WWID: Not growth policy?

In Chapter 6 of What Works in Development, Abhijit Banerjee of JPAL recaps the ineffectual history of research on economic growth and concludes that "it is not clear that the best way to get growth is to do growth policy of any form." Perhaps it would be better, he says, to focus on keeping our house in order - maintaining social stability and building human capital - so that we can take advantage of the growth "spark" when it occurs.

I sympathize with commentator Peter Klenow, a micro-oriented macroeconomist, who responds:

Beyond accounting, macroanalysis has contributed a slew of robust correlations that help guide microexperimental work. Correlation need not imply causality, of course, but certainly does not rule it out... It is up to theorists and microexperimentalists to flesh out the causal mechanisms behind these correlations.

Bill Easterly - editor of the book, and reserving the last word for himself - makes three main points:

1. Macroanalysis established the negative effects of extreme policies and outcomes (e.g. land expropriation and hyperinflation in Zinbabwe); it was only in cases of moderate variation where the conclusions broke down completely.


2. "Macroeconomists have earned their ignorance the hard way," largely "because the demand for explanations of growth was so intense."


3. RCTs "do not really offer a serious alternative to how to achieve 'growth success'", because the small interventions they test in specific situations could never scale up to meaningful increase growth on a macro scale.
   

I think Easterly is being too pessimistic here, and Klenow is closer to the mark - the right answer has to be a middle ground where RCTs are one of many tools in the toolkit, microexperimental work complements and is informed by macroanalysis, and we keep on trying to crack the mystery of growth, counter to Banerjee's skepticism that we ever can.

WWID: An Experimental Approach

In Chapter 2 of What Works in Development, Dani Rodrik (who has sadly stopped blogging) argues that 1), we shouldn't consider RCTs superior to other types of studies, because while they have strong internal validity they often have weak (and unacknowledgedly so) external validity (and other studies can be stronger on external validity), and 2), there is a philosophical convergence on "experimentalism" between micro development economists (e.g. the randomistas) and macro development economists, who now think much more in terms of diagnostics and testing to find binding constraints on economic growth than the previous worldview which came with an a priori vision of what works (e.g. the Washington Consensus).

Then there are two short commentaries:

• Sendhil Mullainathan sees a divergence instead of a convergence (with the macro guys willing to make sweeping recs, and the micro guys only willing to make "guarded statements" about very specific interventions)


• Martin Ravaillon argues that the internal validity of RCTs is less ironclad than advertised because of omitted variables like selective participation, other actors (e.g. gov't shifts resources toward control villages, etc.)

American mercantilism, redux

I was sound asleep in Ethiopia for Obama's State of the Union address, and it wasn't pleasant to wake up to this debrief:

Then there was his disappointing discussion of trade, which included a bizarre promise to double U.S. exports in five years. Does this mean he expects the dollar to drop dramatically? He also announced the launching of "a National Export Initiative that will help farmers and small businesses increase their exports, and reform export controls consistent with national security" (more on that topic here), and vowed to "seek new markets aggressively, just as our competitors are." Nothing here, other than a cursory, noncommittal mention of the Doha round, indicates that Obama views trade as anything other than a zero-sum game. There's a name for this approach to trade: mercantilism.

Macroeconomics has never been my forte, and I was under impression that mercantilism was essentially a discredited 18th-century pre-economic theory. According to Wikipedia, though, it is not that simple, e.g.:

Paul Samuelson, writing within a Keynesian framework, defended mercantilism, writing: "With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid."

I'll have to let others who are more educated in these matters sort this out, but my feeling is not good and my populism radar is blinking.

Obama can't seem to keep anyone happy - he managed to promote the one plank of the liberal/progressive agenda that Paul Krugman doesn't agree with.

The autistic macroeconomist

Tyler Cowen is a huge fan of Scott Sumner's blog, but despite this golden endorsement I don't read him regularly because his posts are long and technical and macro is not my passion. But here Sumner reviews Cowen's excellent new book (highly recommended, by the way - I thought it was a truly path-breaking work that could materially change society's view of autism over time), and veers off on a fascinating tangent.

For context, Sumner believes that he, like Cowen, displays some strong characteristics of the autistic cognitive style (again, read the book). The operative principle in this particular case is that autistic people are less likely to be swayed by what behavioral economists call "framing effects" (and Naseem Taleb refers to derisively as "narratives").

Cowen pointed out that autistic people often seem to act more like a rational “economic man” than the non-autistic. They are less swayed by framing effects and also less swayed by emotions such as envy and revenge, which can be counterproductive. I always thought it was obvious that it was better to get a 5% real wage increase, when all your colleagues got 10%, then to get a mere 4% real wage increase when all your colleagues got 2%. But as I got older I realized most people don’t look at things that way. The world is not full of characters like “Spock” on Star Trek.

I won't paraphrase Sumner's wonky build-up around coin collecting and monetary economics and NGDP (his post is worth reading in full), but here's the kicker:

I believe that the financial crisis of 2008 was the mother of all frame jobs. The commercial bankers were framed, when it was really the central bankers that created the severe recession.

Over the past few months I have rolled out one quotation after another, trying to show that if one believes the logic of modern macroeconomics, the implications are clear. Fed policy was effectively highly contractionary, and a more expansionary policy could have prevented the sharp fall in NGDP. And there is no evidence that the fall in RGDP is anything more than what one would expect from this sort of monetary policy failure.

So why am I not making any headway? Because the post-Lehman crash was a very powerful framing device. It’s a great story.

That stopped me in my tracks, because it is so true. The fall of Lehman is such a powerfully compelling narrative, and most of us are so drawn to narratives, that it is difficult to dislodge from either our minds or the public discourse once it's taken hold. But what if, 10 or 50 or 100 years from now, dispassionate (autistic?) macroeconomists - or alien archaeologists and economic historians, for that matter - marvel at how the powerful narrative of the credit crisis blinded us to the mundane economic reality of the cause of the recession in which the world now finds itself mired?

I am still shaking my head at how original and powerful this thought is. Wow.