Tuesday, February 11, 2014

Is the Lucas Critique an Atomic Wedgie?

Yes, let's.

The topic, if you've not already read the pair of posts from MR and Econlog are on the topic of brand-spankin' new migration restrictions in Switzerland. Tyler takes it as evidence of voter pushback against wild immigration; Bryan retorts that the actual problem is not enough immigration. Garett, cagey and pithy as ever, invites his Twittersphere to first parse what he means, then to apply what is (and I might be reaching in my interpretation here) a gripe about linking macroeconomic policy to econometric analysis.

Some economic theory extends very nicely. You can use the first law of demand to talk cogently about topics ranging from the market in peanut butter to the "market" in ideas. Or even in irrationality. Does the Lucas Critique extend to topics outside of macroeconomics? This is a deeply important point for euvoluntary exchangeurs, as most of what we're interested in is policy-level intervention into microeconomic interactions.

In this case, the intervention is still macro-ish: immigration restrictions are mostly about the labor market: should we think about whether or not the recent Swiss intervention will produce the outcomes they presumably want (lower unemployment for Swiss nationals, I guess)? But I'm not kidding when I say that Jones is one cagey dude. He could just as easily mean that we need to think about a recursive voter opinion specification. Caplan notes that there is a (+) relationship between voter tolerance of immigration and immigrant population concentration. But if the extended Lucas Critique holds, that relationship is only necessarily valid under the structural parameters held over from the previous regime.

In other words, is there no telling how Swiss opinion towards immigration will change under the new rules? Could the high-immigrant cantons change their minds once the new restrictions have a chance to sink in?

The answer: possibly.

It's a fascinating empirical question, and I almost get the sense that Jones is deliberately baiting me (specifically) to follow up on the issue, knowing as he does that I can't resist questions like these.

So with the gauntlet dropped, I simply have to accept. O, the soft coercion of relentless curiosity. I've already got the rudiments of an econometric specification sketched out in my head.

As for the larger question of how far we can stretch the underpants of the Lucas Critique over the head of the economics nerd? I'm not prepared to answer that question here, but it sure is interesting to consider. Maybe one of my neoliberal dudebros on le Twitter will pick up on it.

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Do you have suggestions on where we could find more examples of this phenomenon?