Wheeler Auditorium Friday "Office Hour' 11 AM-12 Noon: Topic: Milton and Rose Director Friedman's "Free to Choose"
Econ 1: Spring 2012: U.C. Berkeley: DRAFT Principles of Macroeconomics (April 2, 2012)

Asymmetric Loss Function Blogging: The U.S. Economy Needs a Boost

Betsey Stevenson and Justin Wolfers:

U.S. Economy Needs Stimulus, Not Soothsayers: We have very little idea where the economy will be next year. Truth be told, our best guesses just aren’t very good…. The dismal science is more dismal and less science than most people recognize. Careful studies by both Federal Reserve economists and the Congressional Budget Office have found that forecasts of the next year’s economic-growth rate typically miss by about one percentage point, and often more. Unemployment forecasts aren’t much better.

Why? Data are imperfect. Theories are coarse. Models oversimplify. The economy is constantly evolving and can’t be subjected to controlled experiments. Economic cycles are infrequent, so our understanding of them necessarily proceeds very slowly. None of these drawbacks, though, is fatal to the enterprise. Rather, they tell us that policy makers, the media and the public should beware of economists who argue their forecasts with certainty….

Serious forecasters embrace uncertainty, giving rise to the much-derided stereotype of the two-handed economist. But this is exactly what we need….

Consider the current economic-policy debate. Most forecasters suggest that as the recovery slowly grinds on, unemployment will fall to about 7.5 percent by the end of 2013, from the current 8.3 percent…. [T]he consensus forecast is highly likely to be wrong. Unemployment could fall to 6.5 percent, or rise to 8.5 percent. Each of these possibilities needs to be considered…. If unemployment falls to 6.5 percent, there’s no overwhelming reason for concern…. [I]nflationary pressures are unlikely to build unless the jobless rate drops to 5 percent…. Even if inflation does accelerate, the Fed has ample power to reverse course by raising interest rates to slow growth…. [I]f we find ourselves with 8.5 percent unemployment fully six years after the recession began. Europe’s experience in the 1970s and 1980s demonstrated that persistently high unemployment can become entrenched, leading to further unemployment in the future -- a process economists call hysteresis. Skills atrophy, hope fades and people lose contact with the networks that can help them find work. If this occurs with the millions of U.S. workers who have been without jobs for more than a year, it will be costly and very difficult to undo.

In other words, the cost of too little growth far outweighs the cost of too much…