The Economist runs a good article. Excerpt:
But how plausible were the numbers? Twelve years on, economists have
shown little inclination to go back and check. One exception is Timothy
Kehoe, an economist at the University of Minnesota. In a paper
published last year, he argued that the models “drastically
underestimated” NAFTA‘s impact on trade
flows (if not on jobs). The modellers assumed the trade pact would
allow people to buy more of the goods for which they had already shown
some appetite. In fact, the agreement set off an explosion in the
exports of many products Mexico had scarcely traded before. Cars, for
example, amounted to less than 1% of Mexico’s exports to Canada before
the agreement. By 1999, however, they accounted for more than 15%. The
only comfort economists can draw from their efforts, Mr Kehoe writes,
is that their predictions fared better than Mr Perot’s. A low bar
indeed.
Here is Kehoe’s paper.
A mathematical model expressed symbolically is a nicely concise and unambiguous representation, and therefore good for communicating with other specialists. The Economist is right that a representation like that is almost impossible for a non-specialist policymaker or a layman to wrap their heads around, though.
I think part of the answer here is software. The article makes an analogy with flight simulators, and says that a pilot training in one need not know the details of how it works. The flight simulator does a lot to help the pilot out, though–it presents a nice visual display that summarizes the elaborate calculations going on behind the scenes.
Where are the economic model simulators? One could build software that would take a symbolic model and give you knobs for each of the parameters and a graphical display of the interactions. This would make it a lot easier for a policymaker to “fly” a model, and impart some intuitive sense of how it operated. It might even make decent TV.
Well, one can hope.
Economics has always tried to lord it over the other social sciences with its air of precision and use of numbers with decimal parts which implied an ability to understand social phenomena and predict the future.
It seems to me that basically this is a fraud. The reality is that not only do the big models not model reality but even the base assumptions are not understood.
As an example, consider the supply and demand curve. As cost increases, demand goes down. (as mentioned in the article, no one can know the shape of the curve). The problem is that we don’t even know what cost is. The only way to understand it is retroactively.
In a famous day care center example, the centers tried to decrease late pickup by parents They introduced a fine to increase the money price for late pickup. Unfortunately late pickups increased. RETROACTIVELY it was realized that the cost of late pickup included a large moral component that they had effectively reduced by adding a money fee.
This uncertainty is true for all of the assumptions on which these models are based.
Hey RobbL,
Are you forgetting about elasticity? Some parents are willing to pay in order to be late, so they’ll continue to demand a certain quantity of day care.
The problem is that we don’t even know what cost is. The only way to understand it is retroactively.
Did anyone actually read the Kehoe paper that the Economist article was based on? Looks like Ross Perot was right. Check out Table 5 (http://www.econ.umn.edu/~tkehoe/papers/NAFTAevaluation.pdf). Mexico’s exports were predicted to rise 50.8%. They actually rose by 140.6% Imports rose 50.5% versus a prediction of 34%. Sure looks like a “big sucking sound†. Of course, it didn’t do Mexico much good. GDP growth from 1994 to 2005 was only 2.7% per year (Chile was 4.8%).
Worse, US farm exports devastated rural Mexico triggering a tidal wave of illegal immigration that is savaging much of America today. Any gains to America farmers (wheat and corn are global commodities) were trifles compared to the vast costs to our overall society.
The net is that NAFTA has been a disaster for both countries. AMLO, to his credit wanted to repeal many of the agricultural provisions. Of course, cheap labor elites in the US and crony capitalists in Mexico have done well†¦ And they have their apologists…
Noah Yetter,
When you start sending your children to schools dominated by illegals, you can protest the word “savaging†. When your income crashes because of Open Borders you can object to “disaster†. When you can’t afford a home because of runaway population growth, you can tell us how great mass immigration really is.
Wages for production workers have been falling since 1973. They are now down to the 1959 level. Our nation can pay for only 53% of its goods imports via exports. All the rest is debt.
Exactly who benefits from “lower prices† with real wages declining for 33 years? “Cheap† imports paid for via debt are a well trodden path to national ruin.
Try looking at the facts, not libertarian ideology.
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