From: pcollac@pyrnova.mis.pyramid.com (Paul Collacchi)
Newsgroups: misc.headlines,talk.politics.misc,alt.activism,sci.econ
Subject: Re: Boom Boom Boom Boom :)
Date: 27 Aug 92 01:14:14 GMT
Reply-To: pcollac@pyrnova.mis.pyramid.com (Paul Collacchi)
Distribution: usa
Organization: Pyramid Technologies, Mt. View, California.

In article <thompson.714869497@daphne.socsci.umn.edu>,
thompson@atlas.socsci.umn.edu (T. Scott Thompson) writes:

|> I am always amazed at how people claim to understand business cycles
|> so well when most economists are of the opinion that they are among
|> the most poorly understood of economic phenomena.
|>

I think its important to clarify and expand on this a little.  I think,
by "understand" it is better to say "predict", since prediction would
be the ultimate demonstration of understanding.  Secondly, I think most 
economists would agree that the business cycles exist.  This last 
assertion means that economies don't seem to expand indefinitely -- 
their curves are not monotone increasing.  It does suggest that the
'system' has indigenous forces at work which counterbalance one another,
and that the cyclical nature persist through whatever economic 'policies'
are thrown at it.

Another point has been well made that suggests that the business cycle
might show more regularity were it not for politicians trying to alter
things.

The complexity of the whole process is staggering.  Its very possible
that this 'system' has so many variables that the aggregate measure
GDP is in fact simply fluctuating about some norm in a regular,chaotic
way and is COMPLETELY unrelated to any of the effects mentioned by any of
us.  I don't think that there are really enough data points to make
proper correlations between political events such as tax reductions 
and economic metrics such as GDP.

This is why I posted the earlier remark about the pigeon conditioning
itself to believe a correlation existed between its action which coincided
with a reward given to it randomly.  Four "booms" in one hundred or so data
points doesn't seem like enough to discern any repetitive statistical
signature in a GDP curve. Besides, what constitues a "boom".  I think
we decided by first looking back at the graph for tax cuts and then
chose a boom to be those periods of GDP rendering which looked like
those that followed the tax cuts.  I think that's called 'data mining'. 
Secondly, when does the fiscal 'boom'following a tax cut "end"?  When
does the tax cut cease to be the significant factor?  When a democrat
gets elected? :-)  Or do we simply select as "significant" another
convenient event immediately prior to a contraction and say, "Well the
tax cut sure worked, but .... that damned [your prejudice here] cause
the [your expletive here] recession!"

This is why political debate under the guise of 'scientific' economics
is so much fun.  You just pick your own bias and then selectively 
perceive three or four events which make you right.  Its all good sport
and you never have to worry about being disproved since who can hold
enough of the variables constant and run enough trials to disprove you?

|> Let me point out some possible alternative "explanations."  The
|> Kennedy and Reagan tax cuts (together with the Vietnam war and War on
|> Poverty during the 60s) generated large government deficits.  There is
|> no way to sort out whether or not the resulting "booms" were due to
|> lower tax rates or due to Keynesian style deficit spending.  Second,
|> isn't it possible that the inflation in the 70s had something to do
|> with the enormous run-ups in oil prices by OPEC in '73 and '79 rather
|> than do to "bad policy" by the U.S. government?  Third, I find it
|> plausible that both the recession of 1979-81 and the ensuing drop in
|> inflation and economic recovery were as much due to the radical change
|> in monetary policy introduced by the Fed in the late 70s as they were
|> due to changes in fiscal / regulatory policies.
|> 
|> I am _not_ suggesting that my alternative theories are right and
|> others are wrong.  Instead, I am suggesting that the evidence about
|> "causality" for business cycles is pretty weak.
|>
 
I'm a little surprised by this.  Aren't there mathematical models which
are able, at least, to simulate GDP cycles?  These GDP cycles may not
have amplitudes or frequencies which match anything real, but the models
themselves may suggest something about the nature of variables at work 
needed to produce curves that 'look like' GDP graphs.

Paul Collacchi
Newsgroups: misc.headlines