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Expectation vs. Presumption

Robert Gavin:

Summers cites recovery, risks in view of economy: The US economy has probably begun a lasting recovery, but the outlook has become more uncertain in recent weeks.... [T]he recovery still faces risks, from the premature withdrawal of federal spending aimed at stimulating the US economy to a financial meltdown in Europe to increased tensions in Korea.... [A]fter expressing confidence that European policy makers would contain the government debt crisis and avoid another global financial crisis, he added that the assessment was "my best guess, and I could be wrong." Or, when asked if the nation had achieved a self-sustaining recovery, Summers responded, "I think that’s the right presumption and my expectation. I wouldn’t be foolish enough to be certain."

Let me differ.

That the nation has achieved a self-sustaining economic recovery is the right expectation, in the sense that the median of nearly everybody's forecast probability distribution has a self-sustaining recovery built into it.

But it is unwise to make the presumption that the nation has achieved a self-sustaining economic recovery in any planning or decision-theoretic exercise. It is very important to look at the lower tail of possible future results rather than to presume that the things that happen in the lower tail won't happen.