22 Jun 2009

The Danger in Macroeconomic Tautologies

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Tyler Cowen has been on fire lately. Check out this:

You’ll also read many commentators breaking national income into its components of C, I, G, and X-M (consumption, investment, government spending, and net exports) and asking where the growth will “come from” to “drive” the recovery. Of course national income accounting is an identity, so this cannot be a nonsensical question. Yet when the word “drive” is used, we are smuggling in a causal category. There is no guarantee that any particular decomposition of the national income identities the relevant causal components for what will “drive” recovery. How would it sound if you aggregated national income by zip code or county (or household) and asked where the boost to drive recovery would come from? Such an approach might not be on the right conceptual track.

That’s just beautiful. I have been chafing against this notion of “we need exports and more consumer spending to pull us out the recession” too, but Tyler’s ZIP code analogy is better than what I was trying to come up with.

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