The Comfort of Conformity: How Hegemony in Economic Modeling Precludes a Better World
By Jeronim Capaldo
In answering macroeconomic questions about the US economy, such as the impact of increased spending and the benefits of more trade, experts often rely on economic models. However, these models, such as Dynamic Stochastic General Equilibrium (DSGE) models and Computable General Equilibrium (CGE) models, have limitations and flaws that hinder our understanding of the macroeconomy. This reliance on flawed models has led to a dominant economic strategy based on fiscal austerity, labor market flexibility, and trade liberalization, which has been followed by many countries, including the world’s richest economies. These models have also limited policy discussions and prevented alternative approaches that could better explain critical aspects of reality, such as employment growth, inequality, and inflation.
A closer look at the DSGE and CGE Models
DSGE models have influenced policy decisions regarding potential output and fiscal policy. These models have supported austerity measures in the European Union (EU) since 2011, despite their poor track record. Similarly, CGE models have monopolized global trade analysis and have hindered sensible discussions on trade policy by ignoring unemployment and inequality. Both types of models have limited our understanding of the macroeconomy and have prevented the exploration of alternative approaches.
A case study: Italy’s six-year recovery plan
An example of the influence of these models is Italy’s COVID-19 recovery plan, which includes macroeconomic projections from a DSGE and a CGE model. The projections differ significantly, and the choice between them can have a significant impact on policy decisions. However, both models have limitations that prevent them from accurately capturing demand-driven growth. This disconnect between the models and reality diminishes the relevance of their simulations.
The comfort of conformity
Macroeconomic policy decisions are influenced by experts armed with models. The prevailing opinion, informed by inadequate models like DSGEs and CGEs, exerts significant influence on sovereign decisions. Governments often conform to this prevailing opinion due to their reliance on other governments and intergovernmental organizations during crises. Breaking the influence of these flawed models on policy requires access to alternative models and encouraging policy discussions outside the dominant orthodoxy.
SDGs, Targets, and Indicators
1. Which SDGs are addressed or connected to the issues highlighted in the article?
- SDG 8: Decent Work and Economic Growth
- SDG 10: Reduced Inequalities
- SDG 16: Peace, Justice, and Strong Institutions
2. What specific targets under those SDGs can be identified based on the article’s content?
- SDG 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 percent gross domestic product growth per annum in the least developed countries.
- SDG 8.5: By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value.
- SDG 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average.
- SDG 16.6: Develop effective, accountable, and transparent institutions at all levels.
3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?
- Gross Domestic Product (GDP) growth rate
- Employment rate
- Income growth of the bottom 40 percent of the population
- Transparency and accountability of institutions
SDGs, Targets, and Indicators
| SDGs | Targets | Indicators |
|---|---|---|
| SDG 8: Decent Work and Economic Growth | 8.1: Sustain per capita economic growth in accordance with national circumstances and, in particular, at least 7 percent gross domestic product growth per annum in the least developed countries. | Gross Domestic Product (GDP) growth rate |
| SDG 8: Decent Work and Economic Growth | 8.5: By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value. | Employment rate |
| SDG 10: Reduced Inequalities | 10.1: By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average. | Income growth of the bottom 40 percent of the population |
| SDG 16: Peace, Justice, and Strong Institutions | 16.6: Develop effective, accountable, and transparent institutions at all levels. | Transparency and accountability of institutions |
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Source: bu.edu
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