From: thompson@atlas.socsci.umn.edu (T. Scott Thompson)
Subject: Re: Boom Boom Boom Boom :)
Reply-To: thompson@atlas.socsci.umn.edu
Organization: Economics Department, University of Minnesota
Distribution: usa
Date: Fri, 28 Aug 1992 16:14:49 GMT

pcollac@pyrnova.mis.pyramid.com (Paul Collacchi) writes:

>> > pcollac@pyrnova.mis.pyramid.com (Paul Collacchi) writes:
>>   thompson@atlas.socsci.umn.edu (T. Scott Thompson) writes:

>|> The most successful forecasting models do not attempt
>|> to model causal mechanisms directly, and therefore are rather
>|> uninformative about what the "fundamental forces" are driving the
>|> business cycle.
>|> --

>I assume then that there are "analytic" models as well -- one's in which
>tons of little micro-economic beings are "added up" to form a macro-economic
>whole.  You say these don't do too well?

Yes.  These models are known as "micro-simulation" models.  They have
a pretty good track record at predicting relatively stable things like
demographic change, at least over horizons of a few years.  They are
notoriously bad at predicting aggregate economic variables like GNP
over any horizon.

I used to work in the Human Resources Division of the Congressional
Budget Office.  We were often assigned the job of answering questions
like: "If we make policy change X to program Y what will happen to
government revenues &/or expenditures?"  Typically you cannot answer
questions like this without modelling the distribution of various
variables in the economy.  The macro aggregates are not enough.
Microsimulation models give forecasts of the distributions, probably
not very good ones, but they are the only tools available for
answering some of these policy questions.  So we used them.  However,
we _always_ rescaled the output of these models to be in conformance
with the macroeconomic aggregate projections produced by our macro
forecasting division.  This was partly because it was important for
the organization to tell a consistent story to Congress, but also
because we had no faith whatsoever in the aggregate projections that
came out of the microsimulation models.

>Are other developed economies anecdotally relevant?  Are there ANY examples
>of tax cuts which do NOT result in economic growth?  Are there any examples
>of tax cuts in our own GDP which did not result in growth?  Questions like
>these must be valid as far as 'disproving' hypotheses.  Given what you
>said, I don't think its ever possible to prove them.

Perhaps more to the point: Are there any examples of cuts in tax
_rates_ (which is what supply side economics is really all about) that
were expenditure and revenue (hence fiscal policy) neutral?

This is a point that I don't think many members of the general
population understand.  No economist that I know would disagree with
the statement

    "All other things equal, lower tax rates produce higher levels of
     economic activity."

The difficulty, of course, is lowering tax rates while keeping all
other things (including tax revenues) equal.
--
T. Scott Thompson              email:  thompson@atlas.socsci.umn.edu
Department of Economics        phone:  (612) 625-0119
University of Minnesota        fax:    (612) 624-0209
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