The type of tax cut that Romer and Romer think falls into this category is what they call an “exogenous” tax cut — one designed not to counter business cycles, but rather a “spontaneous” tax cut under relatively healthy economic circumstances.
This is very much not the type of tax cut that we are contemplating right now. Instead, what is being contemplated is a countercyclical action in an unhealthy economy designed to return the economy to normal growth. Romer and Romer are not all that keen on this type of tax cut; in fact, they argue that such “countercyclical fiscal policy is not achieving its intended purpose,” and that “policymakers’ efforts to adjust taxes to offset anticipated changes in private
economic activity have been largely unsuccessful”…
The thing is that’s really irksome is that Mankiw should know a lot better. This is not some random blogger at Townhall trying to parse a difficult economics paper and overlooking an important point of context — this is one of the premier economists in the world. He knows very well what the Romer and Romer paper says — and he’s made a deliberate choice to misrepresent it.
In poker terms, this is what we’d call a “tell”. Mankiw doesn’t have anything. He’s bluffing. Out of ideas. Taking one for the team, and touting the party line for shits and giggles. Except, this isn’t exactly fun and games, and Mankiw should leave the discussions to people who are serious about getting our economy moving again.
Nate is a smart guy—smart enough that he ought to know when he’s in over his head—but he misses the boat on this one, as Mankiw is “kind enough” to point out.
I usually don’t respond to blogosphere commentary on my work because, after all, time is scarce. But this critique by Nate Silver is noteworthy because the error it makes is so fundamental. It offers a teachable moment….
This argument raises the question: Why did the Romers focus on exogenous policy changes? The reason is that these are the only changes that can be used to reliability identify the effects of tax policy. If a tax change is made in response to some event, call it X, that influences the economy, it is hard to disentangle the effects of the tax change from the the direct effects of X. The Romers focus on exogenous tax changes for the same reason doctors conduct randomized drugs trials–not because they are interested in randomization as a prescriptive tool, but because randomization solves a statistical identification problem.
Imagine if a clinical doctor reasoned the same way as Silver did. He would say, “All the evidence on the effects of this drug are from randomized drug tests. In my practice, I never randomize treatment of my patients. Therefore, I can safely ignore the results from the randomized experiments.”
That is, of course, fallacious. We need the randomized experiments to inform us about the effects of medical interventions, even though interventions in practice are rarely randomized. Similarly, we need to consider the effects of exogenous tax changes, even though many actual tax changes are not at all exogenous.
The point isn’t that Mankiw “should know a lot better”; he does know better. That’s why he’s a professor at Harvard and one of the most respected economists in the world. It’s always possible that an expert is wrong—they make mistakes all the time—but, when preparing a critique of an expert you’re first thought should be “what am I missing?” not “what an idiot!” If you think an expert should know better, he/she probably does. Start from this premise that you are wrong, and reexamine the disagreement. If you still think the expert is wrong, proceed with caution in presenting your criticism. E-mail a friend with knowledge in the area, or even send an e-mail to the expert. Jumping ahead to calling someone a partisan hack is a less forgiving approach, especially if the mistake is on your end.
The “error” that Mankiw supposedly makes is so fundamentally correct that it does make for a teachable moment (in more than one respect)—the kind that will stay in Mankiw’s class lecture notes for years.
Addendum: For all the people out there criticizing Mankiw for dissing the Romers, I just learned something interesting from Mankiw’s recent NPR interview.
— Mankiw was a friend of Christina’s in graduate school.
— Mankiw was best man at the wedding of David and Christina.
— David Romer was best man at Mankiw’s wedding.
If he’s doing anything that the Romers find offensive or inappropriate, I think he’s going to hear about it and it would cost him some close friends.