Thread by @GautiEggertsson

@ben_moll is right to take a little victory lap in a new paper with @MSchularick and @GeorgZachmann. This is based on his his work with @BachmannRudi, @DBaqaee, @christianbaye13, @kuhnmo, @andreasloeschel, @APeichl, #KarenPittel, @MSchularick. Let me explain 1/

https://twitter.com/ben_moll/status/1655837631756877824

This was timely public spirited policy research at its best. It had a big impact. I know, for I follow the polical dynamics in oil and gas well for reasons not relevant for this post. And I don't know how well you recall the environment their paper was written in. 2/

It was written early in the Ukraine-Russia war. The Germans were very reluctant to impose sanctions. The government was being heavily influenced by "research" by lobby groups. The government was dragging its feet in supporting sanctions fearing gigantic economic cost. 3/

The industry lobbyist predicted gloom and doom if Germany imposed sanctions and lost out on Russia's gas. And in come a few world class academic economist, combining their skills and tools of the trade, using state of the arts methods to address this question.4/

Their answer: The effect will not be all that big. There was a predictable backlash against the team that don't know the "real world" but just "live inside unrealistic models". I even recall the German cancellor calling out @BachmannRudi! 5/

The professional incentives for an academic to engage in this type of work is minimal. You can say it even has negative expected returns, given predictable backlash. 6/

It does not count on our CV's, for promotions, outside offers, salaries, etc. Some econ collegues even turn up their nose and show distain for "policy work" of this kind as not being sufficiently "serious." Many trivialized covid research on the same basis. 7/

That's why it is to be admired and celebrated when we see people providing the public good and sticking their head out. Make the hard call. This was important and may have had an effect on actual policy in a situation where major decisions were being made. 8/

And of course it did not hurt that the pointy-head academics, "living inside their little models with all those silly assumptions" turned out to be -- naturally -- right! 9/

There is a bit of a broader lesson here -- I think. Policy makers very often dismiss "models" pointing out special assumptions and the like in our mathematics. 10/

But I have spend some time in policy institutions. The choice is never really between an explicit theoretical model and some more "sophisticated" model free analysis based on the "real world" -- supposedly making no silly assumptions. 11/

This is a false choice. The choice is not using a model or no model. Dig into it and try to explicitly write down what those people that claim to base their analysis on a more "flexible and sophisticated approach" have in mind. Here is my experience: 12/

They are typically assuming some form of a model, typically partial equilibrium, even if they don't always realized it. And if you take the time to try to explicitly write down what they have in mind and spell out the assumptions the following emerges: 13/

More often than not it turns out that the "sophisticated real world" analysis proves to look exceedingly silly when you spell out the assumptions needed to arrive at the supposedly "model free" approach. 14/

In contrast, explicitly writing models typically helps you avoid making first order mistakes in thinking, however imperfect our models may be. 15/