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Home Publications Blogs Beat the Press In History of Economic Errors, Martin Feldstein Deserves Mention

In History of Economic Errors, Martin Feldstein Deserves Mention

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Wednesday, 17 April 2013 23:42

Former students and admirers of Harvard professor Martin Feldstein, who was also the chief economist in the Reagan administration, were undoubtedly outraged to see him excluded from the NYT's Economix blog list of top blunderers in economics. Professor Feldstein's claim to fame in this category stems in large part  from a 1974 article which purports to show that Social Security led to a reduction in private savings.

This article received considerable attention and played an important role in advancing Feldstein's reputation as one of the top economists of his generation. However, it turned out that the result was attributable to a programming error. This error was eventually uncovered by Dean Leimer and Selig Lesnoy, two researchers at the Social Security Administration. When the error was corrected, the relationship between Social Security wealth and private saving turned out to be statistically insignificant.

Feldstein actually revisited the topic again in the 1990s and claimed that with two decades of additional data he was able to establish that he had been right all along. This one turned out not to be quite right either. My colleague David Rosnick and I tried to replicate his results without success. After repeated efforts to contact Professor Feldstein to better ascertain his methodology, he eventually gave us enough information to determine that we were running our regressions correctly.

Feldstein also added that it did not surprise him that we could not replicate his results, since saving data are subject to large revisions. This is true, but then it leads one to wonder why anyone would make major policy pronouncements based on results using the pre-revision data.

 

Addendum:

I am also reminded of this $12 trillion mistake back in 2003 by Michael Boskin, who had been the chief economist in the administration of the first President Bush. He was briefly convinced that money being withdrawn from tax sheltered accounts like 401(k)s would lead to huge budget surpluses. (Thanks to Charles McMillion for this one.)

There was also the time in 2007 when Boston University Professor Larry Kotlikoff, one of the country's leading deficit scolds, was concerned that people were saving too much for retirement.

Comments (13)Add Comment
...
written by Last Mover, April 18, 2013 4:57
Once again Dean Baker the Error Terrorist prys data errors from the cold dead pages of classified history that protects them from the public.
All of These Cases Prove that Keynes' Analysis Was Correct
written by Paul Mathis, April 18, 2013 5:32
Economists who ignore Keynesian concepts do so at their peril. His fundamental analysis of savings, investment, consumption and government spending was, and is, correct. Until his ideas are proven wrong, contrary analysis must be regarded with great suspicion.
Oh man
written by Chris Engel, April 18, 2013 6:55
Dean, it sounds like there should be a CEPR report that compiles a whole list of these. Or a book!

These are great anecdotes that help to put topics in context, useful for analysts, consultants, teachers, etc.

between Stockman and this clown...it's becoming clear just how incompetent Reagan's gang was in economic policy.
...
written by skeptonomist, April 18, 2013 7:58
A link between SS taxes and private retirement savings seems very plausible - why wouldn't people save more if their taxes are lower and they don't have SS benefits to look forward to? I think I will tentatively assume that the link exists until it is proven otherwise. But quantifying it is another matter - you can't do experiments with strict control of the variables involved, and studies would be likely to be inconclusive.

Anything which reduces the amount of money flowing through Wall Street is usually a good thing. Certainly it is at the moment, since corporations and banks have plenty of cash, but demand (consumption) is low. If SS diverts the money which would go into things like 401k's, where it tends to inflate stock prices, to seniors who will spend most of it, that is definitely a good thing as far as the current situation is concerned. Of course there is the long-term problem of assets for retirement, but one solution to that is to expand SS so that retirement is less dependent on stock prices, whether in 401k's or disappearing constant-benefit plans.
...
written by AlanInAz, April 18, 2013 8:07
Feldstein was also guilty of slight of hand during the presidential campaign when he analyzed the Romney tax plan.

http://delong.typepad.com/sdj/2012/08/martin-feldstein-accidently-proves-either-i-152-186-or-ii-it-is-mathematically-impossible-for-romney-to-keep-his-tax-po.html

a confederacy of dunces
written by Peter K., April 18, 2013 8:52
Not strictly speaking economic errors, but in the same ballpark: Alan Greenspan/Rubin/Summers etc. on the resiliency and risk management of financial markets.

Bernanke: "subprime is contained." (guys appointed by Reagan, Clinton. and W.)

McCain in 2008: the fundamentals of the economy are sound. No, their methods were unsound as GDP declined 9 percent in 2008Q4. But now I'm leaning more towards Baker's modest proposal to allow the financial sector's slate to be wiped clean.

still being used
written by Arne, April 18, 2013 9:05
Andrew Biggs at,
http://www.american.com/archiv...bad-idea,
is using a 1998 literature rview, http://www.cbo.gov/publication/11011,
that cites Feldstein. Even if it is true that savings is reduced, it is less than 1 to 1, so retirees are unambiguously better off, but I find myself not able to assess the relative merits (to the economy) of increasing demand and increasing "savings".
...
written by Kat, April 18, 2013 9:09
The article about professor Larry K was kind of odd. The contention was that Americans were saving too much for retirement and he based this observation on... the fact that retirement calculators of financial companies overstated how much money someone needed in retirement?
Might it be useful to actually examine what households had saved in 2007? Or, household wealth in 2009-- Larry might find that level of savings more to his liking.
link problem in my comment
written by Arne, April 18, 2013 10:03
The title of Biggs post is Why Expanding Social Security Is a Bad Idea.
re: Chris Engel's Modest Proposal
written by Pauley, April 18, 2013 10:29
Is there, or should there not be, a grading sheet of journalists, economists, orgs and news outlets for general reference on where on the spectra of competency, honesty, corporate shilliness and [insert whichever here] these fall and to what degree the rational public should give them credence?
Maybe James Galbraith's May 18, 2010 statement to the Senate Judiciary deserves mention
written by John Wright, April 18, 2013 1:35
James Galbraith stated "I write to you from a disgraced profession."

http://rwer.wordpress.com/2010/05/18/i-write-to-you-from-a-disgraced-profession/

In the USA at least, many economists appear to be servants of the elite in their pronouncements.

The cynic suggests to be otherwise could have a deleterious effect on their own income.
...
written by Calgacus, April 18, 2013 10:43
Skeptonomist: A link between SS taxes and private retirement savings seems very plausible - why wouldn't people save more if their taxes are lower and they don't have SS benefits to look forward to? Yes. The existence of SS and its effect on savings was one of Keynes's arguments why the Depression would not recur in the USA after the war ended.


Anything which reduces the amount of money flowing through Wall Street is usually a good thing. Certainly it is at the moment, since corporations and banks have plenty of cash, but demand (consumption) is low. If SS diverts the money which would go into things like 401k's, where it tends to inflate stock prices, to seniors who will spend most of it, that is definitely a good thing as far as the current situation is concerned. Again, you're channeling JMK.
Wasn't there a noted fail by Alesina et al?
written by Hugh Sansom, April 19, 2013 9:44
Another paper about the wonders of austerity by Alberto Alesina and Silvia Ardagna. Paul Krugman wrote on this just over a month ago: http://krugman.blogs.nytimes.c...g-alesina/

Among other things, we need a study of how just _being_ at Harvard increases the probability of one's work being accepted as The Gospel Truth.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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