Are economists too reliant on models and not enough on good old economic thinking? Virginia Postrel reminds us of the utter confusion of the Carter administration in 1980, when inflation didn’t behave as economists’ models were predicting it would:
“It’s really scary,” a senior Carter administration official told Time in 1980, when inflation hit 13.5% after four years of increases. “This inflation thing is frightening because we do not know what causes it, or what to do about it. The economists go to their computers, plug in the data, and out comes information that says that nothing like this should be happening. It’s very, very scary stuff.”
This is from an interview that Fed chairman Jerome Powell gave to the Wall Street Journal a few weeks ago:
“That’s just one example, something that we didn’t see. We had a real hit to labor force participation. We didn’t see that coming. And so really these supply side factors, you have to add them in to any kind of economic model to get the kind of inflation that we have. We clearly had very strong demand, and we knew that. What we didn’t know and anticipate was how large the supply side effects would be and how persistent they were.”
Over at Vox, Dylan Matthews has a post with this quote:
Put another way, the people you’d expect to have the surest handle on where inflation is going have admitted they got it wrong, too — and by a lot. “The models really led us astray,” Karen Dynan, a professor of economics at Harvard and former assistant secretary of the treasury for economic policy, told me, offering the below chart as further evidence.
He adds this chart:
Models can be useful. It’s blind faith in models that’s problematic. Hopefully, economists will have learned that lesson this time around.
Talking about bad models, see this.