Recovery from Financial Crises: John Taylor Drives Noah Smith into Shrill Gibbering Insanity
Noah Smith:
Noahpinion: Reinhart-Rogoff vs. Bordo-Haubrich (with grandstanding by John Taylor): [D]o not listen to John Taylor. He is not being a scientist, he is being a politician…. [T]his is an example of how politics hurts the academic discipline of economics…. I think it's inevitable; you can hardly expect John Taylor not to do his job and support his boss…. Are we ever going to get political candidates to stop insisting that their advisors support their campaign narrative?… Maybe, but I am not optimistic.
I think Noah misses an important thing here: it's not just that economic advisors give their political masters the free gift of endorsements in return for vague promises of future high federal office. Politicians also do craft their messages and their policies to win validation from economists. And when somebody--like John Taylor--stops telling his political masters "no: I am not going to validate that" an important check on craziness is removed. As more than two former cabinet-level appointees have asked me about Taylor: "Why is he doing this? I wouldn't have done that. I wouldn't do that."
Then Noah turns to substance:
But do pay attention to the academic dispute between R&R and B&H…. [T]here are three big differences in the methodologies used by the two teams…. R&R compare recoveries across different countries. B&H only look at the U.S…. R&R define the "strength of a recovery" as the time required to reach the pre-crisis level of GDP per capita; B&H define the "strength of a recovery" as the rate of total GDP growth… following the trough…. R&R define a "financial crisis" much more narrowly than B&H.
It seems to me that R&R have by far the strongest case on all three dimensions.
Noah Smith:
Because B&H include only the U.S., they ignore episodes like Japan's crisis-and-recovery in the early 1990s. This means that, for one thing, B&H have a much smaller sample…. It also means that B&H are comparing across different periods of history. This doesn't seem appropriate to me. For one thing, in its earlier history, the United States was experiencing "catch-up growth", which means that the trend rate of growth was much higher than it is now…. B&H, by refusing to even look at other countries, are potentially throwing away a huge amount of information….
My instincts tell me that B&H's more expansive definition of financial crisis is wrongheaded - after all, they include 1981 as a "financial crisis", even though basically everyone believes that that was a "Fed recession" caused by the Volcker disinflation. Intuition strongly suggests that R&R's restrictive definition of a "financial crisis" is much more credible…. I like R&R's approach better than B&H's, because it comes at the problem from more different angles. This is how I think the best empirical research is done; you ask a question, and then you attack that question with multiple data sources, multiple alternative assumptions, and multiple models….
And I think no one should take John Taylor's promotion of B&H's results seriously, since he is part of Team Romney.
