There’s an interesting post on the Atlantic by Jim Manzi, Stimulus predictions: put up or shut up, that calls on economists who are making predictions about what Obama’s stimulus package will or won’t do to present their models on which these predictions are based.
In part, he says:
So here’s what we would need to falsify a prediction. Anyone who claims to know the impact should escrow a copy of the source code of the econometric model that is used to make the prediction, along with a stated confidence interval, operational scripts, and assumptions for all required non-stimulus inputs that populate the model with a named third-party. Upon reaching the date for which the prediction is made, the third-party should run the model with the actual data for all non-stimulus assumptions and compare the model result to actual. Any difference would be due to model error. We actually still would not be able to partition the sources of error between “error in predicting causal impact of stimulus” and “other”, but at least we would have a real measurement of model accuracy for this instance.
Of course, I sincerely doubt this will happen. I wonder why not?
As readers of this blog will understand, I don’t make empirical predictions from my models, but I do make qualitative ones; and my models aren’t the econometric giants that conventional economists build, but smaller models that, in contrast to the econometric lot, are truly dynamic (for those who don’t realise that standard economic models aren’t genuinely dynamic, please read this blog post “Why Did I See it Coming and “They” Didn’t?” ).
So I’ve taken up Jim’s challenge, and wrote the following comment on his blog:
Dear Jim,
I’m willing to take your challenge, but from an unusual perspective.
While I am an academic economist, I don’t build nor believe in the type of econometric models that dominate economics these days–generally so-called “New Keynesian” or “Dynamic Stochastic General Equilibrium” models.
Instead I build nonlinear dynamic models based on Minsky’s “Financial Instability Hypothesis”, and I have started constructing a strictly monetary model of a pure credit economy.
My predictions based on these models are qualitative rather than quantitative, but on the grounds of Minsky’s extremely prescient hypothesis the sheer scale of private debt that has been accumulated, and the abundant historical data on debt with which we can review past economic performance in the light of Minsky’s hypothesis, I have been arguing that this crisis is beyond bailouts.
Therefore while I think the bailouts are better than doing nothing, ultimately I see them as futile. All they will do is replace some private debt with even more public debt as has happened in Japan (if the spending is debt-financed), or pump fiat money into the economy only to see it disappear into debt repayment and not reflate the economy if (as Bernanke is now doing with M0) the helicopter approach is used.
To check my reasoning and qualitative predictions on this front, I proffer two models that are elucidated on posts on my blog http://www.debtdeflation.com/blogs:
http://www.debtdeflation.com/blogs/2008/11/26/parliamentary-library-vital-issues-seminar/
and
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
The former includes a model of Minsky’s Hypothesis built in the systems engineering program Vissim, which is downloadable from the blog; the latter details a model of a pure credit economy that undergoes a credit crunch, using the mathematics program Mathcad.
The former can be downloaded and run; the latter I only explain in the post, though there is a draft of a forthcoming paper that details the mathematics of the model:
http://www.debtdeflation.com/blogs/wp-content/uploads/papers/NotKeenOnBailoutsFinal.pdf
Both models, which I’m now working on integrating and extending, imply that there is no way out of this crisis while we still in effect honour the debt that was run up during this speculative bubble. We either have to inflate it out of existence, or selectively abolish it.
Since, as you’ll see from the second post above, I also doubt the possibility of causing inflation simply by driving up M0, the second option is the only one that I expect will work: at some point, to end this crisis, much of the debt is going to have to be repudiated.
I’ll keep an eye on that blog entry to see what eventuates, and whether any neoclassical economists submit their models for scrutiny.