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An Open Letter to Paul Krugman

Posted By William Beach On April 18, 2011 @ 2:40 pm In Economics | Comments Disabled

Over the past two weeks, you have relentlessly engaged in dishonest, deceptive and factually incorrect critiques of Heritage’s recent analysis of the Ryan budget plan, and they need to be addressed. With all of the work good people of every political stripe need to be doing in Washington today, the last thing we all have time for is correcting your typically contrived commentary. But when The New York Times gives you such a platform to spread distortions, they necessitate a response.

You’ve laid out several claims about Heritage’s macroeconomic analysis which you’ve urged your readers to consider in rejecting our recent work on the House Budget Resolution, also known as Budget Chairman Paul Ryan’s budget plan.

First, you assert our work on the Ryan plan should not be believed because our macroeconomic forecasts of the 2001 tax relief legislation proved to be incorrect. Second, you claim we essentially made up our estimates of how the Ryan plan would affect economic performance by crafting our work to reach supply side conclusions. And third, you declare we are intellectually dishonest because we posted a set of results on the day that Ryan released his plan that drew immediate criticism, withdrew those results, and posted a second set of results that same day.

Each one of these claims is false, as you most likely recognize.

Claim #1 – The 2001 tax relief analysis: As you should know, the purpose of using economic models in the analysis of proposed policy change is to give policy makers advice on the likely effects of their policy moves. They need to know if proposed actions will produce more or less economic activity and how the pace and depth of economic activity will affect the key fiscal metrics under their control. In short, we’re forecasting changes from the historical trend of the economy.

When we made the economic forecasts in March of 2001 of how the 2001 tax relief legislation would affect the next ten years of economic life, we did not know that the United States would be attacked on September 11, that we would begin fighting a ten-year, world-wide war against global terrorism, that the housing sector would collapse under the weight of 30 years of bad public policy, and so forth. Even so, we succeeded in our task of giving accurate economic advice: we got the trend effects right.

  • We argued that the 2001 tax act would raise the level of output above trend. We estimated a 2010 GDP of about $12.6 trillion. It actually came in around $13.2 trillion.
  • We argued that the 2001 tax cuts would stabilize and grow the labor market. Stability occurred: our unemployment estimates are within a few tenths of a percent of actuals prior to the onset of the great recession. What Heritage and others did not get right was the degree to which older labor would leave the labor force in the period 2001 through 2007 and the effects of increasing global competition. Along with the Congressional Budget Office and nearly every other forecasting group in the country, we overestimated the growth of the labor force in the ten-year period 2001 through 2011.
  • We argued that after-tax income would grow significantly higher than baseline as a result of the tax cuts. It did and a good deal more than we anticipated.
  • We laid out estimates that nearly every major economic indicator would grow above trend, and they did, especially the all important consumption expenditures of households and businesses.

I’m very proud of our policy analysis from that tumultuous period in U.S. history. If anything, it shines even brighter today as a result of all that has transpired to dislodge the economy over the past ten years.

Claim # 2 – We crafted the Ryan plan results with the end in mind: While I can see how you may have forgotten the limited purposes of economic policy modeling (though it’s still shocking that someone of your stature could be so unmindful), it is simply bizarre that you argue that we designed the economic modeling of the Ryan plan to reach specific conclusions. Either you are intentionally lying about our work, or you are totally ignorant of the complex, widely used model we employed for this work and also failed to read the detailed description of what we did that is posted on the House Budget Committee web site along with our results (which you apparently did see).

We used the highly regarded U.S. Macroeconomic Model of IHS Global Insights, Inc. Perhaps this is a model you as a pundit “do not recognize,” but most economists do.  This model has been around in its various forms for nearly 50 years. It contains over a thousand equations and several thousand variables. The modeler’s ability to affect the mechanics of the model is very limited, and, given the fact that the Budget Committee gave us final inputs only a few days prior to publication of their budget, we only had time to make sure that this detailed model would solve with the enormous changes to public policy we had to introduce into it.

Then, as I mentioned, we published a detailed description of how we did this work. Even today, it is there for anyone to read, and I especially encourage you to do so. I don’t expect everyone to agree with our modeling of this plan, but I do expect the debate over our work to start from an understanding that our modeling is fully described in the methodological appendix to our publicly available report.

Claim #3 – We’re intellectually dishonest because we switched out our initial set of results for a second, less controversial one: You’ve made this claim several different ways over the past two weeks, and I just don’t have time to rebut each version.

First, the suggestion that we switched out one set of results for a second one on April 5 is simply false. With the exception of the results for annual change in the unemployment rate, those currently posted on the House Budget Committee web site are the original estimates of April 5. I have described in great detail in many published interviews the steps we took to audit our unemployment estimates and why we posted new estimates the next day.  I can’t think of any way you have not seen these explanations, but I would gladly send you copies of these interviews if you haven’t seen them.

I posted a new set of unemployment estimates on our web site later that day. I also want to point out that we made this change in full public view, as your many published exclamations clearly prove.

So, Paul, I strongly urge you to engage me from this point on in serious policy debate. This is perhaps a tall request to make of someone whose recent column “Let’s Not Be Civil” is filled with hysterical demagoguery. You and I will likely never agree about the way the economy works, but an intellectually honest debate between us could encourage someone whose views really count to solve the big policy problems that you and I have frequently agreed are grave dangers to the future of this country.

Sincerely,

Bill Beach

Director, Center for Data Analysis


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