Interest Rates Rise Not When the Deficit Outlook Gets Worse But Rather When It Looks Like the Economy Will Improve More Rapidly
The State of Working America

Mark Thoma: Prepared for the Worst

Mark Thoma explains why he is still looking at the lower tail:

Economist's View: The Slow Recovery of Unemployment: I don't like to make economic forecasts. Though I do it on occasion, I generally leave that to Tim Duy -- he's much more of a data grubber than I am so he's better at it anyway. I do try to comment on what data says when it's released, mostly at MoneyWatch, but I don't generally consider those to be formal forecasts of where the economy is headed. There's a good reason why I try to avoid forecasts. In the past, whenever I've tried to predict the path the economy would take, I've found myself reading subsequent data releases in a way that supports the forecast. I think that once you make a forecast, it affects your objectivity, and I think that applies generally, not just to me.

Perhaps that's why I'm feeling more and more alone in talking about the current state of the economy.... When people say, for example, that there's nothing in the latest employment report to change the relatively optimistic forecasts they've made recently, I try to say that there's nothing in the data to reject the alternative forecast either, i.e. that we are still headed for a very slow recovery of employment. Whatever your null hypothesis or prior beliefs were, the latest data did little to change that outlook.... I am very worried that we are, for all intents and purposes, about to abandon the millions who are still unemployed. Once we conclude that a robust recovery is underway, we will turn our attention to other things....

I fully understand the desire to have a perfect landing, to get policy just right. But just right when the costs of unemployment are so much higher than the costs of inflation means that we should bias policy toward the unemployment problem. If we are going to make a mistake, it should be too much employment, and the inflation that comes with it, rather than too little.

However, with the inflation hawks writing almost daily in the WSJ and elsewhere that we need to raise interest rates immediately to avoid inflation, and with all of the pressure to address the budget deficit, if anything the bias in policy seems to be in the other direction....

Until I am sure that the economy is on firmer footing than it's on now, and that employment prospects have improved substantially, I will continue to be the one who pushes back against optimistic reading of the data. And I will make no apologies for it beyond what I've said here.