Replies

"With all due respect, Dr. Jorgenson is a pointie headed professor who has been bought and paid for by FAIR and has never spent one hour in a real business. It is just the same old boilerplate crap that doesn't even specifically apply. He simply assumes prices on everything fall, interest rates drop, wages go up, yada yada yada. Not impressed. I can point to sources that says Clinton is an honest man, doesn't make it so."

I have asked this question of the guardians of the status quo many, many times and have yet to get a straight answer, so I will try once more.

You and the other defenders of the current system say that some of the leading academic economists in the country don't pass muster with you, that they don't measure up to your exacting standards. So who would you prefer to rely upon in making economic forecasts - professional athletes, politicians, accountants, lawyers? Who do you believe has more credibility than economists?

It is just the same old boilerplate crap that doesn't even specifically apply. He simply assumes prices on everything fall, interest rates drop, wages go up, yada yada yada.

Actually Jorgeson's IGEM parameters are set by empirical/econometric measures derived from historical data series responses between tax changes and corresponding changes in output prices, tax rates etc, not assumed values.

Given a historical series, NIPA:GDP etc, any researcher will end up with the same answers using an equivalent econometric approach.

http://www.economics.harvard.edu/faculty/jorgenson/papers/baker.pdf

Revised April 12, 1999.
THE ECONOMIC IMPACT OF FUNDAMENTAL TAX REFORM
by
Dale W. Jorgenson Harvard University
and
Peter J. Wilcoxen University of Texas, Austin

This paper was prepared for presentation at the
Baker Institute Conference
on Tax Policy Reform
Rice University Houston,
Texas November 6, 1998

The econometric approach to parameterization has several advantages over the calibration approach.First, by using an extensive time series of data rather than a single data point, we can derive the response of production patterns to changes in prices from historical experience. This is particularly important for the analysis of tax policies, since these policies have changed substantially during our sample period and tax rates have varied widely. The extensive time series evidence on behavioral responses to changes in tax policy is ignored in the calibration approach.

A second advantage of the econometric approach is that parameters estimated from time series are much less likely to be affected by the peculiarities of a particular time period. By construction, parameters obtained by calibration are forced to absorb all the random errors present in the data for a single benchmark year. This poses a severe problem when the benchmark year is unusual in some respect. For example, parameters calibrated to the year 1973 would incorporate into the model all the distortions in energy markets that resulted from price controls and the rationing of energy during the first oil crisis. Econometric parameterization greatly mitigates this problem by reducing the influence of disturbances for a particular time period.

Empirical evidence on substitutability among inputs is essential in analyzing the impact of tax policies. If it is easy for industries to substitute among inputs, the effects of these policies will be very different than if substitution were limited. Although calibration avoids the burden of data collection required by econometric estimation, it rules out substitutability among inputs by assumption. This can easily lead to substantial distortions in estimating the impacts of alternative tax policies. By contrast the econometric approach determines the extent of substitutability on the basis of empirical evidence.