More defence
Ok, so there were a couple of comments in the previous post that I think I need to discuss in order to explain why macroforecasters have value.
Hold up: In defence of macroforecasters
Hold up a second here. My two favourite bloggers have consecutively posted suggesting that macroforecasters are essentially a waste of space (Offsetting Behaviour and Marginal Revolution). As a macroforecaster I am inherently biased, but I think that such forecasters can add value. Let me discuss why.
As I have said in the past, if a forecaster thinks his value comes from the accuracy of predicitons, and sells himself as such, he won’t be adding value. The economic environment is too uncertain, and our forecasting methods too imperfect, to simply rely on forecasting accuracy per see. But given that we can’t provide a perfect version of the future – we must offer something else.
As I have also said in the past, we provide a description of what has happened, a service on the sort of things going on, and a point of view regarding the risks around the economic situation.
I have asked a number of clients what they find useful, and what they want from us, and I generally get told that they like to have information condensed and described in a clear, consistent fashion. Having someone available who is keeping up with the news, and is willing to discuss it at any point has value – and as economists we can also paint risks around the situation, and indicate what “general economic” issues people should keep an eye out for.
The value stems from this service – a service that most private sector macroeconomists are blatantly honest about. Essentially we would never say “this IS going to happen” we would always say “given this set of information, we see this set of potential outcomes, and have this set of probabilities on them – as new information is released we will tell you what this indicates about the general economic situation”. We definitely aren’t there to tell people how to run their business – we are just there to provide information regarding the general environment this business activity is taking place within.
Sure the information may disparately be floating around in places, but we tie it together and use the economic method to interpret it in a clear concise fashion. It is a service, a service people are willing to pay for, and so I would suggest it must have value.
Why all the hating on DSGEs?
Over at Greg Mankiw’s blog he links to a comment on DSGE models by the legendary Robert Solow. Surprisingly, the comment is relatively negative.
If I am honest, I found Solow’s attack on DSGE a little strange, and fairly inconsistent. Here is why:
Update: (Before saying why I think this, I should say) This initially came from an Arnold Kling post, and the lingo regarding biology has moved into some of Brad’s negative writing about economists he disagrees with (ht Economist View). My own view is that these authors are attacking a straw man when they attack DSGE’s (the straw man I’m talking about is the 1980’s RBC model, as I discuss later) – instead of attacking the inappropriate assumptions of some of the practitioners they have decided to attack the method. This disappoints me.
Yes – all models have weaknesses. But it is about seeing what to use and where. And contrary to Brad’s language he is being far from objective in his attack on this type of modeling.
Now, back to the post as it was a few days ago 😉
The taxing issue of burden
One thing I have noticed of late is that many people want to talk about tax cuts in terms of “who gets what”. We see someone with an income of $XXX and say they will get $Y a week from the tax cut. I find this perplexing as I have never seen tax this way.
The reason why I find this way of looking at tax changes strange is that it ignores how prices change in response to the structure of the tax system. I fear that, to many people, this seems like a benign (possibly even esoteric) issue – when actually it is one of the most essential issues to keep in mind when thinking about the design of a tax system.
One proviso on tax …
Kiwiblog blogs about to a good sounding report by the Maxim Institute on tax. I especially like this line:
We need to design the tax system so that it allows the government to take the money it requires, while doing the least amount of damage to the economy and so too our potential prosperity
However, there is a proviso that needs to be taken into account when we say this. Any redistribution that we as a society deem is appropriate given our value judgments needs to occur through “the money the government requires”.
The tax system that is solely based on efficiency will not be a tool for redistribution. Depending on our value judgments, we will want a certain level of redistribution, and this has to occur through the level of government spending. The higher redistribution is, the higher government spending is, and as a result the higher the tax rate will have to be.
Yet, according to this post, the recommendations of the report switch from the design of optimal tax to the equity-efficiency trade-off associated with redistribution:
A 2001 OECD study found that about one half of a percentage point increase in government consumption (the expenditure to GDP ratio) could cause a 0.6 to 0.7% direct reduction in per capita output.
Yes, there is a trade-off. However, the level of government spending and redistribution should be premised on this trade-off. By saying something like “If we can limit spending so that over time it is under 30% of GDP” we are making a value judgment regarding the amount of redistribution that is in societies interest – we aren’t discussing the role of optimal taxation.
My main point here is, there are two separate issues: Firstly, the design of an optimal tax system GIVEN the level of redistribution. Secondly, the socially preferred level of redistribution. The first question is easy, even an economist can answer it. The second question is incredibly difficult.
The unit of taxation
While having a quick look of “Failbook” I found this enlightening status update:
This is one of the reasons why taxing on the basis of a “family” unit instead of an “individual” unit doesn’t make sense to me. By setting up an arbitrary idea of what a family is you ensure that people arrange their affairs to take advantage of that, and you ensure that people that are either unwilling or unable to enter these arrangements struggle.
People pool resources and work together by forming a family unit if they want to. Lets just stick to taxing people as individuals, and let individuals in society make the decision on what type of family unit to set up given this equal treatment – after all it is the individuals that make choices.