A Billion-Dollar Bill on the Sidewalk

A new $29 bn. stimulus announced by Japan reminds about how more effective the package could be if we knew more about the impact of fiscal spending. Christina Romer (2012) and Council of Economic Advisers (2014, Ch. 3, Appx. 2) update on traditional aggregate estimates, but any such spending is also an opportunity for randomized trials—that is, a missed opportunity.

The motivation for experiments in macro is, of course, omitted variable bias. Macro has natural experiments to handle it. That’s what you find in research like Romer and Romer, 1989; Card and Krueger on the minimum wage in New Jersey; Card on the Cuban immigrants in Miami. Natural experiments are pure luck in this sense: you need to look for pseudo-random assignments, which are rarely the case. In contrast, designed experiments make all kinds of random assignments at will, including those allowing for interactions between macro policies. Governments spend hundreds of billions on programs outside routine annual budgets. These programs have nice, open-minded goals of supporting specific sectors or people. However, a typical assignment is not random within target groups—and it greatly complicates estimation of how effectively the money has been spent.

The 2009 American Recovery and Reinvestment Act created arbitrary opportunities for a few evaluations to appear, but apart from these bottom-up initiatives, the stimulus was business as usual. Eventually, the 2014 Economic Report of the President recommended RCTs for microeconomic programs and grants (2014, Ch. 7). It was an important step with too little attention to macro RCTs, which will have to wait.

Waiting for randomized macro evaluations costs billions of dollars, as policy makers launch programs based on careful, but imprecise, expectations of the impact. That’s despite per-capita costs of evaluations in macro are lower than similar overheads of microeconomic programs. Assignment in macro is simpler; household and firm responses appear in regular statistical reports. Why not to run more evaluations? No sophisticated problems or conspiracies here. It just takes twenty years for any idea to travel from economists to policy makers. The stopwatch is somewhere in the middle right now.

That means yes, the joke about $10 bill on the sidewalk is actually not about economists.