The Economist takes on CGE modelling

When I was doing research on the idea of a Canada-US customs union, I came across a study (a PhD dissertation, actually) that was cited by proponents, claiming huge gains from a customs union. I looked into the methodology and found some serious shortcomings. CGE, or Computable General Equilibrium, models are a quasi-empirical approach that puts numbers to experiments, such as the impact of a tax increase or a trade deal. But while they sound like empirical estimates, they are just projections of the underlying theory, which makes them pretty subjective.

Anyway, The Economist does a good job of reviewing CGE models, where they came from and their shortcomings. I’ll leave it here with one choice quote:

[T]he results of CGE models flow from the presuppositions of their authors. Most empirical exercises confront theory with numbers—they test theories against the data; sometimes they even reject them. CGE models, by contrast, put numbers to theory. If the modeller believes that trade raises productivity and growth, for example, then the model’s results will mechanically confirm this. They cannot do otherwise. In another context, Robert Solow, a Nobel prize-winner, has noted the tendency of economists to congratulate themselves for retrieving juicy plums that they themselves planted in the pudding.