Econometrics colloquium: Updated

More on the debate of econometrics can be found here.

Here is the text of the latest e-mail that I sent to our friend Don Luskin:

It seems to me that the debate regarding econometrics has become less of a debate about the discipline and more of an exercise in disproving the arguments from each side. Even those who claim that econometrics is a “pseudo-science” have acknowledged that it is useful or that they, in fact, use it in some capacity.

The problem seems to be with using econometrics for political purposes. Econometrics is useful for economists and investors, but can be dangerous in the hands of others. The problem with many of the academic studies is that professors are rewarded for having many citations to their work, regardless of its quality. In other words, an academic can receive many citations disproving a scholarly article in which he “proved” something that is counterintuitive or even contrary to economic theory. Thus he has been rewarded for producing what is essentially useless garbage. However, an abuse of the method is not enough reason for condemnation.

The debate is not whether or not econometrics is useful as even the biggest skeptics have agreed that it “can be a valuable discipline”. The debate is actually in regards to whether or not econometrics should be allowed to be used for public policy. That, unfortunately, is left up to individual opinion.

The bottom line is that econometrics has a useful purpose; the extent to which it should be used and trusted can be debated.

UPDATE: The debate continues here and it gets pretty heated. Here is a taste:

If Mr. Beck’s characterization of econometrics as “bullshit” is correct, why does he think intelligent and successful market participants (e.g., big banks, bond trading houses) pay good money to econometricians? I am always curious to know why people in the business of making money would so readily throw money out the window when all they need to do is consult wizards such as Mr. Beck, who can provide such compelling evidence of their folly and presumably can offer alternative analysis as well.

Ouch.

Don Luskin vs. Econometrics

After our friend Don Luskin posted comments claiming that econometrics was a pseudo-science. I sent off an e-mail asking him to explain why he thinks that econometrics is such a sham and he replied with an update on his blog. Now, the discussion has become a fierce debate with others joining the fray. You can read the debate here.

With that being said, allow me to respond to the latest comments.

I am still not truly sure what Luskin meant by not being able reproduce results. In fact, first semester econometrics students are often given assignments in which they are required to reproduce someone else’s results and then expand on them. Further, Luskin claims that that the data is often inaccurate and poorly defined. Although this may be true in some cases, these studies are quickly proven wrong and dismissed by academics as having “poor data”.

He continues by claiming:

Because it posits cause and effect relationships in data that cannot be proven — and uses these very relationships themselves as “proof” of its claims — it is neither “logical” nor “subject to verification.”

These relationships are proven through statistical methods. Are we to assume that statistics is a pseudo-science as well? Econometricians set up models with a dependent variable and several independent variables. They then use regression techniques such as ordinary least squares, ridge, spatial, tobit, probit, etc. to determine the relationships the independent variables have on the dependent variables holding all others constant. The studies are “subject to verification”. Econometrics has been used to show that consumption, investment, government spending, and net exports determine GDP, which is in line with economic theory.

Finally, the fact that errors can sometimes occur and that data can be manipulated is a problem common to all science. Simply because errors occur is not a reason in and of itself to dismiss a method of study.

UPDATE:  The debate continues here

Outsourcing monetary policy

Daniel Gross explains the outsourcing of monetary policy:

Outsourcing isn’t just a one-way street on which rich countries shift jobs overseas. In recent years, some developing countries have contracted out the work of setting monetary policy to the United States. Ecuador and El Salvador, in 2000 and 2001, respectively, abandoned their own currencies, adopted the dollar and placed their monetary policy in the capable hands of Alan Greenspan, then the chairman of the Federal Reserve.

Read the whole thing.

My latest at TCS Daily:

“Snow Job”:

The Chicago Mercantile Exchange (CME) has announced plans to offer futures contracts for seasonal snowfall in New York City and Boston. Investors, companies, and local governments will now bid on contracts predicting the snowfall in each city in an attempt to make money and manage risk. The announcement is exciting not only for economists, but for people who wish to have accurate estimates of snowfall…

Continued at TCS Daily.