A question for folks smarter than I am on these matters...
We have a diverse readership here on WARN. I have chatted with a few of you via email and in other contexts and know that there are some quantitatively oriented and trained social scientists among you.
In the interest of transparency, I can read the math and the stats. I can provide some takeaway on what they convey or not. I can also do a pretty decent sniff test on a funky looking model--but that doesn't mean I can tell you exactly what is wrong and how to do the math by hand to smoke it out. In those instances I say "you need to go talk to that person down the hall."
Today's New York Times piece on Herman Cain's "9-9-9" plan--or as I like to call it the "no, no, no" plan--had a very revealing passage. We now know that the author of said policy briefing is not an economist, he is actually a hedge fund financial manager type, but the following passage really struck me:
In an interview, Mr. Lowrie said he had a bachelor of science degree in accountancy from Case Western Reserve University. On his Facebook page, he describes his political views as “free markets.” Mr. Lowrie said he had been inspired by two well-known proponents of supply-side thinking: Arthur Laffer, often considered the father of the concept that lower tax rates help pay for themselves by generating additional economic growth, and Jude Wanniski, who promoted the idea among politicians. Mr. Lowrie became involved with the Ohio chapter of Americans for Prosperity, the conservative organization supported by the billionaire Koch brothers.
The plan could have major economic and political challenges: It might result in a substantial revenue loss for the government and shift the tax burden toward lower- and middle-income people.In an interview, Mr. Cain, a math major in college, said he had asked Mr. Lowrie to do a “regression analysis” that would allow the government to eliminate all existing taxes, including those on capital gains and estates, and collect the same revenue from just three streams. “The number came up to be 9 percent,” Mr. Cain said. “And that’s how we came up with 9-9-9.”
Mr. Lowrie, who met Mr. Cain at a conference sponsored by the conservative Club for Growth, dismissed the notion that his own understanding of economics was limited by lack of a Ph.D. “I don’t list myself as an economist,” he said. “I have an accounting degree, and I’m an investment adviser. I’ve never hung out in a faculty lounge.”
A former staff member for Mr. Cain in Iowa described his and Mr. Lowrie’s relationship as “buddy-buddy,” adding, “They were just like two executives palling around together.”Their plan has drawn fire from both right and left. Conservatives are wary of a national sales tax, concerned that it would create another, easily increased method of taxation. Among the critics are The Wall Street Journal editorial page and Bruce Bartlett, an official in the Reagan and first Bush administrations, who contributes to the Economix blog for The New York Times.
First, anything that has to do with the much misunderstood Laffer Curve gives me pause. Second, anything having to do with the Koch Brothers should raise a huge red flag amongst folks concerned with the Common Good. But, the statistical lingo which is designed to impress lay people begs an especially good number of questions.
1. Given all of the variables in a nation's economy can you actually use a basic (or even simultaneous) regression model to "predict" economic outputs like GDP? In addition, during last night's debate Herman Cain bragged about "dynamic modeling," i.e. including assumptions about U.S. economic growth as a constant in the model. How reliable is dynamic modeling? How does one factor in the ups and downs of the economy to date, and are said predictions at all reliable out past a given time horizon? Is this some type of weighted variable?
2. Statistical modeling is useful to the degree that it gives you a better answer than a guess would have produced otherwise. If a basic regression analysis has revealed the genius of Cain's 9-9-9 plan, why are there ever business cycles, or ups and downs, or system shocks like the Great Recession? How and why do these models fail? And when have they ever been successful at making accurate predictions?
3. Does the ecological fallacy apply to econometrics? I primarily work with cultural texts and theory. But I have always been suspicious of grand models that purport to make predictions about the economy. Is this suspicion misplaced?4. Finally, is Mr. Lowrie qualified to be offering these types of analyses? When he says, "“I have an accounting degree, and I’m an investment adviser. I’ve never hung out in a faculty lounge,” I get more than a bit worried. Are you?