Should-Read: Jared Bernstein: When econ models potentially mislead, econ profs should say so

Should-Read: Jared Bernstein also wishes that we had (1) Greg back. It is indeed the case that the old (1) Greg-teaching-students-about-public-finance-issues was much better than the current (2) Greg-going-as-far-as-he-believes-he-can-to-be-helpful-to-the-Republican-Party:

Jared Bernstein: When econ models potentially mislead, econ profs should say so: “Greg Mankiw points out the direction [but not the magnitude] of Hassett’s result is consistent with a particular economic model…

…teaching his students how to get a result like Hassett’s by imposing standard assumptions common to such models. Greg… answers the question: is there an economic model that might defend Kevin’s findings, at least directionally if not their magnitudes? Answer: yes…. [But the] question… is: what’s the real-world likelihood that corporate tax cuts will raise workers’ wages anywhere near the amount Hassett claims?… The answer… is “very low”… based on both theory and evidence….

The interesting economics question is to why the [Mankiw] model predicts such an unrealistic result…. Which of the assumptions most fail to comport with reality? To the extent that we want to train students to be useful practitioners as opposed to proficient, yet unrealistic, modelers, answering those questions would also provide some real educational value-added…. The model assumes that the US is a small, open economy… assumes away imperfect competition…. Summers made a great point about this: The modelling of Mankiw and others “illustrate why well-resourced, team-based institutions with a strong culture of attention to detail like the Congressional Budget Office, the GAO, the Joint Tax Committee Staff or the Tax Policy Center are so important.” By “detail,” I take him to mean an unbiased use of literature (unlike Hassett, who totally cherry-picked), and more important, an historical perspective…. Corporate tax cuts never come close to the wage impacts Hassett claims, and Mankiw’s modelling supports. Real modelers analyzing real policy proposals must reference real empirical results, and not just the ones that go their way.

This all points to a bigger problem…. A well-placed, highly-pedigreed economist (Hassett) makes an implausible claim…. His claims can be and are, if not defended, then apparently corroborated, by an economic model, in this case by other highly pedigreed economists. This is lovely development from the perspective of the politicians and their donors who crave these high-end tax cuts. All they need is some “analysis,” regardless of how cherry-picked, and a little backup from other erudite economists saying “under certain conditions, yeah… this could happen.” They—those other erudite economists—shouldn’t do that….

They should be explicit about how applicable the model is to the real world, and whether the assumptions it violates are germane to policy makers (Krugman does so here; Furman here)…. In the hurly-burly of political economy, it’s an egregious omission, one with the potential to mislead policy makers and, once the tax cuts fail to generate the result predicted by the model, reduce the trustworthiness of economic analysis.