between sub-regions and get macroeconomic impacts. This should bother people for and against stimulus. First, if stimulus has a positive impact, then the fact that the states are open economies on the same currency will create spillover effects that bias the impact estimates downward. If stimulus doesn't have a positive impact and there's crowding out, then any gains in one state are going to come at the expense of other states, and inter-state differentials will be biased upwards. As one of my mentors at Urban in all things econometric likes to put it, "the estimates are mush".

Identification of impacts in macroeconomics is hard. You can't just look at raw data like John Taylor does. You can't do inter-state comparisons like these people do. You have to do hard work identifying your model. Role models in empirical macro should be economists like Robert Barro and Christian Romer.


  1. "if you actually apply some serious Keynesian stimulus, you can minimize job losses."

    How is this different than prostitution? Sure, if you're willing to pay for sex, you can minimize slumps in activity. Government jobs are expenses, and, of course, if you're willing to pay for it, you'll have them. Is this fascinating to anyone? Perhaps Mr Berstein can show us a graph of sexual activity in Nevada compared to the rest of the country.

    "if you actually pay people to pretend to like you (nonproductive jobs), you can give the illusion of minimizing real friendship (productive jobs) losses."

    Not a good week for him, considering the blatant deception of his "The country wants Balance" post.


  2. Ed -
    I'm not sure it's quite that easy to dismiss, even if he does a bad job providing empirical evidence.

    The sentence you cite is one that I think is true, personally, but it's not exactly tautological. After all, if there is crowding out the statement is wrong. The statement in and of itself is not obvious, although with the right kind of theoretical justification and the the right kind of empirical justification it makes sense. Unfortunately, Bernstein doesn't provide that here.

  3. I don't think it's right to privileged one technique over another, they are all equally prone to giving biased estimates. Its not like identifying a time series model is particularly "scientific" or mechanical.

  4. Daniel, you have given a great example of intellectual honesty in this post.

  5. "The sentence you cite is one that I think is true." Of course it's true, that's my whole point. It's undeniably true! If you're willing to pay someone to, say, cash a government check and call them "employed", then you've solved the unemployment problem! You've minimized job losses! Perhaps Berstein will send a check to everyone in Delaware, call them Federal employees, and then show how he "solved" the unemployment crisis. Has he solved some riddle? Yes, Daniel, we can buy, buy, buy all the "jobs" we want. You don't need a theory or empirical evidence to know that. Just hand a homeless man a dollar and "pay" him to stand on one leg. Boom! Job creation and Keynesian job-loss minimization. His graph is ridiculous.

  6. Ed -
    re: "If you're willing to pay someone to, say, cash a government check and call them "employed", then you've solved the unemployment problem!"

    You and I may agree it is true, but if this is why you think it is true then we disagree on WHY it is true. You're presuming that cashing that check doesn't have general equilibrium effects that put someone out of a job somewhere else in the economy. That is a presumption I think you can make under certain circumstances, but not under others. So simply saying that doesn't make this statement true.

    Gene -

    Andrew -
    The interstate comparison technique simply ignores major biases in the estimate. It seems to me you can privelege some techniques over that. Why should we give biased estimators any creedance? Now - since properly identified models are hard to come by I'd definitely agree we should try multiple strategies, but I do think we can discriminate between them.

  7. "So simply saying that doesn't make this statement true."

    Yes, Daniel, it does, in 100 percent of all cases. Solving the problem of unemployment (no sexual activity) can be solved instantly if you're willing to pay for it. Bernstein was just showing us that DC is a Brothel. ;)


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