Economic Placebo Effects

10/21/2012 03:32:00 PM
In medicine, placebo effects almost always have the same sign: people either do not experience any placebo effect, or the effect is positive. Recently in the econosphere there has been a lot of argumentation about the sign of the economic placebo effect. Here's Christina Romer arguing essentially that presidential "do something" attitude is associated with a substantial positive placebo effect, even if nothing is actually done. As Mark Thoma notes, this is similar to Romney's claim that simply electing him to office will trigger an economic boom even "without actually doing anything" purely through the awesome placebo that is Mitt Romney.

But not everyone is so optimistic on the value of placebo effects. John Taylor claims here that "policy uncertainty" is the main reason for the slow recovery, where otherwise expansionary short-term policies like fiscal and monetary stimulus are actually suppressing the economy by way of a negative placebo effect.

I'm a little disheartened to see these arguments, since they look very non-scientific arguments designed to protect each side's ideological bent. Nevertheless, I'm curious to see how the evidence actually works out. For all his huffing and puffing, John Taylor has yet to point us to a single study that actually asks the question of whether there is a causal link between business confidence and economic outcomes, even if we accept his premise that policy uncertainty is harming business confidence, which also remains unproven.

This seems to me to be a good time for an instrumental variables regression. We can easily regress economic outcomes on business confidence, but to a large extend causality goes the other direction--good economies foster high confidence--meaning that the estimates are meaningless. So we need to find an instrument that affects business confidence, but that we know is unrelated to economic outcomes in all other ways other than through business confidence. Any suggestions?
Unknown 10/21/2012 06:42:00 PM
matthew if we are going with the placebo affect(without actually doing anything)then obama is your man.he has not done a dam thing ,except that medical tax ,obamacare .oh and fast&ferocious you know killing 300Mexicans,and one american.oh and helping the black panthers at polling booths.
Matthew Martin 10/21/2012 09:26:00 PM
David, you are entitled to your opinions about Obama and his policies. However, I do not want to let that black panthers comment slide. It is insensitive and untrue--it is language that divides society, leaving black people feeling oppressed and white people feeling fear, all for no reason at all.