What Are Economic Models Good For?

Some people seem to have gotten the idea, based on my arguments about the use of models to measure the effects of the stimulus, that I think economic modeling is useless. I don't. Models can be useful for making informed guesses about the future. This is what the Congressional Buget Office does when it projects out over a decade. That's incredibly difficult, and, as the CBO will tell you, those projections are naturally subject to a lot of error. But from the limited-knowledge standpoint of the present, they can provide a loose guide to what we think might happen.

Where I'm skeptical, however, is that models can tell us what's happened in the past.

Let's say your friend Paul announced that they intended to lose 24 pounds. And the way this person was going to do it was to work out for 90 minutes a day, six days a week, for six weeks. First, he consulted with a personal trainer and an expert from the exercise department at the local college. Then he ran some tests and did some calculations about how many calories he could expect to burn at each workout, and he figured that, in combination with my average daily caloric intake, it ought to result in him losing four pounds each week. Paul is aware that some experts have begun to question whether exercise is the most effective way to lose weight. But he's also heard from friends and numerous local health and fitness experts that, executed properly, it can work. And his numbers—his model—show that it ought to add up. Six weeks, four pounds a week—it should work, right?

After six weeks, Paul calls you up on the phone and announces that the program has run its course. You ask if he's lost weight. And he says that, "Yes, as planned, I worked out for 90 minutes for six days a week. According to my model, I've lost 24 pounds!"

But that's not the question you asked. You asked if he's actually lost weight. Simply telling you that he performed the workouts as planned doesn't actually tell you if the assumptions he was using about how much weight loss he could achieve were correct.

So Paul may have lost weight. He may not have. But the thing is, based on his answer, we don't know.

On the stimulus, the government is responding to the question of whether or not the stimulus worked in much the same way that Paul answered the question about his weight loss. Prior to the program's passage, the White House developed economic models to determine the stimulative effects of government spending: Put a dollar of government money into the right sector of economy, get a little more than dollar of productive activity back out. But when asked to measure the stimulus program's success, they're essentially saying that they spent the money mostly as planned, so, based on the model, it must have created jobs.

Obviously, the workout analogy isn't perfect. One big difference is that weight loss is pretty easy to measure directly. As Harvard economist Greg Mankiw points out, it's almost impossible to accurately measure the tangible results of the stimulus program—which is why we see folks rerunning models in order to attempt to provide answers. And although both the body and the economy are complex systems that produce tremendous uncertainties, the uncertainties in weight loss science don't quite match up to the uncertainties in macroeconomics.

But the point isn't to nitpick the differences (though I'm sure some people will). Instead, it's simply to say that the "proof" touted by stimulus advocates that the program worked isn't really proof of much at all. Models can provide a rough guide to what we assume will happen in the future, but they're not nearly as good at telling us about the past.