Follow the trail here. It’s only barely polite, if that. But the issues are important. The issues are what should our economic policy be and the honesty in data analysis.
John Taylor is a professor of Economics at Stanford. In mid-January, he posted an analysis, Higher Investment Best Way to Reduce Unemployment, Recent Experience Shows that depicted a very strong relationship between unemployment and investment. The higher the investment as a percentage of GDP, the lower the unemployment. Or something like that.
Some economists argue that the efforts now underway to reduce government spending as a share of GDP will have adverse effects on unemployment. This is not what the data show. Consider this chart which shows the pattern of government purchases as a share of GDP and the unemployment rate over the past two decades. (The data are quarterly seasonally adjusted from 1990Q1 to 2010Q3.) There is no indication that lower government purchases increase unemployment; in fact we see the opposite, and a time-series regression analysis to detect timing shows that the correlation is not due to any reverse causation from high unemployment to more government purchases.In sharp contrast, the data on spending shares show that the most effective way to reduce unemployment is to raise investment as a share of GDP. The second chart shows the relation between unemployment and fixed investment over the past two decades. Higher shares of investment are associated with lower unemployment.
A couple days ago, Greg Mankiw wrote A Striking Scatterplot and noted that causality could be reversed, but was nevertheless impressed.
Of course, causality goes in both directions: Strong investment demand leads to lower unemployment, and a stronger economy, reflected in lower unemployment, encourages investment spending. As a result, the interpretation of this scatterplot can be debated. But there is no doubt that the strength of the correlation is impressive.
But earlier today, Krugman pulled the analysis apart, saying,
It’s mostly the housing bust! Yes, business investment is low — but no lower than you might expect given the depressed state of the economy. In fact, business investment is roughly the same percentage of GDP now that it was at the same stage of the much milder 2001 recession.
What the data actually say is that we had a catastrophic housing bust and consumer pullback, and that businesses have, predictably, cut back on investment in the face of excess capacity. The rest is just politically motivated mythology.
And then Justin Wolfers eviscerated Taylor by pointing out that he didn’t use all the data and that earlier data showed a very different pattern.
Sometimes you see the perfect piece of evidence. The scatter plot that is just so. The data line up perfectly. And then you realize, perhaps they’re just too perfect. What you are seeing is advocacy, dressed up as science. Here’s an example, provided by John Taylor.
And then Brad DeLong summed it all up Krugman here and Wolfers here, complete with the key graphics.
Lessons?
- Now I don’t have either the credentials or the “cred” of any of these guys. But what seemed obvious to me to be missing was some notion of the time it takes for a cause to have an effect. There’s just no way that the effect could be effectively instantaneous, occurring in the same year. So one factor or the other should have been lagged.
- If you’re not going to use all the data, at least say so and attempt some sort of explanation. (Hmmm. I may be guilty of that failure.)
- When you post to the web on a controversial and important matter and you have an audience, somebody will attempt to challenge your analysis. Sometimes, it’s just a legitimately different interpretation of the data. Heaven help you though if you’ve distorted or omitted key data.
Don’t just use the damn data. Use all the damn data.
Tagged as:
Economics,
Fudge?,
Use the Damn Data