Thursday, October 27, 2011

Keynesian Multipliers and the Perpetual Intellectual War

The recent EconTalk podcast concerned Keynesian multipliers (like, if the multiplier is 1.2, an increase in government spending of $1 increases total national income by $1.20), and within the podcast the interviewer did what many libertarian economists have been doing for three years: mocking the use of decimal points in multipliers.

For example, the Congressional Budget Office used a multiplier of 1.52 (I'm pretty sure, that's what Dr. Roberts at EconTalk has said) to appraise Obama's fiscal stimulus.  Are macroeconomists being arrogant, or ridiculous when they use a multiplier of 1.52 instead of 1.5, when everyone knows these type of estimates can in no way possess a precision warranting two decimal places?  The Cafe Hayek blog has frequently mocked macroeconomics for this, as if Keynesians do not understand the complexity of a real economy, but the libertarian does.

But what if we hesitate in our attack, and instead try to understand why such decimal places are used?  My guess is that macroeconomists (especially when they represent the Congressional Budget Office) want to communicate that these numbers are not guesses: instead, they are the result of intense econometric estimates.  When you hear the multiplier of 1.52, you are more likely to believe that rigorous data-crunching was involved in the estimate, even if the estimates are not precise. However, if they simply said a multiplier of 1.5, it sounds like a casual estimate, derived from no data or statistical estimation.

It is my sincere wish that economic blogs from different political parties would seek to sincerely understand the reason for their opponent's views, rather than stay on the attack perpetually.  True, their readership might decline.  But I would learn more.

For example, just imagine how much we could learn if, when libertarian bloggers attack Paul Krugman for his inconsistent statements over the last fifteen years, they try to understand what in the economy has changed which induced Dr. Krugman to alter his remarks.  Instead, libertarian bloggers attack him, asserting that Krugman was once an economist but is now a progressive columnist--that he has sold out!

After all, are university economists educators, or political pundits?

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