In support of dynamic scoring

Estimating the impact of tax cuts is a tricky business. You can fairly easily calculate how the revenue from current income and spending will change, but that’s just the beginning. The problem is that people don’t stand still: they change their earning and spending habits in response to your tax changes, which changes the revenues from the taxes. The UK government is pretty good at estimating that but economists have long known that there are a couple more stages before you have a full picture of what’s going on. That’s why HM Treasury has begun to use a dynamic, computable, general-equilibrium (CGE) model to estimate the effect of tax changes.

CGE models bring us closer to reality…

The CGE model accounts for the long-term effect on the economy of changing behaviour. In the case of cuts in the fuel duty it accounts for the growth in production caused by a reduction in transport costs. Increasing production generates more road traffic, which yields more fuel duty revenues and partially offsets the cost of the cut. Using the CGE model to ‘dynamically score’ (as the jargon goes) the cost of the tax cut incorporates effects these effects that are not a part of the traditional approach. Read more

Economics, theory, and data

This post was titled “Why data alone is not enough for economic inference”.  I was all prepared to write a post on the fact we need data and theory in order to do economic inference and create knowledge. I had links (*,*,*,*,*).  Then Noah Smith wrote this like really good post on the issue, so I’d suggest reading that.

On the other side there are those who are “too in love” with theory without any reference to data, or prior literature (which is a way of building a case for inference between theory and data).  A clear example of that comes from some of the comments that specific physicists moving into economics make – and Chris House has expressed that here.

I’d note that Read more

On economics: Germs of choice

Recently Alex Coleman stated on twitter that he found economics ridiculous (in his defense, I specifically believe he is talking about macroeconomics – not the other 95% of economics that is not macroeconomics.  Also, he probably heard an economist on the radio – we always sound a bit ridiculous floating in the media).  That’s cool.  A lot of tweets were written by people, most of which I won’t bother replying to as they tend to be hogwash that people throw out when they know nothing about economics but just want to attack economists – it frustrates me, and I’d rather not be frustrated right now ;) .

However, I read these sorts of threads as sometimes people make interesting points I had not heard, or had heard before but feel like I want to consider them more.  I found this comment by Danyl from Dim Post interesting in that way:

So what does that mean?  I’ll give it a go, and hopefully my discussion is in the same way he is considering it!

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There is no One Model to Rule Them All

I like the influence that physicists are having on economics. Moving towards agent-based modelling in some areas of the discipline is a great idea. But, in addition to lending their novel insights, some seem to enjoy piling on economics generally. Generally you have to take the good with the bad but Mark Buchanan’s latest article is so shockingly bad that I can’t help picking on it. Read more

The arguments about “macroeconomic methodology”

There has been a series of posts by people discussing a new book, “Big Ideas in Macroeconomics“.  Ryan Decker points out a good post by Steven Williamson that has links to other posts.  I haven’t read the book, in fact I haven’t ordered it yet (but intend to) – but I don’t really intend to talk about the book, so I think I’ll be ok.  Instead, I am going to discuss the posts – as I’ve been reading them as they have come out.

The first post was over at Uneasy Money, a blog I really enjoy if you don’t already read it :)

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Thinking about what ‘economics’ is

I am trying to gradually clarify my perception of what economics is.  Here are some cliff notes from a recent discussion I had:

Economists try to answer questions about “the allocation of resources given scarcity”.  Every question is quite specific and different, economics education involves learning a broad set of skills that allow us to tackle questions.  To do this economists use models.  Models embody a set of assumptions, assumptions that create an “artificial world” that we can deduce conclusions from given these assumptions.  We then use data, robustness testing, and rhetorical debate to help us inductively infer conclusions about the real world question we are asking from these artificial worlds.

As a result, economics is a discipline that can discuss a wide range of social questions that range from deterministic statements, to prediction, to description, to exploration – but the answers provided are always conditional on the question asked, and the assumptions we have made for answering that specific question.

Further details can be found in these (in order):

  1. What is economics in the most general sense.
  2. On economics as method.
  3. On assumptionsand again on assumptions.
  4. What does it mean to have many models?
  5. Economics and science – careful with the prediction call.
  6. Before railing against economics – what economists do.

If you know of any literature I should peek at to help inform myself on the status of the accumulation of knowledge and method in the discipline (as there is A LOT of improvement I can do in my understanding here) I would really appreciate it.