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Tuesday, February 19, 2013

Big Data?

Paul Krugman:

Data, Stimulus, and Human Nature, by Paul Krugman: David Brooks writes about the limitations of Big Data, and makes some good points. But he goes astray, I think, when he touches on a subject near and dear to my own data-driven heart:

For example, we’ve had huge debates over the best economic stimulus, with mountains of data, and as far as I know not a single major player in this debate has been persuaded by data to switch sides.

Actually, he’s not quite right there, as I’ll explain in a minute. But it’s certainly true that neither stimulus advocates nor hard-line stimulus opponents have changed their positions. The question is, does this say something about the limits of data — or is it just a commentary on human nature, especially in a highly politicized environment?

For the truth is that there were some clear and very different predictions from each side of the debate... On these predictions, the data have spoken clearly; the problem is that people don’t want to hear..., and the fact that they don’t happen has nothing to do with the limitations of data. ...

That said, if you look at players in the macro debate who would not face huge personal and/or political penalties for admitting that they were wrong, you actually do see data having a considerable impact. Most notably, the IMF has responded to the actual experience of austerity by conceding that it was probably underestimating fiscal multipliers by a factor of about 3.

So yes, it has been disappointing to see so many people sticking to their positions on fiscal policy despite overwhelming evidence that those positions are wrong. But the fault lies not in our data, but in ourselves.

I'll just add that when it comes to the debate over the multiplier and the macroeconomic data used to try to settle the question, the term "Big Data" doesn't really apply. If we actually had "Big Data," we might be able to get somewhere but as it stands -- with so little data and so few relevant historical episodes with similar policies -- precise answers are difficult to ascertain. And it's even worse than that. Let me point to something David Card said in an interview I posted yesterday:

I think many people are concerned that much of the research they see is biased and has a specific agenda in mind. Some of that concern arises because of the open-ended nature of economic research. To get results, people often have to make assumptions or tweak the data a little bit here or there, and if somebody has an agenda, they can inevitably push the results in one direction or another. Given that, I think that people have a legitimate concern about researchers who are essentially conducting advocacy work.

If we had the "Big Data" we need to answer these questions, this would be less of a problem. But with quarterly data from 1960 (when money data starts, you can go back to 1947 otherwise), or since 1982 (to avoid big structural changes and changes in Fed operating procedures), or even monthly data (if you don't need variables like GDP), there isn't as much precision as needed to resolve these questions (50 years of quarterly data is only 200 observations). There is also a lot of freedom to steer the results in a particular direction and we have to rely upon the integrity of researchers to avoid pushing a particular agenda. Most play it straight up, the answers are however they come out, but there are enough voices with agendas -- particularly, though not excusively, from think tanks, etc. -- to cloud the issues and make it difficult for the public to separate the honest work from the agenda based, one-sided, sometimes dishonest presentations. And there are also the issues noted above about people sticking to their positions, in their view honestly even if it is the result of data-mining, changing assumptions until the results come out "right," etc., because the data doesn't provide enough clarity to force them to give up their beliefs (in which they've invested considerable effort).

So I wish we had "Big Data," and not just a longer time-series of macro data, it would also be useful to re-run the economy hundreds or thousands of times, and evaluate monetary and fiscal policies across these experiments. With just one run of the economy, you can't always be sure that the uptick you see in historical data after, say, a tax cut is from the treatment, or just randomness (or driven by something else). With many, many runs of the economy that can be sorted out (cross-country comparisons can help, but the all else equal part is never satisfied making the comparisons suspect).

Despite a few research attempts such as the billion price project, "Little Data" and all the problems that come with it is a better description of empirical macroeconomics.

    Posted by on Tuesday, February 19, 2013 at 10:37 AM in Economics, Fiscal Policy, Macroeconomics, Methodology, Monetary Policy | Permalink  Comments (20)

          


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