Mankiw: Post Friedman Ergo Propter Friedman

Andrew Schleifer (PDF) and Greg Mankiw share in a paean to Milton Friedman and the glorious growth and prosperity he has brought to all the poor and oppressed of the world.

I'm kind of shocked, as I usually am when Professor Mankiw goes into Friedman adulation mode. Because he should know better than anyone:

1. The evidence that shows it just ain't so,

   and

2. The perils of attributing causation this way.

Mankiw's 1995 Growth of Nations (PDF) is one of the best pieces of economics writing I've ever read. (You feel like you're sitting in his Econ 10 classroom at Harvard, absorbing genius and wisdom with every word.) It takes a deep and incisive look at what we can know based on decades of theorizing and cross-country empirical analysis asking the seemingly simple question: What has caused growth? What policies should governments put in place to promote growth?

He lays out the theory in twenty-five magisterial pages, then finishes with a section on "Empirical Studies of Economic Growth." He lists off the (correlational) lessons that we've learned from that research (below), and delivers the best seven pages on the difficulty of attributing causation that you're ever likely to read. 

It's enough to get an economics/policy dweeb all atwitter.

Until you get to the end. His conclusion?

Policymakers who want to promote growth would not go far wrong ignoring most of the vast literature reporting growth regressions. Basic theory, shrewd observation, and common sense are surely more reliable guides for policy.

Wait. Did he really say that? Is the profession that Mankiw stands at or near the pinnacle of simply…pointless? Is it true (as our current fearless leader, now Mankiw's former boss, seems to believe) that everything we need to know we learned in kindergarten (or Econ 10)?

Acolyte, deflated.

But take heart. Earlier in the paper Mankiw utterly contradicts his own conclusion. (Phew!) Sez Greg:

…correlations among endogenous variables can rule out theories that fail to produce the correlations, and they can thereby raise our confidence in theories that do produce them,…

Now that sounds more like the level-headed sage of Cambridge we thought were listening to. The first statement is especially declarative and unqualified (especially from an economist). If the correlational evidence says one thing, and a theory says the opposite, you can pretty much decide that the theory's wrong. Common sense says, "seems sensible."

Which gets us back to the beginning of the section, where Mankiw lists off most of the major bits of correlational consensus from all this research.

A low initial level of income is associated with a high subsequent growth rate when other variables are held constant. This is the finding of conditional convergence, discussed earlier.

The share of output allocated to investment is positively associated with growth.

Various measures of human capital, such as enrollment rates in primary and secondary schools, are positively associated with growth.

Population growth (or fertility) is negatively associated with growth in income per person.

Political instability, as measured by the frequency of revolutions, coups, or wars, is negatively associated with growth.

Countries with more distorted markets, as measured by the black market premium on foreign exchange or other impediments to trade, tend to have lower growth rates.

Countries with better developed financial markets, as measured, for instance, by the size of liquid assets relative to income, tend to have higher growth rates.

These all seem like good input for policy makers. But what's missing here? Well to begin with, small government and low taxes. It's missing because every study worthy of Mankiw's consideration says the same thing: for developed countries, larger government and higher taxes aren't associated with slower growth. There's no correlation–even though tax rates among developed nations vary hugely. And many of the statistically significant correlations that we do see are positive.

I really hesitate to impute motivation. But I will anyway. Is it possible that Professor Mankiw, having worshipped so long at the Altar of Milt (I know how he feels–see my “genius and wisdom” bit, above), is just unwilling to accept empirical evidence of sartorial paucity?

It's the only explanation I can think of for his abdication to the likes of Irwin M. Steltzer and the Hudson Institute, who take such glee in ridiculing egghead economists.

Computers are the opiate of the economist masses. Because it is now so cheap to "crunch" huge volumes of data, economists can devise elaborate equations and plug in millions of numbers with ease. They can also produce publishable material, which is so much more important than old-fashioned, good teaching in determining who receives the coveted tenure that forever relieves academic economists from reliance on market forces for their livelihoods. No need to determine whether the data accurately represent what they purport to represent; no need to ask a question of any interest to practical men of affairs or to policy makers. And certainly no need to make the results intelligible to all save a few colleagues.

This is the opening paragraph from Steltzer's review of Barro’s 1996 Determinants of Economic Growth: A Cross-Country Empirical Study. Steltzer grudgingly allows as how Barro might be different, and quite predictably extracts a truncated, cherry-picked quote “proving” that Big Government is Bad For Growth. (Barro’s data on developed countries says otherwise.)

Why does Mankiw give aid and comfort to the enemy? I would be utterly deflated if I came to the conclusion that for Professor Mankiw, ignorance is not the enemy.