Quote of the day: Eli Dourado on Cowen on Macro

Via Twitter:

When I told Tyler I was confused in PhD Macro I, he said, “Good, that means you understand.”

Ahhh macro.  I think we can all take a lesson from this and recognise the limits of our knowledge – if the specialists that spend their entire lives and focus on hefty amounts of data appreciate their knowledge is limited, I don’t think the rest of us can just magically “intuit” certain knowledge through our “common sense”.  This holds to a lesser degree in all of economics – macro is just especially funktastic.

What does this mean for policy?  It doesn’t mean there is no role for government – we can still view government as a form of social insurance between us all, helping us deal with an uncertain world.  But, it does imply that government micromanagement and fine tuning have to pass a pretty massive burden of proof.  A burden that is hard to pass given that our knowledge is both uncertain and massively conditional.  I’ve heard this points before a few time (here, here, here) … 😉

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  • So don’t trust economists, but trust non-economists even less? That’s awfully cynical, Matt!

    • Base policy on progressive improvements in knowledge, and with a clear idea about where the burden of proof needs to be set (based on an idea of agreed social insurance), rather than knee jerk reactions and “obvious” policies – that isn’t cynical 🙂

  • Luc Hansen


    So thinking carefully, I hope, we have that government actions have to “pass a pretty massive [test of] burden of proof.”

    May I ask, what test does the other side need to pass?

    • The quote is:

      “government micromanagement and fine tuning have to pass a pretty massive burden of proof”

      That is very very different to saying all government policy has to – massively different. At a minimum I noted the social insurance line above – an area where we can, through democratic agreement, flip the burden of proof the other way around! This is done for forms of regulation, the health care system, and the security net – of course those can be further justified through hefty social arguments which in turn help them pass any required burden of proof in many circumstances 😉

      Micromanagement and fine tuning are very different types of policies – a different that is exacerbated by fundamental uncertainty! Very very different types of policies.

      • Luc Hansen

        Thanks Matt. I wasn’t intending any other context in what was meant as a flippant remark, although I was probably thinking more of fine tuning than other aspects of government, and of course I had in mind, as you picked up on, what is generally referred to as ‘the market’.

        As in a comment on a TV business report lately that ‘the markets’ were “exhausted” as an explanation for a dip in our dollar. I find these anthropomorphisms highly amusing! And maybe I’ve been watching too much CNBC and Fox who revel in promoting an adversarial relationship between government and ‘market’.

        Your views on government functions will keep life interesting as I move into more advanced economics and social policy papers – I’ve only done pre-reading for Semester Two and the disciplines seem poles apart in worldview!

        • Hey,

          I wasn’t trying to shut you down or anything, it was a good question – I always enjoy having to flesh out what I’m trying to say a bit more! I really appreciate the comments 🙂

          I find the personification of the market pretty exhausting as well – it is lazy, and so it is awful when I end up stuck in a situation where I end up saying that sort of thing myself 😉

          The key difference between economics and social policy to keep in mind is that economics is trying to avoid being normative – while social and public policy have to embrace it. Now we can’t “reach a conclusion” without normative statements – so taking these things into account does matter!

          The rejoinder by economists is that we need to make sure we have a good description and understanding of what is going on to apply these normative statement to – when a number of policy makers may be a little to comfortable relying on “intuitive” explanations for why the policy may work.

          The additional point I like to raise that I often see ignored by some members of all sides is the underlying lack of knowledge and the caution we should apply as a result – it isn’t a new point, Hayek, Schumpeter, Knight, and even a certain reading of Keynes can be seen as covering that off a long time ago. However, as a individuals we have an incentive to believe we know more, and can do more, than we really can – so it is a point that is worth raising. I have often heard non-economists communicate uncertainty and the “illusion” of control of a the broad economy a lot more clearly than many of us economists!

          Ultimately, the disciplines can (and should) inform each other – but in the end the policy analyst has to tread this line in a way they feel comfortable.

          • Luc Hansen

            No worries Matt, I just ran out of time to expand on my last post – getting ready for Friday evening work while trying to detach the 4 yo from my ankles!

            I certainly like to think that we all support policies based on evidence, but the evidence is that this thinking is, in fact, delusional ( I wonder if I could work that line of thought into an assignment?). For example, what’s the evidence that NZ economic welfare will be magically transformed when we reach a 20% net debt level, as promoted by Treasury and the government? From what I can see, it’s just mantra. And this is a policy that could have major detrimental effects on some New Zealanders, especially the lower socio-economic deciles. Similarly for EU austerity. Confession: I’m a Simon Wren-Lewis type rather than a John Taylorite!

            And how can a trained economist [http://www.econtalk.org/archives/2013/06/kling_on_the_th.html] who no doubt likes of think of economics as a science, casually dismiss the findings of the vast majority of the world’s climate scientists, which is surely ignoring evidence on a grand scale? By the way, that was a talk that started out intelligently exploring a novel hypothesis and degenerated into one-sided partisan mud throwing 😉

            A point about enacting random things, and this idea gets my wife cross when I mention it in relation to say, some ACT pronouncements, is that at least they serve as a trial to weed out bad ideas, rather than reading an endless series of tit-for-tat academic papers or watching interminable TV current affairs debates. The food in schools initiative is a good example of a programme for which the economic evidence is weak, but it is going to get a good run for the forseeable future, so we can focus attention elsewhere until the post-hoc studies start to arrive. Anyway, just the calming effect on the adults of the programme is arguably welfare improving!

            Time to do things. I hope I haven’t bored you too much 😉

            • Hey Luc,

              Small randomised trials of policies in communities is something economists are generally super duper for – irrespective of our normative positions 😉

              With regards to the “net debt” positiion – we can’t look at that without really having an idea about what monetary policy is doing. Having a sensible rule for debt, with monetary policy sorting the “demand” side makes sense in terms of providing certainty. Now if we are worried about poor families getting hurt this is an important, but seperate, issue about the normal level of redistribution (size of) government we have 🙂

              US economists, when in the public, tend to mix their economist and personal hats a lot – the best economics lecturers I’ve had tended to do two things:

              1) Express the uncertainty we have about results, and use models as a frame for discussing tendencies, where they came from, and an attempt to answer why
              2) They were explict in seperating their economic description from the policies they believed were right (which require an addional normative layer of reasoning).

              There is no need for us to ever agree on a conclusion – the main thing is that we can discuss the description, and then the assumptions, that get us there! That is why I appreciate comments here so much – it is just all of us trying to do that 😉

              • Luc Hansen

                Thanks for the tips, Matt. I’m looking forward to working my way through intermediate and advanced economics over the next 18 mths, and I wonder what my thinking will be at the end of that process!

                As far as the debt thing goes, I’m not convinced about the validity of a ‘rule’ when the whole system thrives on uncertainty (a virtue, imho) but hey, give me a couple of years and I’ll get back to you on that 😉