This week’s Free Exchange Column is about afterthought of last week’s AEA Annual Meeting. The main message of the piece is that economists should consider other factors in their models.
And, Politics is one of the most urgently needed elements which economist should add to their models.
Perhaps the greatest omissions were the questions not asked at all. Most dismal scientists exclude politics from their models altogether. As Joseph Stiglitz, a Nobel laureate, put it on one star-studded AEA panel, economists need to pay attention not just to what is theoretically feasible but also to “what is likely to happen given how the political system works”.
Here is the justification:
Economists seem to feel that such political questions are outside their area of concern. Yet politics helps determine the value of economic-policy recommendations. Many aspects of the stimulus plan passed early in Barack Obama’s tenure, such as the money provided to states to plug budget holes and protect public services from large spending cuts, were chosen because they were judged to have a high multiplier effect—ie, each dollar in new government debt generated a more-than-equivalent rise in output. But the spending remained largely invisible to voters, who had little idea as a result whether (or how) they had benefited from it. That, in turn, made stimulus easy to demonise, hindering subsequent attempts to boost fiscal spending and harming labor markets. Policies that look effective in the absence of political constraints can prove anything but in the real world.
I do think that we should explore further on the role of politics in macroeconomics models in the future #WITFT21 Interviews.
Read the whole thing: