No economist can do without data. At least that’s how I feel now.
Some time ago, I was an economist without data. I pondered textbook theories and mathematical models. These models have shaped our profession and made it rigorous, analytical and powerful. All praise and honor to the great thinkers that helped us get there! But models need and must be confronted with data. Only then can you know if it applies to the case at hand.
No model is correct regardless. In fact, you can construct elaborate mathematical models with no bearing to the world whatsoever. Just doing the maths correctly doesn’t make your model useful. So which model will be useful for you? Take it to the data, and you will know.
Here is an example: I used to think that lower incomes would lead to lower consumption which would drag the economy down through a multiplier effect. It was pretty automatic. I had read that in a textbook. Besides, it was commonly thought to be true by people I frequented. Even the newspapers talked about it. But it turned out that none of them had checked the data. And the data looks like this:
While it is true that consumption closely tracks income over time, the connection is not precise from year to year. We see that slower income growth in any particular year doesn’t necessarily make people cut back on spending. Why not? Well, most people have some savings they can use to prop up their incomes for a year or two. This likely diminishes the famous textbook multiplier. But be careful not to disregard the concept altogether: Remember that over time, consumption tracks income closely! It seems unlikely that consumption can be kept up if incomes were to fall on a permanent basis.
Suddenly, I knew a lot more about what to make of the famous multiplier effect. At least for my own country from which this data is drawn. But what now if you ask me if that applies to your country as well? Earlier, I could have said: Sure, it applies to every country. That’s what the textbook says.
Now I simply say: Have you checked the data?