The Data Will Set You Free (Or At Least Suggest A Few Interesting Regressions)

There’s been a lot of chatter over the last two years or so about recession predictions, and why some smart economists have been so wrong so far. There are no definitive answers, even if some explanations look potentially informative, if not exactly kind for the dismal scientists who stumbled. But we’ll leave that for another day… well, maybe not entirely. The ever-perceptive Noah Smith (who moonlights as an assistant finance professor at Stony Brook when he’s not blogging) weighs in, albeit inadvertently and through the thought experiment of pondering “A world without macroeconomists?” Along the way, he observes that taking the numbers at face value, with minimal if any theory, can still tell us something useful at times, but not without complaints — “Measurement Without Theory,” as Koopmans famously charged (pdf).

In any case, Smith reminds that you can still see a lot just by looking:

Empirical macro is fundamentally constrained by the limitations of time-series data (“history only happens once”, i.e. ergodicity and stationarity are near-impossible to verify) and cross-country comparisons. But within those limits, macro empiricists can tell us a lot, just by quantifying things and noting seeming regularities. That’s enormously helpful both for policy and for forecasting. You need controlled experiments to create a reliable predictive theory of the world, but there’s a huge amount you can know without controlled experiments, just by watching the world go by and keeping careful track of what you see. And macro empiricists can certainly do the latter. It’s thanks to them we know things like Okun’s Law, which tells us that fast growth is consistently associated with low unemployment. It’s also thanks to them that we know that investment is much more sensitive to the business cycle than consumption. Or that slightly less than half of people seem to be “hand-to-mouth” consumers who don’t obey the Permanent Income Hypothesis. Etc. Without macroeconomists, we just wouldn’t know these things, and reasonable people would argue about them.