The Romer/Romer letter to Professor Gerald Friedman marks a turning point. It concedes that there are indeed important issues at stake when evaluating the proposed economic policies of Presidential Candidate Bernie Sanders. These issues go beyond the political debate and should be discussed seriously between and among professional economists.
All forecasting models embody theoretical views. All involve making assumptions about the shape of the world, and about those features, which can, and cannot, safely be neglected. This is true of the models the Romers favor, as well as of Professor Friedman’s, as it would be true of mine. So each model deserves to be scrutinized.
In the case of the models favored by the Romers, we have the experience of forecasting from the outset of the Great Financial Crisis, which was marked by a famous exercise in early 2009 known as the Romer-Bernstein forecast. According to this forecast (a) the economy would have recovered on its own, in full and with no assistance from government, by 2014, (b) the only effect of the entire stimulus package would be to accelerate the date of full recovery by about six months, and (c) by 2016, the economy would actually be performing worse than if there had been no stimulus at all, since the greater “burden” of the government debt would push up interest rates and depress business investment relative to the full employment level.
It’s fair to say that this forecast was not borne out: the economy did not fully recover even with the ARRA, and there is no sign of “crowding out,” even now. The idea that the economy is now worse off than it would have been without any Obama program is, to most people, I imagine, quite strange. These facts should prompt a careful look at the modeling strategy that the Romers espouse.…Dare I say smackdown.
INET
Economic Forecasting Models and Sanders Program Controversy
James K. Galbraith
"It’s fair to say that this forecast was not borne out: the economy did not fully recover even with the ARRA,"
ReplyDeleteWhoa what is he using as his measurement of "the economy"? the NIA/GDP? it recovered to 2008 levels of GDP by 2010... what is he talking about? We've fully recoverd and then some then GDP was under 15T now it is over 18T...
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How can Galbraith be viewed as credible within the academe when he says "the economy did not fully recover" when by the accounting framework the academe uses to measure the economy it manifestly DID recover?
ReplyDeleteHe is saying that they are using the wrong metrics. Same as other who are saying look at the entire employment picture rather than U3, and define full employment as a job for all willing and able to work instead of by the so-called natural rate.
ReplyDeleteHeterodox people refuse to buy into the BS that the toadies for the elite are spewing.
Right, he's probably also means hasn't returned to trend (something which the Romers might focus on iirc) Ordinarily that's just curve fitting astrology, but returning to the anemic growth of the previous decade(s) should be no biggie. Galbraith imho is too pessimistic in general. The low growth of the past few decades was an explicit human decision, not something forced on the world by the nature of things.
ReplyDeleteTrump & Sanders wouldn't be so popular if plenty of people weren't still hurting, hurting worse than they did under Dubya & plenty more can see that even if they're OK themselves. Look at who Galbraith is arguing with - look again at the crazy things the Romers are saying. Surprised even me. And they're at the liberal end. And even Dean Baker, usually even more sensible, somewhat endorsed their thinking.
Took a look at his book: He describes the history after the GFC as "A long, slow recovery thereafter—a failure to recover in any full sense of that word—was even more so." [outside curve-fitting standard modelizing astrology with a magic return to NAIRU "full employment" "baked in"]. Throughout the relevant chapter Ten "Broken Baselines and Failed Forecasts", that's the theme, the silliness of such models that predicted that the worse things got, the quicker the recovery would be, because of the magic pull of full employment that occurs without a nasty government stupidly interfering. He notes how the models constantly pushed back the date of full recovery when "the economy did not remain on the growth track anticipated in early 2009." ... "Each year, the forecasters told us, the world would be 'back to normal'— with full employment, recovered output, and high investment—five years hence."
From John K. Galbraith:
ReplyDeleteThere are undoubtedly rewards from an increasing GDP, for from such increase come the income, employment and products and services that sustain life and enhance it's accepted enjoyments. But from the size, composition and eminence of the GDP comes also one of our socially most widespread forms of fraud. The composition of the GDP is determined not by the public at large but by those who produce it's components. This, in major part, is the result of the comprehensive and talented persuasion of the economic world, including it's economists. How does the GDP move? It's scale and content are extensively imposed by producers. Good performance is measured by the production of material objects and services (and now, unfortunately, smoke and mirrors by wall street as well--zap). Not education or literature or the arts but the production of automobiles, including SUVs: Here is the modern measure of economic and therewith social achievement. --from The Economics of Innocent Fraud.