Posted by: Tobias | January 26, 2009

Stimulus Experiments

Len Burman on why we should experiment with different forms of stimulus in the face of our profound ignorance of what works and what doesn’t:

What do we do in the face of our ignorance? At the national level, we probably should try lots of different things — kind of a diversification strategy. We’re doing that. But we should also encourage the states to experiment so we can learn what works, rather than mandate a one-size-fits-all approach.

The ideal “experiment” would assign different “treatments” to different states. States that begin with A-E: tax credits, F-K: infrastructure, and so on. We could even have a control group that would get nothing. Sorry, Wyoming.

OK, that’s not going to happen. But suppose we used part of the economic stimulus package to give states grants of, say, $500 per resident, with more for states with especially high unemployment.

States could use the money to cut taxes, subsidize employment, build roads, drop money from helicopters. Some might even come up with good ideas not on the Obama whiz-kids’ list.

The feds would collect data from States on how they spent the money, and measure how households and firms responded. This treasure trove of data would fuel research on what works and what doesn’t.

This isn’t a perfect experiment. States’ choices won’t be random, but there are statistical techniques to deal with that. And, we’d end up with a lot more information to assess policy options — 50 data points instead of one, from a uniform, national policy.

He’s right, of course. This is never going to happen. But it should. It still seems more than a little crazy to me that the US government is about to spend 850 billion dollars without having a very good idea about what is likely to work and what likely won’t. Let’s at least spend some money on making sure we have a better idea in the future – recessions aren’t going away anytime soon, I promise you – or at the very least structure the spending in a way that will make it easier for those working in the econometric trenches to properly identify the effects of the stimulus.

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