Confirmation Bias in Macroeconomics

Prakash Loungani writes,

The evidence shows the “cycs” have been proved largely right. U.S. unemployment has fallen pretty much in line with the recovery in output. U.S. states where growth was stronger than the national average had declines in unemployment greater than the national average. And looking across the globe, countries which experienced more rapid growth than the global average — a group which includes the United States and the United Kingdom — had declines in unemployment greater than the global average.

Pointer from Mark Thoma. His point is that this vindicates the theory of aggregate demand. My response: as opposed to what? A theory that output and employment are totally unrelated? Whose theory is that? In fact, employment and output should be correlated whether one is telling a PSST story or an aggregate demand story.

The usual notion of confirmation bias is that people over-rate findings that favor their preferred point of view. But macroeconomists go beyond this. They take findings that are completely neutral in their implications for one point of view vs. another and claim that these findings confirm their preferred point of view.

4 thoughts on “Confirmation Bias in Macroeconomics

  1. Wasn’t too long ago when the UK was the poster child for ‘foolish austerity’ that was going to strangle AD, stifle GDP growth, and prevent any recovery in employment.

    Then the Brexit vote was going to send Britain into an economic tailspin.

    But in both cases, as far as we can tell at this point, the country ended up doing reasonably well regardless.

    ‘Motivated confirming interpretation’ is one thing, but it’d be nice if the claims were consistent from week to week.

  2. There is a weak and strong version of every theory. The “strong” version is often treated as the caricature of the position, but it is the one that has empirical content. The “weak” version searches for excuses for why a certain event does not falsify it, which is bad, but is often treated as the more subtle understanding of the theory.

    The evidence over time is entirely in line with the strong version of “aggregate demand matters in the short run, but not in the long run,” which was the dominant paradigm pre-crisis. The weak version could find some excuse as to why the opposite would have still been in line, but it would sound a little silly to outside observers.

    Maybe the biggest issue with PSST I have is that I don’t know what the strong version of PSST entails.

  3. It does lean away from structural interpretations. Under structural unemployment, the most depressed areas will tend to stay depressed or become more depressed while the least depressed areas will tend to grow the fastest as employment shifts away from deficient, obsolete, declining areas towards growing areas. Now you can claim all areas have both declining and growing industries so one can’t distinguish them with much power, or you can argue incentives for growth are higher in areas with higher unemployment so patterns will shift towards those areas which suggests patterns are not heavily geographically or narrowly industry based, but it does require addressing.

    • I would say it is not a good explanation of the issues which is not that employment and output are correlated, but that growth is often stronger where it has been most impacted by recession.

Comments are closed.