Is a Budget Deficit Necessary for Economic Health?

The blow-up over the Reinhart-Rogoff results reminds me of a point I’ve been meaning to make about our ability to use empirical methods to make progress in macroeconomics. This isn't about the computational mistakes that Reinhart and Rogoff made, though those are certainly important, especially in small samples, it's about the quantity and quality of the data we use to draw important conclusions in macroeconomics.

Wonderfully interesting recent CEPR (DP No. 9269) paper titled THE FAILURE TO PREDICT THE GREAT RECESSION. THE FAILURE OF ACADEMIC ECONOMICS? A VIEW FOCUSING ON THE ROLE OF CREDIT by Maria Dolores Gadea Rivas and Gabriel Perez Quiros (http://www.cepr.org/pubs/new-dps/dplist.asp?dpno=9269.asp) takes up a gargantuan task of trying to answer why (and indeed if) economists failed to predict the latest financial and real economic crises.

Steven HorwitzOver at the Cobden Centre, Toby Baxendale reports on a study he commissioned, written by Anthony Evans and several co-authors, looking at what the public does and does not understand about how the banking system works.  (Full disclosure:  Tony showed me an early draft of the questions and I provided him some feedback on precise wording, but I was not compens

If you want a nice exemplar of some issues in the history of economic methodology, you could do worse than contrast two recent papers - one by David Meenagh and colleagues, one by Rhys ap Gwilym - to chapter 12 of Keynes’ General Theory; all address the question of whether markets are efficient.

Paul, a loyal MR reader, writes to me and queries:

Peter Morici submits:Since the Democrat’s debacle in Massachusetts, President Obama has been campaigning. In the State of the Union address, his new budget and other staged events for the faithful to gather for hope, the President has the audacity to double down on class warfare and crowd frenzying envy, and tout as success an economic recovery about as thin as the Chicago Cubs World Series record book.

Catherine Rampell reports from the front lines of economic thinking: “I’m a deficit hawk, but…” That’s a line I heard a lot during recent trips to Washington and to a national economics conference in Atlanta. It was proclaimed, again and again, by economists who seemed worried about losing their budget-consciousness bona fides because they are currently urging legislators to expand stimulus efforts, or at least not to curb them.