Why Isn't Modeling Driving Policy?
Back when I began my studies in economics in the hallowed halls of Claremont McKenna College, I first leaned of economic models when I was introduced to them in a Bank Simulation program. We would provide inputs for several variables; they would be given to the modelers who would then run a simulation representing a bank’s operations for a quarter. It was amazing. The simulations were crude and the computers they ran on were cruder. We could run a simulation just once a week. But we could experiment and optimize banking policies to yield the most profits while maintaining sufficient liquidity.
Fast forward 40 years. Computing power has increased exponentially as has the understanding of how economies work. There are universities, governmental agencies, and private institutions with sophisticated models now that allow economists and policy makers to model the entire US economy at a very granular level. The CBO’s CBOLT model and the Penn-Wharton Budget Model are world class econometric tools that can be used to effectively evaluate changes in tax, fiscal, and monetary policy. The Federal Reserve also employees a number of economic models too. These models are substantive and take time to set up and run. Yet these models are what guide the CBO and the Fed when assessing policy proposals and Fed policy changes. As an example, the CBO and the Penn-Wharton model forecasted the minimal short-term impact of the Tax Cut and Jobs Act on GDP and jobs growth fairly accurately. These also forecasted the rapid growth in national debt.
The United States is faced with a near existential threat to its economy right now due to the current pandemic. The issues are incredibly complex. The relationship between policies to control the spread of the disease and to support the economy are tightly coupled. Yet, the Executive and Legislative Branches, while claiming they are making decisions based on facts and science, are really making decisions by gut instinct and political circumstance. This despite having some really phenomenal tools at their disposal.
Imagine if the folks at Johns Hopkins, the CDC, and National Institute for Allergies and Infectious Diseases had gotten together with the CBO, Penn Wharton, and the Fed and worked collaboratively to look developing a comprehensive set of health, fiscal and monetary policies simultaneously free from politics and solely focused on three areas:
1) Minimizing the loss of life and spread of the disease;
2) Providing interim economic relief to individuals and business through complimentary fiscal and monetary policy;
3) Plotting out a long-term recovery plan based on a national plan to inoculate the nation and our trading partners once vaccines emerged.
There would certainly be debates, but among experts. There wouldn’t be a debate based on the morality of extending unemployment benefits or increasing our levels of debt. Further, these models and simulations could be run and updated as data came in. It would become the impetus for upgrading the means that the government uses to collect and quality check the data used in these simulations.
Politicians need to work with analysts without prejudice on a constant basis. In a pandemic just as with a war, battles are won and lost based on the soundness of intelligence, the responsiveness of logistics, and strength of leadership to compel a nation to sacrifice in the short term for the long-term success of the campaign.