Introducing Suzie Dershowitz Part 3

Still ‘Provoking Accountability’….Of the ‘Unaccountable’

POGO's Suzie Dershowittz, Source: POGO

Back to Part 2

Major Ploy Du Jour #2: “This Proves/Refutes Our POV/Their POV” (In this case both). Only.... it doesn't. Hint: You could lay all the economists in the world end to end and you still wouldn't be able to reach a conclusion.

Ms. Dershowitz’s cogitative effluence attempts to use the CATO ‘study’ as evidence (may I say ‘proof’?) that one particular defense industry economic impact study, which we shall refer to as the “Fuller study”, and one that points to destructive effects from an imminent and abrupt downturn in defense acquisition spending, is not to be trusted and is also out of the ‘mainstream’ of economic thought. Now, I have many problems with using the CATO ‘study’ in this manner (as I would for any study used in the same way). BUT… for this exercise we will focus on problematic areas of the CATO analysis (because as much as POGO might like to think it is a study-- it is not a study, but is merely an analysis that is critical of the Fuller study) where Ms. Dershowitz unwisely attempts to use in support of her assertion that ‘left, right, and center’ agree with POGO: that there will not be the kind of damage that the industry-sponsored study warns us will happen.

The key points that POGO is relying on and promoting in the Dershowitz piece are twofold:

1. Dershowitz/POGO relies on the CATO claims that the Fuller study overstates the adverse impact of lost defense acquisition programs because it does not take into account the impact of applying freed resources in the economy elsewhere.
2. Dershowitz/POGO relies on CATO claims (and claimed ‘evidence’) that the Fuller study overstates the net economic ‘multiplier’ of defense acquisition spending.

Fatally-Flawed POGO/CATO Point #1

The CATO claim of Fuller overstating the adverse impact of defense cuts by not taking into account the redirection of resources for other purposes is relayed to us by POGO/Dershowitz as follows:

What's more, Zycher explains that redirecting resources (such as labor and capital) to more productive uses can yield long-term benefits for the economy as a whole:
The process of allowing market forces to redirect resource use increases aggregate output and wealth, thus making virtually all individuals better off over time on net. The movement of resources from less to more profitable sectors increases the aggregate productivity of the economy.

The first problem with this complaint is how it is framed. What Dershowitz fails to mention is that the CATO author’s problem with the Fuller study is a ‘problem’ he has with all such studies. In the notes of the CATO analysis we find (pg 15): 

I criticize the Fuller analysis here not because it is necessarily more flawed than most such analyses, but instead because it is quite typical of that body of literature, and is the most recent that I have found. 

What exactly is the CATO author referring to? The CATO author’s complaint is that the Fuller study ONLY deals with the jobs and economic activity lost in the defense sector and NOT what the impact is when resources get reallocated as a result. The implication from the POGO piece is that this is a deficiency. In fact, it is a design OBJECTIVE.

Fuller’s methodology was designed to estimate the direct adverse economic impact of a rapid contraction in defense acquisition activity on the defense industry, and this was clearly expressed on Page 4 in Fuller’s report “The U.S. Economic Impact of Approved and Projected DOD Spending Reductions on Equipment in 2013: Summary of Research Findings”. –No more, no less.

Academic Slap Fight

That the author of the CATO paper found sufficient ‘fault’ with Fuller’s limiting the scope of his study to prompt CATO to in effect, pick a prissy academic ‘slap fight’ over Fuller conducting the study such that it is more relevant to current events and the population at large, rather than making it more relevant to ivory tower academics, is more indicative of contrivance on CATO’s part to promote their agenda than any by Fuller and the Aerospace Industries Association who sponsored the Fuller study. I believe I can state this without fear of cogent disagreement or recrimination because it can be shown that there are clearly sufficient reasons to NOT include speculation on downstream effects as advocated by the author of the CATO paper. Before we get to those reasons, it will be helpful to spend a paragraph or two on what really drives 1) any economic impact study, 2) what data is analyzed and 3) how it is interpreted when conducting and reporting the study.

Models Drive Studies and Ground Rules and Assumptions Shape the Models.

It must be remembered that economic impact studies are to varying extents “model-driven”. On some of my projects, I work with an Operations Research colleague (big ‘Shout Out’ to Doctor Dave) who is fond of opening any conference or meeting where we will be presenting study findings developed using model driven data on a cautionary note. Doctor Dave will begin by paraphrasing a quote attributed to statistician George Box. “Remember, ALL models are ‘wrong’, but some are useful.”.

For best illustrative purpose on our topic, I think one of Box’s more complete expressions of the point is even better:"Remember that all models are wrong; the practical question is how wrong do they have to be to not be useful." Given this ground truth, by extension we can safely observe:

Remember: All model-driven studies are wrong; the practical question is -- how wrong do the models have to be for the study to not be useful?

A study that would resemble what the CATO analysis advocates cannot be compared to the Fuller study. The CATO analysis advocates introducing additional assumptions and caveats and carries the analysis further than just determining the negative impact on the defense industry. Some examples:

…This shift of resources, including labor, across economic sectors is an example of what economists call “structural unemployment.” It is the result of changes in the underlying economic conditions of demand and supply that yield shifts in the relative price signals inducing resources to flow toward and away from various sectors. In other words, as demand and supply conditions change, the “structure” of the economy changes as well: some industries grow while others decline, either absolutely or in a relative sense. Structural unemployment is a fundamental feature of any dynamic economy driven by constant changes in individual preferences, individual choices, technological shifts, and a myriad other factors. Any owner of an input, including workers suffering from unemployment caused by a change in market conditions, is worse off, at least temporarily. But the process of allowing market forces to redirect resource use increases aggregate output and wealth, thus making virtually all individuals better off over time on net. The movement of resources from less to more profitable sectors increases the aggregate productivity of the economy...

…A change in the aggregate demand for defense services is more difficult to measure (or to perceive) than is the case for goods and services traded in the private sector—value in the public sector is a good deal murkier—and public decision makers may have weaker incentives to respond to such changes in demand conditions...

All true and interesting in an academic sense, but how much faith may one place in an academic exercise to confidently make major policy decisions? How well would such information benefit a decision maker with our current economic environment and problem? Both the Fuller and a CATOesque study would ‘inform’, but is a CATOesque study as ‘useful’ as the Fuller study, since a CATOesque study involves the modeling (how well done, i.e. realistic?) of a “dynamic economy driven by constant changes in individual preferences, individual choices, technological shifts, and a myriad other factors”? Would a CATOesque study effectively capture the inner workings and outcomes of a “process of allowing market forces to redirect resource use increases aggregate output and wealth” over the 10 year period affected by the looming sequestration debacle? How well would a CATOesque study quantify a relative value lost or gained, if “value in the public sector is a good deal murkier”? How long will it take for “virtually all individuals” to be “better off over time”, how bad will it be for them in the interim, and WHO exactly isn’t part of the ‘virtually all” in the picking of winners and losers?
Sidebar: I notice that the CATO analysis studiously refers to Defense Service costs and values instead of the Defense Acquisition costs that the Fuller study examines. What are the differences between the two definitions, if any? I suspect the CATO analysis is referring to services as well as acquisition of material defense products.

Coming Up: Part 4

I believe CATO understands the weakness of the argument that the Fuller study ‘doesn’t go far enough’ (and POGO doesn’t care: with POGO it is all about whether or not a vehicle can be used to peddle their noise). I believe CATO fully understands the notion of ‘usefulness’ and that it wasn’t enough to claim the sort of study they advocate would be more useful. At best it would be perhaps useful in a different way, and more likely it would be less than helpful through introduction of uncertainty via likely errors of assumption and deduction. This MAY be why CATO went to some lengths to employ (and POGO parroted) the additional complaint that the Fuller study somehow overstates the net economic ‘multiplier’ of defense acquisition spending in arriving at the results Fuller did find, and IMHO it used rather questionable methodology and tautology in attempting to ‘sell’ the idea that Fuller was out of the economics mainstream in employing the multiplier that he did.
By using CATO's own references, I will show how the Fuller multiplier is probably more appropriate than the Economic Aesthetes at CATO or the Progressive Proles at POGO would like us to believe. I will provide those arguments supporting my assertions on this point in the final part, Part 4, of “Introducing Suzie Dershowitz”.


Part 4