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Why a Dataset Doesn’t Speak for Itself April 3, 2013

Posted by larry in economics.
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In short, all data require an interpretation before being incorporated into an explanatory theory.

In the flowing graph, the same data can lead to different explanations for what is going on. The same data can yield differing interpretations. That is to say, vide Quine, theoretical matters are underdetermined by data. (This does not, however, justify Friedman’s cavalier attitude to data.)

[Graph: David Beckworth, University of Texas, San Marco. GDP has been transformed into Naperian logarithms, natural logs; so for 1929, real GDP = c.$865.2bn => ln(865.2) = 6.763.  And in 1933, real GDP = $635.5bn => ln(635.5) = 6.45.]

SameDataDifferentExplnation

One thing must be pointed out with respect to this regression line. If, as seems to be the case, the period from approximately 1924 to 1929 was a bubble, then the regression line based on that period is too high. As it is, the line appears to depict a period of normality from approximately 1924 to 1929, followed by a severe disruption, which is then followed by a return to normality. This is not quite the truth.

As the graph clearly depicts, in the current development of economics, different interpretations can be given of the same data.  In our particular case here, the Higgs-Krugman interpretations are complementary and are about different factors, but this need not always be the case.  In my opinion, the rather severe recession that took place in 1937-38 when Roosevelt stopped the fiscal stimulus and the recovery that begins after it is started again can be interpreted as a Millian situation where causal agency can be attributed to Roosevelt’s fiscal stimulus.  It can also be argued that the recovery was as slow as it was and not as great as hoped because it was not enough.  It can be seen that the war propelled the system out of the depression quite quickly.

My interpretation of the two recovery periods is consistent with how a Keynesian would see it.  That is, that it was Roosevelt’s fiscal stimulus that was responsible.  The Millian test for the stimulus being the fundamental cause becomes apparent when the stimulus is removed, which causes a recession almost immediately, and begins again when the stimulus is reimplemented.  The recovery is present when the fiscal stimulus is present and absent when the stimulus is absent. The war of course acted as a superstimulus and generated a massive recovery, which made Roosevelt’s own stimulus package redundant and so it was wound up.  A comparison of the effects of Roosevelt’s fiscal stimulus and that of the war strongly suggest that it is the magnitude of the fiscal stimulus that is the effective agent of recovery.

I ought to point out that Amity Shlaes is a Bloomberg reporter on economic issues, not an economist, and in a book published in 2008, The Forgotten Man, argues that Roosevelt’s fiscal stimulus programs, the New Deal, made the Depression worse.  She also thinks LBJ’s Great Society was a Keynesian experiment, which it wasn’t because it was an attempt at large scale social engineering, and a reasonably successful attempt in some respects.  However, she does not like it and you immediately understand this when you know that she was a fan of William F. Buckley.  I can only think that it is her book and her “debates” with Krugman that got her a place on this graph.

Buckley and Gore Vidal both commented on the Democratic convention and, due to their political differences, they attacked one another beginning with each others’ political views.  But this escalated rather quickly.  It wasn’t long before Buckley called Vidal a queer and Vidal responded by calling Buckley a fascist.  Each threatened to sue the other though the case never materialized.

Further evidence that fiscal stimuli work and austerity policies don’t is supplied to the following graph that I created using data from eh.net. A similar, though somewhat modified, caveat re the regression line applies to this graph as it does to the one above.

FDRFiscalStimuliPassMillsTest

The graph shows FDR preparing for war long before the end of 1941. For evidence and argument that Roosevelt prepared for the war in the Pacific long before Pearl Harbor, consult Robert B. Stinnett, Day of Deceit: The Truth About FDR and Pearl Harbor (2000).

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