#forecasting Feed

The Economic Forecast: Commonwealth Club Non-Public Event Opening Statement

3 Month Treasury Bill Secondary Market Rate FRED St Louis Fed

Because of the shutdown, we are flying much more blind than we would like to be. We are not getting the normal data flow. Thus there is more than the usual level of uncertainty.

Given that:

  • I believe there is something like an 80 percent probability that Europe is now in a small recession.
  • The Chinese government continues to say that all is well.
  • But somehow six percent fewer cars were bought in China in late 2018 than in late 2017.
  • Over the past half century the reliable recession signal has been yield-curve inversion—since 1965 eight inversion signals: one false (1998), one near-recession (1966), and six recessions.
  • There have been no recessions not signaled by a yield-curve inversion.
  • The Federal Reserve currently plans are to invert the yield curve in June.
  • Neither Steve Moore nor I understand why the Fed thinks that this is a good thing to do.

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Should-Read: If the Federal Reserve's 2%/year PCE (2.5%/year CPI) inflation target were appropriate, there would no be only a weak case for the proposition that the Federal Reserve is following an inappropriately tight monetary policy. Unfortunately, the Federal Reserve's current inflation target is not appropriate: the zero lower bound, and the Federal Reserve's limited power and willingness to do "what it takes" at the zero lower bound, means that a 2%/year PCE inflation target is almost surely inappropriately low. It runs enormous risks of prolonged, deep recession for no countervailing gain. Hence even with today's inflation number, I still say that there is a strong case for the proposition that the Federal Reserve is following an inappropriately tight monetary policy: Katia Dmitrieva: U.S. Consumer Prices Top Forecasts, Sending Markets Tumbling: "Core gauge advances 0.3% from prior month, above projections. Apparel index rises 1.7%, most in almost three decades...

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Procrastination on September 14, 2017

We re All Public Intellectuals Now The National Interest

Over at Equitable Growth: Must- and Should-Reads:

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Procrastination on August 4, 2017

We re All Public Intellectuals Now The National Interest

Over at Equitable Growth: Must- and Should-Reads:

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Must-Read: The smart and honest Simon Johnson likes the Trumpists' and Cogan, Hubbard, Taylor, and Warsh's 3%/year real national product fake forecasts even less than I do:

Simon Johnson: Trump’s Growth Charade by Simon Johnson - Project Syndicate: "Officials in President Donald Trump’s administration frequently talk about getting annual economic growth in the United States back above 3%... https://www.project-syndicate.org/commentary/trump-administration-growth-assumption-by-simon-johnson-2017-07

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Must-Read: The Federal Funds rate is currently bouncing around between 0.82 and 0.91%. When the Federal Reserve embarked on its tightening cycle in December 2015, its median expectation was that by now it would have raised the Federal Funds rate to between 2.25 and 2.50%—that it would have undertaken 9 25 basis point interest rate hikes rather than three. Its expectation was that, even after those nine hikes, PCE core inflation would be running at 1.9% per year rather than the 1.5% per year that the smart money currently sees.

A policy significantly looser than they thought they were embarking on. And inflation outcomes noticeably worse, in the sense of falling below target, than they anticipated even with the tighter policies they thought they would adopt.

Yet I have very little sense of how the Federal Reserve is adjusting its thinking to its forecasting overoptimism for 2016 and now for 2017. Nor do I have any great sense of how the Federal Reserve is dealing with the fact that it has now been overoptimistic in forecasting 2017, 2016, 2015, 2014, 2013, 2012, 2011, 2010, 2009, and 2008:

Gavyn Davies: The Fed’s Lowflation Dilemma: "The [last] two months together have left core CPI inflation 0.4 percentage points lower than expected... https://www.ft.com/content/b165f756-e4bf-3a70-880f-74474f6538fa

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Should-Read: Chad Stone: Donald Trump's Indefensible Economic Growth Forecasts: "The 1.1 percentage point gap between the Trump annual growth forecast over the next decade and CBO's is the largest on record and much larger than any since the Reagan-Bush era... https://www.usnews.com/opinion/economic-intelligence/articles/2017-05-26/donald-trumps-indefensible-economic-growth-forecasts

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Procrastinating on May 2, 2017

We re All Public Intellectuals Now The National Interest

Over at Equitable Growth: Must- and Should-Reads:

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(Late) Monday Smackdown: Robert Lucas Pretends... Edition

Clowns (ICP)

(Late) Monday Smackdown: This, from eight years ago, still seems to me to be highly, highly unprofessional:

Robert Lucas (2009): In defence of the dismal science http://www.economist.com/node/14165405: "Fama tested the predictions of the EMH.... These tests could have come out either way...

...but they came out very favourably. His empirical work was novel and carefully executed.... [The] flood of criticism which has served mainly to confirm the accuracy of the hypothesis.... Exceptions and “anomalies”... for the purposes of macroeconomic analysis and forecasting... are too small to matter.

The main lesson we should take away from the EMH for policymaking purposes is the futility of trying to deal with crises and recessions by finding central bankers and regulators who can identify and puncture bubbles. If these people exist, we will not be able to afford them...

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Procrastinating on February 18, 2017

We re All Public Intellectuals Now The National Interest

Over at Equitable Growth: Must- and Should-Reads:

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Must-Read: Note that in its rosy scenario Trump is not exceptional--for a Republican. Similar claims were made by Hassett, Hubbard, Mankiw, and Taylor on behalf of Mitt Romney back in 2012. Rosy scenario, and subsequently having to explain--in 1988, in 1992, in 2008, and 2020--why their projections back during the campaign and in the transition were such b.s.

And, yes, Hassett, Hubbard, Mankiw, and Taylor would have been making excuses last year had Romney won in 2012:

Nick Timiraos: Trump Team’s Growth Forecasts Far Rosier Than Those of CBO, Private Economists: "While there are often disparities between the White House and independent agencies on growth projections, they are rarely this large...

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Must-Read: Whether Britain's BREXIT vote would bring on a more-or-less immediate recession depended on whether markets and the Bank of England could and would drop the value of the pound far enough to boost exports enough to offset the shock to investment in Britain. There was a risk that they would or could not--enough of a risk that I thought that avoiding a post-vote recession was a tail possibility. But a more than 20% fall in the value of the pound turns out to have been enough to do the job:

U S U K Foreign Exchange Rate FRED St Louis Fed

However, is there any other high card in the hole that can make use forecast that British economic growth in the five years post-vote will be as fast as or faster than in the counterfactual in which the BREXIT vote went the other way? Yes--if Britain reverses itself and abandons the BREXIT project. Otherwise? I cannot see any. Untangling value chains is expensive. And the untangling will end with less productive value chains than Britain has now. You can argue--and I do--for a less financialized Britain in which government does much more to nurture and support communities of engineering practice and excellence. But BREXIT looks to me like a uniquely stupid and destructive way to set about such a policy shift. And I cannot imagine the clowns who run Britain's Conservative and Unionist Party today having any clue as to how to accomplish such.

So put me on record as strongly supporting Britain's Office of Budgetary Responsibility against all of its enemies and critics--including the extremely sharp [William Munchau[]:

Simon Wren-Lewis: Hitting Back: "A reaction to reading this [by Wolfgang Munchau][]...

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Must-Read: The fact that Nate Silver and http://fivethirtyeight.com choose to express their forecast as a pseudo-Bayesian win probability and relies on an underlying model in which uncertainty is necessarily symmetric has, I think, substantially impeded communication about the state of the presidential election. So let me endorse this attempt by Matthew Yglesias to bring clarity:

Matthew Yglesias: Nate Silver’s model underrates Clinton’s odds: "Even if you buy Silver’s main modeling assumptions (and I largely do)...

...there’s considerable evidence outside the realm of things captured by poll aggregators that leads me to believe that if the polls are wrong, they are more likely to be underestimating Clinton’s support than overstating it....

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Election Forecasting

Today in Team Bedwetting: Nate Silver and company's http://fivethirtyeight.com has its morning forecasts:

Preview of Election Forecasting

Question: Just what information is there in the "polls-plus" forecast? What does it implicitly assume that Donald Trump will say and do in the next three months to double--double!--his chances relative to what the random drift of the polls under the impact of event and randomness would predict?

And how reasonable is this implicit assumption about what Trump will say and do?


A Brief Guide for Matthew Yglesias, Perplexed as He Is About the Metaphysical Status of 538's "Forecasts"

Live from Data Journalism: Matthew Yglesias is perplexed:

2016 Election Forecast FiveThirtyEight

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Needed: Large Greek Devaluation or Large-Scale Transfers to Greece. With Bonus Godwin's Law Violation!

Over at Equitable Growth: Consider Olivier Blanchard and Daniel Leigh: Growth Forecast Errors and Fiscal Multipliers:

Www imf org external pubs ft wp 2013 wp1301 pdf

This strongly suggests to me that of the 7%-points by which Greek growth fell below IMF estimates in 2010-2011, 5%-points of that were due to the fiscal consolidation that the IMF had forecast would be imposed on Greece. Consider that the IMF had already expected the Greek economy under baseline to shrink by 4%-points, and for fiscal consolidation to shrink the Greek economy by 3%-points, and we have 4/5 of the damage to the Greek economy--relative to a counterfactual forecast under some zero-spending-austerity baseline was due to austerity.

I find this hard to square with the very-sharp Olivier Blanchard's contribution of today: READ MOAR

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Must-Read: Mark me down as one of those people who never understood what the Federal Reserve saw in the data or the forecast to make an end-of-2016 short-term safe nominal interest rate of 3%/year appropriate in the first place. It seemed to me to indicate a dangerous degree of unrealistic groupthink around the FOMC table and among the senior staff. It now strongly looks as though by the end of 2016 the Federal Reserve will have undershot all three of its inflation, its growth, and its employment targets for nine straight years:

Liz McCormick: Memo to Bond Market From Fed: You Were Right on Interest Rates: "Federal Reserve policymakers are coming around to the bond market's wisdom...

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Noted for Your Lunchtime Procrastination for February 25, 2015

Screenshot 10 3 14 6 17 PMOver at Equitable Growth--The Equitablog

Plus:

Must- and Shall-Reads:

And Over Here:

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Long-Run Real GDP Forecasts: The Hopeless Task of Trying to Pierce the Veil of Time and Ignorance Weblogging

Over at Equitable Growth: OK: Now that I am awake and coherent and caffeinated, we may resume...

I draw somewhat different conclusions from the wavering track of potential GDP since 1990 than do the viri illustres Steve Cecchetti and Kermit Schoenholtz:

First, I think that monetary policymakers should not be looking at potential output and the output gap at all. They should be looking at the labor market. You can determine whether monetary policy is such as to accord with people's previous expectations and thus balance supply and demand in the labor market much more easily than you can track whether actual production and demand are above or below what your retrospective estimate of potential output will turn out to be.

Forecasting Trend Growth Living with Uncertainty Money Banking and Financial Markets

Stephen G. Cecchetti and Kermit L. Schoenholtz: Forecasting Trend Growth: Living with Uncertainty: "We should all be wary of anyone... READ MOAR

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Over at Equitable Growth: Dynamic Scoring Considered Harmful: Focus

NewImage

Over at Equitable Growth: I had always thought that dynamic scoring was a bad idea because it leads to a ratchet--Democrats when they are in power claim deficit reduction from a stronger economy if their policies are enacted , and then Republicans when they are in power claim deficit reduction from a stronger economy if they undo what the Democrats did. You have no chance of getting policy-effect forecasts that are unbiased on average if you allow the party in power to shape CBO's estimates of macroeconomic impacts.

The vir clarissimus Robert Lynch has a good look at all the other issues in this can of worms: READ MOAR

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Monday Smackdown: Robert Waldmann: Fiscal Multipliers and the Fiscal Cliff: Focus

FRED Graph FRED St Louis Fed

Over at Equitable Growth: I was writing a piece about the rather strange belief I hear that the failure of the U.S. economy to fall into a recession in 2013-2014 demonstrates that fiscal multipliers are relatively small. But Robert Waldmann did it first, and better than I was doing:

Robert Waldmann: 2013 and All That: "There is continued discussion...

...of how fiscal tightening in the first quarter of 2013 (the fiscal cliff in January and Sequestration in March) was followed by decent growth in the second half of 2014.... I have two more thoughts. First... there was a contractionary fiscal shock... and a contractionary forward guidance of monetary policy shock.... No matter what one’s view of the relative effectiveness of fiscal policy and of non standard monetary policy at zero lower bound, one would expect disappointing growth... very disappointing compared to forecasts of rapid growth reducing the output gap as all past US output gaps have shrunk. READ MOAR

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Wisconsin Forecasted to Lag Further Behind Minnesota: Live from Kaldi's Coffee CCCXXV: September 8, 2014

Wisconsin Forecasted to Lag Further Behind Minnesota EconbrowserMenzie Chinn: Wisconsin Forecasted to Lag Further Behind Minnesota, and Kansas travels its own path...

...Bruce Bartlett brings my attention to this article noting Minnesota’s economic performance. This reminded me to check on the Philadelphia Fed’s forecast.... The cumulative growth gap between Minnesota and Wisconsin (relative to 2011M01) is forecasted to grow--rather than shrink--over the past six months.... The cumulative growth gap between Kansas and the Nation is also forecasted to rise, from the current gap of 2.7%, to 3.2%, in just the next six months...

The blue states have shot themselves in the foot with respect to overall economic growth--although not with respect to growth in per-capita income, and definitely not with respect to growth in per-capita wealth--via excessive NIMBYism. (And, I would argue, via blowback from Republican state-level tax-limitation initiatives like Proposition 13 and Proposition 2 1/2: with development population growth make the lives of state and local government officials harder and not easier, you greatly diminish the political voices for American pro-development boosterism. Blame Howard Jarvis for the fact that people from Texas cannot afford to move to the better-paying jobs waiting for them in California.)

Now the red states are shooting themselves in the foot definitely with respect to growth in per-capita income, definitely definitely with respect to growth in per-capita wealth, and now--perhaps--respect to the pace of overall economic growth as well. It will be interesting to see how much of a drag this "We don't need no infrastructure/We don't need no Medicaid expansion/No common core in the classroom/Biologists! Leave them kids alone!" red-state political equilibrium exerts on the regional distribution of economic activity over the next decade. Will it be enough to offset the Hispanic population influx and the continued transition to the full air-conditioning equilibrium?


Noted for Your Evening Procrastination for September 5, 2014

Over at Equitable Growth--The Equitablog

Plus:

Must- and Shall-Reads:

 

  1. Reassessing the Beveridge Curve Shift Four Years Later Murat Tasci and Jessica Ice Economic Trends 09 05 14 Federal Reserve Bank of ClevelandMurat Tasci and Jessica Ice: Reassessing the Beveridge Curve “Shift” Four Years Later: "Early on in the current recovery, economists and policymakers were worried about a potential shift in the Beveridge curve.... Job vacancies were rising, but the unemployment rate was not declining, fueling a debate about a structural problem in the labor markets. Exactly four years ago, we... argued that it was too early to call what had happened a shift.... We concluded that the Beveridge curve behavior we were seeing in this recovery was typical of recoveries in general, and that the curve would likely follow its historical business-cycle pattern going forward, erasing any evidence of a shift. Well, four years later, we have 16 more quarterly data points to inform us.... It is safe to say that what seemed like a shift in the Beveridge curve ended up being another manifestation of the 'normal' dynamics of unemployment and vacancies in the United States..."

  2. Noah Smith: Job Shortage or Stagnation Vacation?: "Are Americans working less because the government is paying them not to work? A large number of people seem to think this. Obviously the idea is popular on the right--recall Mitt Romney’s infamous '47 percent' speech in 2012. But a surprising number... have picked up the idea.... Casey Mulligan.... Kurt Mitman.... Jordan Weissmann.... Economists... like simple stories... like effects that they understand... the idea that taxes are an incentive not to work is a simple, uncontroversial idea....But... if government programs are paying people not to work, then that should put upward pressure on real wages.... But when we look at the data, that’s not what we see happening.... When you break up the wage data by percentile, it looks even worse for the vacation thesis.... Economics 101 says that when the price of something and the quantity produced both fall, demand, not supply, has fallen. In America, the price of labor and the quantity of labor have both fallen and stayed low since 2009. That is a hint that the government’s welfare programs are having only a minimal impact on the number of Americans with jobs. Whatever caused us to stagnate for five years and counting, it probably wasn’t welfare."

  3. Chris Blattman: What The Economist should have read before suggesting that US slavery wasn't always so bad: "Here’s the jawdropping finale: 'Slave owners surely had a vested interest in keeping their “hands” ever fitter and stronger to pick more cotton. Some of the rise in productivity could have come from better treatment. Unlike Mr Thomas, Mr Baptist has not written an objective history of slavery. Almost all the blacks in his book are victims, almost all the whites villains. This is not history; it is advocacy.' What could have shed light on this, had The Economist writer bothered to read?... Violence and pain work better in labor markets where people have really poor options, and are easily controlled, like children or the least educated. You see this in child labor during British industrialization, or even in child soldiering in Uganda.... Adults will tend to escape if you use violence, so slavery and serfdom work best when the overlords control the legal system or can hunt you down. You see this with servants in 19th century Britain or with European feudalism and US slavery. When you make it harder for employers to use force, wages go up. You see this in 19th century Puerto Rico coffee growing, or in the Emirates today. It’s not unusual to see a mix.... And when you turn the entire system against them, yes, whipped people work harder.... Suresh Naidu... yes, rewards can be a substitute for violence, but in a coercive labor market, better pay or food is just service to your larger evil plan to enslave more people more profitably.... Places in Peru and Bolivia with forced labor several hundred years ago are now poorer than other parts of the country.... Racially hostile attitudes also get passed down generation to generation in the US.... Is anyone else feeling depressed and hopeless?"

  4. djw: The predatory, broken municipal governments of St. Louis County: "[Radley] Balko is doing some extraordinary and important work here: '"She was crying as I explained the situation to her", Voss says. "So then I started to cry as I explained it her. One of the really frustrating things about what’s happening here is that this system is breaking good people. These are people just trying to get by, just trying to take care of their families". Voss’s eyes well up as he talks about Bolden. This isn’t just an attorney defending his client. It’s a guy who is concerned about what’s happening to another human being. Bolden is a single black woman with four kids. She has several tattoos. It’s easy to see how cops might target her, or court officials might dismiss her. But Voss points out that she had already earned an associate’s degree in medical assistance. And while dealing with all of the arrests and the harassment, she earned another in paralegal studies. The Foristell warrant stemmed from a speeding ticket in 2011. As mentioned before, Bolden didn’t show up in court because she didn’t have the money to pay it and feared they’d put her jail. It’s a common and unfortunate misconception among St. Louis County residents, especially those who don’t have an attorney to tell them otherwise. A town can’t put you in jail for lacking the money to pay a fine. But you can be jailed not appearing in court to tell the judge you can’t pay.... While in jail, she missed a job interview. She fell behind in her paralegal studies. When she finally got her day in court, she was told to change out of her jail jumpsuit into the same clothes she had worn for three days straight, and that had been sitting in a bag for the previous two weeks.' It’s long, but read the whole thing. I confess I was actually surprised when the 'three outstanding warrants per household' in Ferguson fact first came to light; it’s now clear in St. Louis County, this is par for the course, and there are far worse examples–the extremely misleadingly named 'Country Club Hills' has 26 outstanding warrants per resident... a long piece filled with rage-inducing anecdotes.... In the short run, a democratic revival is clearly and badly needed, and one simply has to hope that perhaps this moment of sunshine on these governments will produce something of that sort..."

  5. Kent Daniel and Tobias J. Moskowitz: Momentum Crashes: "Despite their strong positive average returns across numerous asset classes, momentum strategies can experience infrequent and persistent strings of negative returns. These momentum crashes are partly forecastable. They occur in “panic” states – following market declines and when market volatility is high – and are contemporaneous with market rebounds. We show that the low ex-ante expected returns in panic states are consistent with a conditionally high premium attached to the option-like payoffs of past losers. An implementable dynamic momentum strategy based on forecasts of momentum’s mean and variance approximately doubles the alpha and Sharpe Ratio of a static momentum strategy, and is not explained by other factors. These results are robust across multiple time periods, international equity markets, and other asset classes."

  6. Myles Udland: Fidelity Reviewed Which Investors Did Best And What They Found Was Hilarious: "If you want good investment performance, forget you have an account.... O'Shaughnessy relays one anecdote from an employee who recently joined his firm that really makes your head spin. O'Shaughnessy: 'Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was...' Ritholtz: 'They were dead.' O'Shaughnessy: '...No, that's close though! They were the accounts people who forgot they had an account at Fidelity.'... Due to our behavioral biases, we often find ourselves buying high and selling low..."

  7. Robert Waldmann (2012): "Here we go a second time. Neither the Beveridge curve nor the quasi-Beveridge curve show how much employment can increase without 'truly massive and successful public active labor market policies to better match workers to jobs'. It is more useful to look at the matching function showing hires as a function of vacancies and unemployed workers (or, to be quasi-, the peak minus the current employment to population ratio). If the matching function is stable, then the lowest sustainable unemployment rate is stable. However when there is a recession the Beveridge curve will show a huge ugly (as you graph it) clockwise pattern causing alarmed reports of worsened matching. It looked much worse in the UK in the late 90s just before the UK switched from being a high unemployment to low unemployment country."

And Over Here:

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Afternoon Must-Read: Menzie Chinn: Wisconsin Forecasted to Lag Further Behind Minnesota

Wisconsin Forecasted to Lag Further Behind Minnesota EconbrowserMenzie Chinn: Wisconsin Forecasted to Lag Further Behind Minnesota, and Kansas travels its own path...

...Bruce Bartlett brings my attention to this article noting Minnesota’s economic performance. This reminded me to check on the Philadelphia Fed’s forecast.... The cumulative growth gap between Minnesota and Wisconsin (relative to 2011M01) is forecasted to grow--rather than shrink--over the past six months.... The cumulative growth gap between Kansas and the Nation is also forecasted to rise, from the current gap of 2.7%, to 3.2%, in just the next six months...


Afternoon Must-Read: Simon Wren-Lewis: On Macroeconomic Forecasting

Simon Wren-Lewis: On Macroeconomic Forecasting: "Macroeconomic forecasts produced with macroeconomic models...

...tend to be little better than intelligent guesswork. That is not an opinion--it is a fact.... The sad news is that this situation has not changed since I was involved in forecasting around 30 years ago. During the years before the Great Recession (the Great Moderation) forecasts might have appeared to get better, but that was because most economies became less volatile. As is well known, the Great Recession was completely missed.... Does that mean that macroeconomics is not making any progress?... [This] raises an obvious question: why do people still use often elaborate models to forecast?... Why use the combination of a macroeconomic model and judgement to do so, rather than intelligent guesswork?...


Problems: Principles of Economics: Problems * Macroeconomics * Gap Closing II

Suppose that it is December 2020, current forecasts are for a year-2022 level of real GDP of $19.5 trillion without policy changes. Suppose further that you have just moved to Washington to work for the newly-chosen President-Elect as Special Assistant to the Chief Economist of the Office of Management and Budget.

Your boss, the Director of Office of Management and Budget, has asked you to assume that the economy would be producing at potential output come 2022 if it had a real GDP then of $21 trillion, and has asked you to come up with a plan to "get the economy moving again" and restore American production to potential output so that it can once again be, as Ronald Reagan liked to say, "morning in America". In the income-expenditure framework...

Suppose that the Federal Reserve disagrees with your boss, the Director of Office of Management and Budget.

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Econ 2: Spring 2014: Problem Set 5

20140402 Econ 2 Problem Set 5.pdf


A.Suppose that it is December 2020, current forecasts are for a year-2022 level of real GDP of $19.5 trillion without policy changes. Suppose further that you have just moved to Washington to work for the newly-chosen President-Elect as Special Assistant to the Chief Economist of the Office of Management and Budget. Suppose still further that the short-term safe interest rates the Federal Reserve controls are still very close to zero and that the Federal Reserve has promised to keep them very close to zero until at least 2023. Suppose still further that risk spreads on interest rates of different assets are at normal levels.

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Over at the Washington Center for Equitable Growth: The Launch of fivethirtyeight.com and Climate Change Disaster Weblogging: (Trying to Be) The Honest Broker for the Week of March 29, 2014

Over at the Washington Center for Equitable Growth: The Launch of fivethirtyeight.com and Climate Change Disaster Weblogging: (Trying to Be) The Honest Broker for the Week of March 29, 2014: I confess that I had forgotten about the existence of Roger Pielke, Jr.--the last trace I can find of him in my Augmented Memory Packs dates to February, 2010[1] when Google sent me off to:

http://fabiusmaximus.com/2014/03/25/nate-silver-climate-pielke-66723/

and I read:

Nate Silver goes from hero to goat, convicted by the Left of apostasy: Pity Nate Silver. Hero of the Left for his successful take-down of GOP’s election forecasts, shooting down their delusions about Romney’s chances of victory. Good Leftists like Brad DeLong and Paul Krugman heaped praises on Silver, catapulting him into a sweet gig at ESPN. The poor guy thought the applause was for his use of numbers in pursuit in truth, when it was purely tribal. Their applause were just tribal grunts — we good, they bad — in effect chanting: “Two legs good. Four legs bad.” Right out of the box at his new venture, ESPN’s FiveThirtyEight, Silver committed apostasy, and the Left reacted with the fury true believers mete out to their betrayers. He posted “Disasters Cost More Than Ever — But Not Because of Climate Change” by Roger Pielke, Jr....

Since, as I said, I had forgotten about the existence of Roger Pielke, Jr., I was somewhat annoyed at being told that my applause for Silver had just been a "tribal grunt". So I asked: READ MOAR

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Principles of Economics: Problems * Macroeconomics * Gap-Closing

Suppose that it is December 2020, current forecasts are for a year-2022 level of real GDP of $19.5 trillion without policy changes. Suppose further that you have just moved to Washington to work for the newly-chosen President-Elect as Special Assistant to the Chief Economist of the Office of Management and Budget. Suppose still further that the short-term safe interest rates the Federal Reserve controls are still very close to zero and that the Federal Reserve has promised to keep them very close to zero until at least 2023. Suppose still further that risk spreads on interest rates of different assets are at normal levels.

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Principles of Economics: Problems * Macroeconomics * Aggregate Demand and Aggregate Supply II

Suppose that it is June 2015 and you are working in New York forecasting the 2016 economy for Medium-Sized Hedge Fund Named After a Local Geographic Feature. Your bosses want you to inform them about the likely shape of the economy in 2016--not just the total level of real GDP Y, but the levels of consumption spending C, investment spending I, government purchases G, and exports X. Your baseline forecasts--which you get via a painfully-expensive subscription to Mississippi Valley Forecasters--are that for 2016 real GDP (measured in dollars of 2009 purchasing power) and its components will be:

  • X: Exports: $2.3T
  • G: Government Purchases: $3.0T
  • I: Investment Spending: $2.9T
  • C: Consumption of Domestically-Produced Commodities: $8.9T
  • Y: TOTAL: $17.1T

Suppose that you believe the marginal propensity to consume cy= 0.6667.

Continue reading "Principles of Economics: Problems * Macroeconomics * Aggregate Demand and Aggregate Supply II" »


Principles of Economics: Problems * Macroeconomics * Aggregate Demand and Aggregate Supply

Suppose that the aggregate supply curve for 2016 is given by:

  • P = 1.10 for Y < $18.9T (2009)
  • P > 1.10 for Y = $18.9T (2009)
  • No possibility of Y > $18.9T (2009)

With the price level in 2015 being 1.08, so that expected inflation over the year from 2015 and 2016 is 1.85%.

You are working in New York forecasting the 2016 economy for Medium-Sized Hedge Fund Named After a Local Geographic Feature. Your bosses want you to inform them about the likely shape of the economy in 2016--not just the total level of real GDP Y, but the levels of consumption spending C, investment spending I, government purchases G, and exports X. Your baseline forecasts--which you get via a painfully-expensive subscription to Larry Meyer and company's Macroeconomic Advisors http://www.macroadvisers.com/tag/larry-meyer/--are that for 2016 real GDP (measured in dollars of 2009 purchasing power) and its components will be:

  • X: Exports: $2.3T (2009)
  • G: Government Purchases: $3.0T (2009)
  • I: Investment Spending: $2.9T (2009)
  • C: Consumption of Domestically-Produced Commodities: $8.9T (2009)
  • Y: TOTAL: $17.1T (2009)

and your estimate of the marginal propensity to consume cy=0.667.

Continue reading "Principles of Economics: Problems * Macroeconomics * Aggregate Demand and Aggregate Supply" »


Noted for Your Morning Procrastination for February 26, 2014

Over at Equitable Growth--The Equitablog

Plus:

And:

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Over at the WCEG: Yes, Christina Romer and Jared Bernstein Were Far on the Pessimistic (and Correct) Side of Forecast Consensus in December 2008. Why Do You Ask?

Over at the Washington Center for Equitable Growth: One of the many, many interesting things in the Federal Reserve's 2008 transcripts is the staff briefing materials for the mid-December FOMC meeting, which include:

Www federalreserve gov monetarypolicy files FOMC20081216material pdf Www federalreserve gov monetarypolicy files FOMC20081216material pdf 2

READ MORE

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Over at the Washington Center for Equitable GrowthL I Am Sorry. What Was Tim Geithner Looking at in January 2008?: Saturday Focus: February 22, 2014

Over at the Washington Center for Equitable Growth: I Am Sorry. What Was Tim Geithner Looking at in January 2008?: Saturday Focus: February 22, 2014: "Steven Perlberg:

Tim Geithner January 2008 FOMC Minutes: “The World Is Still Looking Pretty Good”: “In January 2008–right as the U.S. economy entered a recession–the former Federal Reserve Vice Chairman (and later Treasury Secretary) was still very optimistic….

Here’s Geithner:

You know, we have the implausible kind of Goldilocks view of the world, which is it’s going to be a little slower, taking some of the edge off inflation risk, without being so slow that it’s going to amplify downside risks to growth in the United States. That may be too optimistic, but the world still is looking pretty good. Central banks in a lot of places are starting to soften their link to the dollar so that they can get more freedom to direct monetary policy to respond to inflation pressure. That’s a good thing. U.S. external imbalances are adjusting at a pace well ahead of expectations. That’s all good, I think. As many people pointed out, the fact that we don’t have a lot of imbalances outside of housing coming into this slowdown is helpful. There’s a little sign of incipient optimism on the productivity outlook or maybe a little less pessimism that we’re in a much slower structural productivity growth outlook than before. The market is building an expectation for housing prices that is very, very steep. That could be a source of darkness or strength, but some people are starting to call the bottom ahead, and that’s the first time. It has been a long time since we’ve seen any sense that maybe the turn is ahead. It seems unlikely, but maybe they’re right. In the financial markets, I think it is true that there is some sign that the process of repair is starting. Having said that, though, I think it is quite dark still out there…. Like everyone else, we have revised down our growth forecast. We expect very little growth, if any, in the first half of the year before policy starts to bring growth back up to potential....

What was he looking at in January 2008 to say that? READ MORE

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Macroeconomic Forecasting and Macroeconomic Methodology: Thursday Focus

Was it Larry Meyer or somebody else who said that the Chicago turn in graduate macroeconomics in the 1980s had made him rich--by destroying the inflow into the profession of people competent to compete with him in the private-sector microeconomic forecasting business? A nice piece from Matthew Yglesias this morning:

Matthew Yglesias: Freshwater macroeconomics has failed the market test.:

One curiosity that economists seem too polite to note is that... 'freshwater' macroeconomics that focuses heavily on the idea of a "real" business cycle and disparages the notion of either fiscal or monetary stimulus... flopped in the marketplace... [but] lives, instead, sheltered from market forces at a variety of Midwestern nonprofit[s].... Stephen Williamson, a proponent of freshwater views, reminded me of this recently when he contended that macroeconomics is divided into schools of thought primarily because there's no money at stake. In financial economics, according to Williamson, "All the Wall Street people care about is making money, so good science gets rewarded." But in macroeconomics you have all kinds of political entrepreneurs looking for hucksters who'll back their theory....

It seems very important to freshwater types to contend that their saltwater antagonists aren't just mistaken or even stupid but actually fraudulent in their views (see Robert Lucas on 'schlock economics' or John Cochrane saying Robert Shiller is trying to take the science out of economics)... politically-motivated cheap talk....

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Monday Noah Smith Smackdown: The First Vice of a Wannabe Academic Weblogging

Paul Krugman reminds me of Noah Smith in July 2012:

Noah Smith: Noahpinion: Inflation predictions are hard, especially about inflation:

Back in 2009 [John] Cochrane predicted inflation, it hasn't happened yet, and DeLong made fun of Cochrane for that fact. Cochrane... [responds] The inflation prediction was (and is) a statement about risks, not a time-specific forecast.... This is a very fair retort. Predictions are not necessarily forecasts...

Naughty, naughty Noah!

Continue reading "Monday Noah Smith Smackdown: The First Vice of a Wannabe Academic Weblogging" »


Noted for March 7, 2013

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  • Joe Weisenthal: Bersani's First Priority: Get Out Of The Austerity Cage: "Bersani… is… attempting to form a government… [and] has a good first priority: 'Michael McKee…. First priority: get out of "austerity cage."' The idea of loosening the austerity cage is growing a bit more popular in Europe. Yesterday Bloomberg reported that EU Commissioner Olli Rehn said it may be appropriate to loosen some deficit targets."

  • Steve Benen: A tale of two falsehoods: "Education Secretary Arne Duncan and House Speaker John Boehner both… made claims that were not true…. Duncan acknowledged that he'd made a mistake, apologized, and set the record straight…. Boehner told NBC, "[T]here's no plan from Senate Democrats or the White House to replace the sequester." This, too, was fact-checked and also proven to be incorrect…. Boehner's office actually doubled-down on the lie, saying the falsehood is true if Republicans are allowed to change the meaning of basic words [like 'plan' and 'replace']"

  • Timothy Burke: The reality of MOOCs is something hypesters remain defiantly unacquainted with: "Digitization in higher education has already often been a powerful, transformative force…. MOOCs… may pretty much kill off preceding forms of for-profit online education, most of which make even the most half-assed MOOC look good by comparison…. MOOCs do their business out in the open…. The University of Phoenix and its ilk made it impossible for to see who was teaching, what their qualifications or skill as a teacher might be, or what a class was like until you were signed on as a paying customer…. [E]ven if they don’t succeed in being either the magic edu-topia or devilish capitalist plot… they… [bring] academics into contact with a wider range of the public… [like] Wikipedia, digital culture, crowdsourcing and so on…. MOOCs aren’t the best or most generative way I can think of to open classrooms and subject expertise to different kinds of feedback and pressure, but they are A way for that to happen. Yes, that means that Thomas Friedman’s latest blandulations have some validity to them, but roughly for the same reason that it’s possible to think that an astrological forecast has some truth in it: throw enough conventional wisdom and irrefutable fortune-cookie sloganeering at the wall and some of it’s bound to stick."

Continue reading "Noted for March 7, 2013" »


John Maynard Keynes: The State of Long-Term Expectation

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I see that over at Naked Capitalism, the commenters are talking about John N. Grey, whose try for the Stupidest Man Alive prize was his statement that:

Financial markets are moved by contagion and hysteria. Mesmer and Charcot are better guides to the new economy than Hayek or Keynes...

I very much doubt that John N. Gray has ever read a word written by John Maynard Keynes. But it is never too late!

So it is time to once again, give the mike to John Maynard Keynes, and reprint the excellent Chapter 12, "The State of Long-Term Expectation" from The General Theory of Employment, Interest and Money:

WE have seen in the previous chapter that the scale of investment depends on the relation between the rate of interest and the schedule of the marginal efficiency of capital corresponding to different scales of current investment, whilst the marginal efficiency of capital depends on the relation between the supply price of a capital-asset and its prospective yield. In this chapter we shall consider in more detail some of the factors which determine the prospective yield of an asset.

The considerations upon which expectations of prospective yields are based are partly existing facts... partly future events which can only be forecasted... future changes in the type and quantity of the stock of capital-assets and in the tastes of the consumer, the strength of effective demand from time to time during the life of the investment under consideration, and the changes in the wage-unit in terms of money.... We may sum [these] up... as being the state of long-term expectation....

It would be foolish, in forming our expectations, to attach great weight to matters which are very uncertain.... For this reason the facts of the existing situation enter, in a sense disproportionately, into the formation of our long-term expectations; our usual practice being to take the existing situation and to project it into the future, modified only to the extent that we have more or less definite reasons for expecting a change....

The state of confidence, as they term it, is a matter to which practical men always pay the closest and most anxious attention. But economists have not analysed it carefully.... Our conclusions must mainly depend upon the actual observation of markets and business psychology.... The outstanding fact is the extreme precariousness of the basis of knowledge on which our estimates of prospective yield have to be made. Our knowledge of the factors which will govern the yield of an investment some years hence is usually very slight and often negligible. If we speak frankly, we have to admit that our basis of knowledge for estimating the yield ten years hence of a railway, a copper mine, a textile factory, the goodwill of a patent medicine, an Atlantic liner, a building in the City of London amounts to little and sometimes to nothing; or even five years hence. In fact, those who seriously attempt to make any such estimate are often so much in the minority that their behaviour does not govern the market....

Continue reading "John Maynard Keynes: The State of Long-Term Expectation" »


Noted for December 12, 2012

Worth Reading:

  • Kate Mackenzie: Tackling the two-headed monster of efficient markets theory and the principal-agent problem

  • Jonathan Portes Writes to the Financial Times About All the Very Serious People Who Are Ruining Europe

  • Rajiv Sethi: Remembering Albert Hirschman

  • Mark Carney: "From our perspective, thresholds exhaust the guidance options available to a central bank operating under flexible inflation targeting. If yet further stimulus were required, the policy framework itself would likely have to be changed. For example, adopting a nominal GDP (NGDP)-level target could in many respects be more powerful than employing thresholds under flexible inflation targeting. This is because doing so would add 'history dependence' to monetary policy. Under NGDP targeting, bygones are not bygones and the central bank is compelled to make up for past misses on the path of nominal GDP…"

  • Peter Orszag: Fiscal Cliff May Unbuild America

Continue reading "Noted for December 12, 2012" »


Fiscal Multipliers: The Olivier Blanchard-Daniel Leigh Nostra-Culpa "Box"

A "box" that is three pages of small print long, mind you…

The authors of this box are Olivier Blanchard and Daniel Leigh:

Box 1.1. are We Underestimating Short-term Fiscal Multipliers? With many economies in fiscal consolidation mode, a debate has been raging about the size of fiscal multipliers. The smaller the multipliers, the less costly the fiscal consolidation. At the same time, activity has disappointed in a number of economies undertaking fiscal consolidation. So a natural question is whether the negative short-term effects of fiscal cutbacks have been larger than expected because fiscal multipliers were underestimated.

This box sheds light on these issues using international evidence. The main finding, based on data for 28 economies, is that the multipliers used in generating [IMF] growth forecasts have been systematically too low since the start of the Great Recession, by 0.4 to 1.2, depending on the forecast source and the specifics of the estimation approach. Informal evidence suggests that the multipliers implicitly used to generate these forecasts are about 0.5. So actual multipliers may be higher, in the range of 0.9 to 1.7.

Continue reading "Fiscal Multipliers: The Olivier Blanchard-Daniel Leigh Nostra-Culpa "Box"" »


Brad DeLong: Eric Hobsbawm's "Age of Extremes": Hoisted from the Archives

Hobsbawm's 19th century "Age" trilogy is great. His 20th century Age of Extremes is less good--profitable as a work of history, but also, alas, profitable as an index of the impact decades of doublethink can leave on a good mind…

Hoisted from the Archives from back in 1995, in that decade between the Fall of the Berlin Wall and the Fall of the Towers:

Brad DeLong: Hobsbawm's Age of Extremes:

Planet Hobsbawm

In the beginning was Karl Marx, with his vision of how the Industrial Revolution would transform everything and wash us up on the shores of Utopia. Marx saw the economy as the key to history: every forecast and historical interpretation must be based on the economy's logic of development. Sometimes--as in much of Eric Hobsbawm's previous work on the history of the nineteenth century--this functioned relatively well.

But sometimes it led to very bad results indeed. And when Marx and Engels's writings became sacred texts for a world religion called Communism, things passed beyond the absurd: the belief that the logic of development of the economy was the most important thing about society became entangled in the belief that Joe Stalin was our benevolent master and ever-wise guide.

Now it is over. The red stars of the Soviet Union no longer shine from the tops of the Kremlin towers at night. Radicals still seek Utopia, but they no longer think the road leads through the economy. Instead, they study culture--as if to change the world just by understanding it. It is difficult to see a future in which authors with the intelligence, industriousness, and audience of Eric Hobsbawm are disciples of Karl Marx in anything like the sense that Eric Hobsbawm is a disciple of Marx.

Now Eric Hobsbawm has written a history of the twentieth century, The Age of Extremes. It has by and large received good reviews: Stanley Hoffman in the New York Times Book Review; Eugene Genovese in the New Republic; Edward Said in the London Review of Books.

But my reaction to The Age of Extremes was different. It struck me as history gone awry: a sketch of the twentieth century not as it has been lived here on earth but as it might have been lived somewhere else, on some "planet Hobsbawm" that might be found in one of those parallel universes often visited in Star Trek episodes, where what looks familiar at first glance turns out on close examination to be alien indeed.

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Why Is Nate Silver's Forecast So Much More Pessismistic for Obama than His Now-Cast?

Because the polls for Obama are much stronger than they should be given the state of the economy, and he expects that to tell over the next month:

Nate Silver: Could 2012 Be Like 2008? - NYTimes.com: The “now-cast” estimates that Mr. Obama would have a 97.8 percent chance of winning an election held today… five and a half percentage points in the national popular vote. By contrast, the Nov. 6 forecast expects Mr. Obama to win by… 3.6 percentage points…. Two things account for this disparity:

First, there are still some effects from the convention bounce… adjustment [which] is phasing out of the model, but it hasn’t done so completely.

Second, the Nov. 6 forecast is still using economic data along with the polls…. [T]he economic index still accounts for about 30 percent of the forecast.

The forecast is thus 0.3(Economic Fundamentals) + 0.7(Polls). Polls is 5.6%. Forecast is 3.6%. That tells us that--if the convention bounce is over--Silver's economic fundamentals give Romney a 1% lead...


Forecasting the Forecasts of FOMC Members

Peter Tillman:

Fed forecasts: Prudent guidance or pure guesswork?: Richard W Fisher, president of the Federal Reserve Bank of Dallas and a member of the FOMC, presented his views on [FOMC members'] forecasts. He argued that “at best, the economic forecasts and interest-rate projections of the FOMC are ultimately pure guesses”… tactical judgements of the moment, made within a broader strategic context” (Fisher 2012)…. [T]o what extent is Fisher’s claim supported by the data?…

Gavin and Mandal (2003)… show that the FOMC’s real growth forecasts are at least as good as those provided by the private sector. The inflation forecasts were more accurate than private-sector forecasts. In light of these findings, Fisher’s (2012) first conjecture seems less convincing.

But what about Fisher’s (2012) other claim that forecasts are “tactical judgements of the moment”… that members pursue strategic motives to have an additional leverage on policy decisions of the committee. McCracken (2010)… argues that hawkish members have an incentive to forecast high inflation…. He finds that for inflation, the midpoint of the trimmed range, ie the outlier-adjusted range, is a more accurate predictor than the midpoint of the full range. Hence, controlling for outliers improves the accuracy of the FOMC's inflation forecast….

In a new data set, Romer (2010) managed to collect individual forecasts for a set of key variables for the period 1992–2000…. Tillmann 2011 uses the rotating voting right to identify strategic motives…. The incentives to pursue strategic motives are stronger for members without a direct say on policy…. [N]on-voters systematically over-predict inflation relative to the consensus forecast if they favour tighter policy and under-predict inflation if they prefer looser policy…. [T]he inflation forecasts exhibit strong evidence of anti-herding, ie FOMC members intentionally scatter their forecasts around the consensus…. Taken together, there is indeed evidence suggesting that motives other than forecast accuracy play a role…


Hope Is Not a Model Either: Macro Forecasting

Remember the state of play: Macro Advisers (and many others) are forecasting roughly 3.4%/year real GDP growth over the next six quarters, with a large 1.2 oercentage-point decline in the unemployment rate--Okun's Law would suggest 0.6 even with that GDP forecast--accompanying it.

I suspect a bunch of the unemployment snapback is based on an assumption in the model that if you deviate from Okun's Law you are likely to snapback. That deviation that we thought existed is now gone as a result of the revised GDP path. I suspect that the next forecast iteration will show an end-of-2012 unemployment rate closer to 8.5% than to 8.0% even if the GDP path remains the same.

But let's concentrate on the GDP path. Karl Smith writes:

Structure of a Recovery «  Modeled Behavior: I haven’t seen the internals of the Macro Advisors model but these numbers don’t sound off to me as a baseline. How would they come about?

  1. Rapid increase in multi-family housing built to rent….
  2. An end to fiscal contraction. The contraction in State and Local spending has been an intense blow to both employment and GDP. However, this should be coming to an end…. What we need is for State and Local to simply stop contracting.
  3. Net Exports. This is a hard call with all that is going on in Europe but both inflation and growth in the developing world should be slowing US import growth and increasing US export growth.
  4. Believe it or not, consumer spending. Consumer spending has not been a superstar but until the last quarter it was decent enough. Gas prices are the biggest variable here, but again I do not see the fundamentals supporting oil over $100 a barrel….
  5. Continued heavy investment in Equipment and Software by businesses. The current strength in E&P is hard to explain and its easy to see it going away. However, if you just assume that something that we don’t fully understand is boosting investment and look at it from a business cycle perspective then a strengthening economy should lead to even more rapid E&P accumulation.

Now, of course predictions are hard – especially about the future…. However, gloom is not a model. You have to base your best guess on your best understanding of the underlying economy. To me that points to growth, even if we have seen a string of disappointments over the last nine months.

It could happen. The future is uncertain. But I cannot help thinking that it would be wise to bet against Karl Smith's future's happening:

  1. If people were going to try to move out of their sisters' basements into multi-family units, I think that they would have done so already--and that we would already have see rents rising. I do expect a multi-family housing construction boom, but it will follow rather than precede a rise in rents that has not happened yet.

  2. Fiscal contraction is ongoing, and accelerating.

  3. The Asian Import Fairy could show up, but I see no reason to think that trends will be markedly different from what they have been in the past year and a half.

  4. Lots of people now know people who lost their job and have not yet managed to find another appropriate one even though it has been years. That is likely to impact consumer willingness to spend in a way that is hard to incorporate into the baseline model.

  5. Businesses have been taking advantage of relatively healthy cash flows and low interest rates to invest in equipment and software at a very gratifying pace--a pace that I would say ought to be associated with above-trend capacity growth. But if demand is growing at less than trend and the capacity utilization rate is low, why should above-trend capacity growth continue?

We have had a non-declining 9% plus unemployment very low interest rate economy for two years now. And the employment-to-population ratio has not moved. Something about the future must be different from the recent past in order to get it to move upward. Starting in 1994 it was the dot-com boom that pulled us out of that jobless recovery. Starting in 2004 it was the housing boom that pulled us out of that jobless recovery. What is going to pull us out of this jobless recovery? I don't see it yet.

In my view the chance that the unemployment rate will be 9% or higher at the end of 2012 has just crossed 50%, heading upward.


Forecasting the Unemployment Rate

Macro Advisors and other mainstream forecasters certainly expect the unemployment rate to decline: a typical glide path has “headwinds” keeping the unemployment rate at 9.2% until the end of this year, and thereafter has it declining from 9.2% to 8.6% in half a year and to 8.0% by the end of 2012.

I really do not see where this forecast is coming from.

It is certainly the case that over an average year in the entire 1948-2010 period the unemployment rate converges 23% of the way back to its sample average level of 6.1%. That regression coefficient starting with 9.2% late this year would get us to 8.7% by mid-2012 and to 8.1% by end 2012.

But since 1990 mean reversion in the American unemployment rate has ebbed away. Since 1990 we have closed on average not 1/4 but rather 1/14 of the gap between the current unemployment rate and its long-run sample average over the course of a year.

The underlying logic of the forecast and the model appears to be that the strong mean-reversion in unemployment we saw in the business cycles from 1948-1990 is still there. However, since 1990 after all three recessions--the recession of 1990-1991, the recession of 2001, and the recession of 2007-2009--the return of unemployment to normal has been held back by special, temporary factors. The forecast is thus that these special, temporary factors are about to end--or, at least, will end six months from now.

And I don't see why the factors that are keeping unemployment from falling are special, temporary, and about to end rather than the new normal, persistent, and likely to endure.


Department of "Huh?!": Libertarians Forecast Inflation Department

Timothy B. Lee:

Why Are Libertarians Inflation Hawks?: Two years ago, my friend Matt Yglesias ... irritated [me]... and [I] made a note to myself to check back in a few years and see how things turned out.... I don’t think we have enough data yet to reach a decisive verdict. It’s possible that that the most recent measurement of 3.6 percent inflation portends a major price rise over the next few months—though the “core” inflation rate of just 1.6 percent suggests otherwise...

Not just the core inflation rate: the wage inflation rate, the level of the unemployment rate, financial market forecasts of inflation, forecasts of inflation by private-industry agents who make their money off of clients who pay for their forecasts rather than politicians who pay for air cover, et cetera, et cetera, et cetera.

Many things are "possible" in this wide green world. But I am having a hard time right now thinking of a bet that has a lower expected payout than the bet that the most recent price-inflation number portends a rise in inflation over the next few months back to, say, Reagan-Bush administration levels...


Worth Reading #4: Professional Forecasters Agree That Stimulus Added to Growth

Bruce Bartlett:

Professional Forecasters Agree: Stimulus Added to Growth | Capital Gains and Games: Friday's Wall Street Journal has the latest survey of 54 professional economic forecasters. Among the questions they were asked was this: "What would the real gross domestic product (annualized growth rate) be/have been for the following period absent the American Recovery and Reinvestment Act?" The average response said that growth would have been -0.93 percent last year in the absence of fiscal stimulus. Since growth was essentially zero on a 4th quarter over 4th quarter basis--the measure favored by forecasters--this suggests that the stimulus added almost a full percentage point to real GDP growth in 2009. For 2010, the forecasters say that growth would be 2.2 percent in the absence of stimulus. Since the average growth forecast for this year is 3.0 percent by these same forecasters, this suggests that the stimulus bill will add 0.8 percent to growth this year as well.... In terms of the unemployment rate, the forecasters say that the February rate would have been 10.4 percent in the absence of stimulus, rather than the 9.7 percent rate reported by the Bureau of Labor Statistics last week. This doesn't close the book on whether the stimulus legislation worked or not, but it should be remembered that the economists participating in this survey are not political hacks at some "think tank" or ivory tower academics, but people paid on the basis of being right about forecasting the economy. Their words ought to carry a bit more weight than those that don't forecast for a living.

By the end of 2010, according to this estimate, real GDP will be some 1.8% higher than it would otherwise have been--call it $270 billion at an annual rate. That would be a multiplier of 2/3 on the part of the bill that was actually real stimulus, which is low but still associated with a very large benefit-cost ratio.


Forensic Table Reading: Bush CEA Forecast Edition

In email, lurkers are questioning my claim that:

Forecasting the Obama Economy: ...what happened to the Mankiw CEA over the winter of 2003-2004, when high politics appears to have reached down into the forecast, changed the table for payroll employment (and only payroll employment: the rest of the forecast is not out of line with contemporary professional forecasts), and produced an estimate for December 2004 (a) inconsistent with the rest of the forecast, and (b) high by 2.3 million in its estimate of payroll employment--all because Karl Rove and company thought it important to avoid headlines like "Bush administration forecasts 2004 payroll employment to be less than when Bush took office." White House Media Affairs would have a much harder time pressuring the forecasters to produce a "rosy scenario" if the pressure has to be kept on month after month [as the Troika forecast is revised, updated, and released at a monthly frequency].

I think that the smoking gun is provided by a little forensic table reading--going through the Bush administration's economic forecasts year-by-year as they were published in the successive versions of the Bush-era CEA's Economic Report of the President, the ERP:

  • In the 2002 ERP, Table 1.1 shows 3.2% growth expected for the next two years gives you 2.9 million jobs--for a forecast labor productivity growth rate of about 2.1% per year...
  • In the 2003 ERP, Table 1.1 shows 3.5% growth expected for the next two years gives you 4.4 million jobs--for a forecast labor productivity growth rate of about 1.8% per year...
  • In the 2004 ERP, Table 3.1 shows 3.7% growth expected for the next two years gives you 6.2 million jobs--for a forecast labor productivity growth rate of about 1.3% per year...
  • In the 2005 ERP, Table 1.1 shows 3.4% growth expected for the next two years gives you 4.1 million jobs--for a forecast labor productivity growth rate of about 1.8% per year...
  • In the 2006 ERP, Table 1.1 shows 3.3% growth expected for the next two years gives you 3.8 million jobs--for a forecast labor productivity growth rate of about 1.9% per year...
  • In the 2007 ERP, Table 1.1 shows 3.0% growth expected for the next two years gives you 3.3 million jobs--for a forecast labor productivity growth rate of about 1.8% per year...

The forecast rate of labor productivity growth over the next two years or so is a relatively stable variable. It starts at an annual rate of 2.1% in the first Glenn Hubbard ERP, and then Glenn and company drop it to 1.8% the next year as they become less optimistic about productivity growth in the aftermath of the collapse of the high tech bubble. Thereafter the Bush CEA forecast assumes a labor productivity growth rate of 1.8% - 1.9% in every year save one: the 2004 ERP, issued at the start of 2004, drops the labor productivity growth rate to 1.3% (and the 2005 ERP raises it back up to 1.8%).

Was there anything in the economic data that would make one much more pessimistic about labor productivity growth in early 2004 and only early 2004? No.

But assuming a 1.8% labor productivity growth rate at the start of 2004 would have meant that the forecast average level of employment in Tqble 3.1 for 2004 would have been lower than the level of employment when Bush took office, and that would have created a point of political vulnerability. There were two ways to fix this that would have satisfied White House Media Affairs: (i) reformat the table so that it no longer reports an annual average payroll employment number, or (ii) push assumed labor productivity growth down because if you keep GDP the same but reduce labor productivity arithmetic forces your forecast to produce higher employment.

Why the Bush CEA didn't pick option (i) is something I have never understood...


http://www.gpoaccess.gov/usbudget/fy05/pdf/2004_erp.pdf

http://www.gpoaccess.gov/usbudget/fy04/pdf/2003_erp.pdf

[Workbook2]Sheet1 Chart 1