Stimulus regret revisited

A year ago I wrote,

Stimulus regret seems to be pretty widespread now. The undercurrent seems to be that, because unemployment is still 10% etc., the stimulus didn’t work …. This conclusion is based on pattern matching thinking. Pattern matching assumes simple A->B correlation: Stimulus->Unemployment. Working backwards from that assumption, one concludes from ongoing high unemployment and the fact that stimulus did occur that the correlation between stimulus and unemployment is low.

There are two problems with this logic. First, there are many confounding factors in the A->B relationship that could be responsible for ongoing problems. Second, there’s feedback between A and B, which also means that there are (possibly large) intervening stocks (integrations, accumulations). Stocks decouple the temporal relationship between A and B, so that pattern matching doesn’t work.

Today, Paul Krugman decries similar thinking, and identifies a third misperception (that an effect may be small either because of weak causal links, or because the cause was small),

It’s kind of annoying when people claim that I said the stimulus would work; how much noisier could I have been in warning both that it was grossly inadequate, and that by claiming that a far-too-small stimulus was just right, Obama would discredit the whole idea?

Krugman points out that evaluating suites of predictions, not just a single outcome, provides a way to discriminate between competing mental models:

Of course, the WSJ also said that the stimulus wouldn’t work. The difference was in how it was supposed to fail.

The WSJ view was that federal borrowing would crowd out private spending by driving interest rates sky-high, that the bond vigilantes would destroy the economy. …

My view was that government borrowing in a liquidity trap does not drive up rates, and indeed that rates would stay low as long as the economy stayed depressed.

How it turned out.

That’s a pretty clear test; among other things, you would have lost a lot of money if you believed the WSJ view.

The problem remains that there is relatively little of such thoughtful evaluation going on in the public discourse.

For a politician evaluated by people who ignore system structure, this is a no-win situation. As long as things get worse, blame follows, regardless of what policy is chosen.

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