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Vector Autoregressions, Simplicity and Congress

October 23, 2011

Macroeconomics is not a simple subject and I claim no special knowledge of it. However one of Paul Krugman’s recent blog postings caught my eye if for no other reason than the sheer wonkiness of the title, “Vector Autoregressions And Keynesian Macro.”  In this posting, Krugman references materials in Christina and DavidRoamedr’s Macroeconomic History course. Chapter three of the Roamer’s course offers evidence from Bernanke and Mihov that vector autoregressions can be used to show that monetary policy works, as summarized below.

Bernanke’s position seems simple enough in concept but representing that concept mathematically gives one, at least gives me, a full and complete awareness that I really don’t understand the theoretical foundation for any relationship between monetary policy and vector autoregressions.

Why do I care? While I will freely admit that my understanding of macroeconomics falls off sharply after (or maybe during) the study of IS-LM type models there are many who demonstrate no such self awareness – most notably politicians. I don’t understand Bernanke and Mihov’s work on policy shocks. I just don’t and I would contend that neither do any of the 435 members of congress. And yet, every day we hear their proselytizing authoritatively on the economy and how Bernanke has missed the point. They continue by giving their constituents their own opinion of how to solve the economic problem that they clearly do not understand.

If you ever have a chance to ask your representation a question on the economy just ask then to briefly explain IS-LM models and why they are important in economic policy discussions.  It’s really not a “gotcha” question for someone involved in influencing our national economic policy. (Another Krugman blog posting gives a high level summary of IS-LM and this one is an easy read, see IS-LMentary)

This lack of basic economic understand has many manifestations in Washington. Is the electorate so gullible as to believe politicians when they say that the way out of a sluggish economy is to cut spending? That concept is universally rejected by economists that understand the problem at a level non-economists never will. Instead of treating us like adults they offer platitudes, over simplifications and false analogies. For example, I’m sure you’ve heard politicians compare our national economy to a household economy. That’s a ridiculous comparison and yet for some it gets traction and it’s what they remember when forming their opinion of what needs to be done. It’s not that simple. It may be apropos to remember Einstein’s words, “Make things as simple as possible but not simpler.”

Difficult problems are never solved by oversimplifications and sound bite solutions.  Sometimes you have to roll up your sleeves, understand a problem and then work to find a solution. The one thing I know is that the solution will not be found on a bumper sticker.

It’s time that Congress gets to work and it’s also time the public stops buying politician’s oversimplifications and see their statements for what they really are – political statements intended not to solve a problem but to position themselves for their next reelection campaign.

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