. . . virtually all formal models failed to predict the housing bust and Great Recession, and the Moody’s model was no exception.
. . . This begs the question: How can a model that failed to predict the Great Recession be relied upon to predict future economic growth, particularly during the most volatile periods of readjustment?
Macroeconomic models, including Moody’s, have no practical way of distinguishing bad investments from good investments. Literally a purely redistributive project like digging a hole and filling it up again will count the same as a project that builds a new road that reduces travel times (and improves productivity). The economic outcomes of these models are fueled by spending, and how fast people and businesses spend, regardless of whether the spending is efficient or productive.
. . . These models do not factor in the opportunity costs of redistributing money from one sector to another, or whether this redistribution is more or less productive.
Income maintenance on food, housing, transportation and other normal household spending is treating the same way as strategic spending that fuels innovation, productivity and growth in new areas. Maintaining consumer spending is at best a stop gap measure. . .
Entrepreneurship does not exist in these models, so this factor is irrelevant to the outcomes even though the most economists recognize that entrepreneurship–discovering new ways of productively investing resources–is a (if not the) critical factor in long-term economic growth. It’s also the key reason why centrally planned economies fail and market-economies thrive.
. . . the spending side of the government stimulus was remarkably ineffective.