Jason Smith — I'll say similar things for half the salary

Jan Hatzius made some macro projections about wages, unemployment, and inflation:

Goldman’s Jan Hatzius wrote Sunday that unemployment should continue to decline to 3% by early 2020, noting the labor market also has room to accommodate more wage growth. Hatzius predicted that average hourly earnings would likely grow in the 3.25% to 3.50% range over the next year. ... For now, Goldman has a baseline forecast of 2.3% for core PCE ...

Well, these are all roughly consistent with Dynamic Information Equilibrium Model (DIEM) forecasts from almost two years ago….

Information Transfer Economics
I'll say similar things for half the salaryJason Smith

See also

Sectoral balance chart.

Business Insider
Goldman's Top Economist Explains The World's Most Important Chart, And His Big Call For The US Economy

Joe Weisenthal

Brian Romanchuk — Why We Should Be Concerned About The Forecastability Of Economic Models

Although it might be possible to find dissenters, the apparent consensus among financial market practitioners is that mathematical economic models provide terrible forecasts. One response is to keep searching through the set of all possible models, hoping to find something that works. The author's suggested response is to accept that forecasting is an inherently impossible task. However, in order to advance beyond nihilism, we need to quantify why mathematical models are terrible. My argument is straightforward: the models that provide the best fit to observed behaviour cannot themselves be forecast with the type of information that we have available in the real world.

(As an aside, I would note that Beatrice Cherrier has written about the preference for tractable (simplicity) of mathematical models in "What is the Cost of 'Tractable' Economic Models," and in a follow up article. Much of what she discusses appears to overlap my thinking about the existing methodology, although I believe that I have a different view. My suggestion is to look at non-forecastable economic models, and tractable (or reduced order) non-forecastable models would be the most interesting. A non-tractable non-forecastable model might provide the best fit to reality, but its complexity would also make it difficult to draw any conclusions from it; this is essentially my concern with agent-based models. Since I was in the middle of laying out my logic, I was not able to work in a longer comparison to her arguments.)

Most economic models are either gadgets or thinking tools that assist in adding rigor. They are not capable of predicting the future any more than sociological models are.

For one thing, there are too many contingent factors involved, even if all were known and could be specified with some degree of precision based on data. 

It is not possible to generate an economic ephemeris. No economic laws of motion have been forthcoming.

The question then becomes how close is is possible to comes, e.g., what is the degree of error. Even that can only be estimated.

The multiplicity of sources of disturbances makes a generalisation of the notion of "small disturbances" difficult. As a result, I would argue that we should instead worry about analysing models with a focus on the properties of their forecast errors rather than the precise nature of the generalisation of exact forecastability....

Bond Economics
Why We Should Be Concerned About The Forecastability Of Economic Models

Brian Romanchuk

Update

Triviality Of Parameter Uncertainty And Measurement Noise For Forecasting

Bill Mitchell — That “old fashioned” MMT predicts well – Groupthink in action

This blog will be a bit different from my normal fare. It provides insights into how entrenched a destructive and mindless neo-liberal Groupthink pervades the economics profession. For the last several years I have been on the ‘expert’ panel for the Fairfax press Annual Economic Survey. Essentially, this assembles a group of well-known economists in Australia from the market, academic and institutional (for example, union) sectors and we wax lyrical about what we expect will happen in the year ahead. To be fair, there is a large element of chance in the exercise as there is in all forecasting. So I am never one to criticise when an organisation such as the IMF or the OECD or some bank economist gets a forecast wrong. The future is uncertain and we have no formal grounds for even forming probabilistic estimates, given we cannot even assemble a probability density function (an distributional ordering of all possible events ) to extract these probabilities. So guess work is guess work and you have to be guided by experience and an understanding of how the system operates and the elements within the relevant system interact. What I do rail against is the phenomenon of systematic bias in forecast errors. For example, the IMF always predicts stronger growth than occurs when it is advocating imposing austerity (thereby underestimating the costs of the policy). The systematic bias in their errors is traceable to the flawed models they use to generate the predictions, which, in turn, reflect their ideological slant against government deficits and in favour of fiscal surpluses (as a benchmark). As luck would have it, in the 2016 round of the Fairfax Scope survey, I was fortunate enough to achieve the status of Forecaster of the Year (shared with 2 other members of the panel) – see Scope 2017 economic survey: Stephen Anthony, Bill Mitchell; and Renee Fry-McKibbin tie for forecaster of the year – for detail. I tweeted over the weekend that as a result “MMT predicts well”. There was a lot underlying that three-word Tweet and it intersected with recent events that demonstrate how far gone mainstream macroeconomics is – it is in an advanced state of denial and has lost almost all traction on the real world....

Bill Mitchell – billy blog
That “old fashioned” MMT predicts well – Groupthink in action
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

Brian Romanchuk — Should We Care About Strong Money Supply Growth?

Although I am not completely averse to the use of monetary aggregates in these circumstances, my feeling is that they are not more useful than any other credit aggregates. Furthermore, the use of credit aggregates is probably safer than the monetary aggregates. Monetary aggregates are a fairly arbitrary hodge-podge of instruments. (Why would we expect that there is any useful information in the sum of currency in circulation and required reserves?) If we look at credit data, we are more likely to have a cleaner read on what is actually happening within the economy.

Bond Economics
Should We Care About Strong Money Supply Growth?
Brian Romanchuk

Brian Romanchuk — The Yield Curve And The Cycle

The slope of the yield curve is a topic of wide interest in bond market economics. It can be viewed as an economic indicator, or an instrument to be traded. Within this report, the focus is on how and why yield curve slopes act as economic indicators. The advent of ultra-low interest rates has made some interpretations of the yield curve untenable, but the yield curve is still useful as an indicator. (This article is an excerpt from Interest Rate Cycles: An Introduction.)

Bond Economics
The Yield Curve And The Cycle

Brian Romanchuk

Matthew Yglesias — A Trump adviser's plan for a multitrillion-dollar budget surplus, explained

Speaking at a Pete Peterson Foundation fiscal summit on Wednesday, Donald Trump adviser Sam Clovis said that the Trump campaign's economic program would unleash so much growth that the federal budget surplus would end up between $4.5 trillion and $7 trillion.…

Let's see your model.

Vox
A Trump adviser's plan for a multitrillion-dollar budget surplus, explained

Matthew Yglesias

The Arthurian — Way ahead of ya, Steve!

Art goes out on the limb. The Steve would be Steve Keen.

The New Arthurian
Way ahead of ya, Steve!

The Arthurian

Peter Dorman — The Recession Template, Except there Isn’t One

There are three different kinds of cycles, as helpfully laid out in an exemplary textbook I’m familiar with. One is the policy cycle, as described by Ritholtz. Yes, that one is flashing a steady green. The second is the investment/profit cycle, whose theoretical basis goes back to Marx, includes Samuelson’s accelerator model, and is driven by the interaction of business costs (including wages), demand, and new investment. The key indicator there is of course profit (and expected profit), and there are no clouds on that horizon at the moment. The third is the financial cycle [described by Hyman Minsky], of which 2008 was the most recent example. Instability of that sort results from credit growth that props up asset prices rather than increasing revenues or from mismatches between liabilities and revenues. In theory it’s possible to see this kind of trouble in advance, although the actual record is spotty. If we are in for a crunch within the coming year it will probably come from financial forces.

Econospeak
The Recession Template, Except there Isn’t One
Peter Dorman | Professor of Political Economy, The Evergreen State College

Zero Hedge — Greenspan Explains The Fed's Miserable Track Record: "We Didn't Forecast Better Because We Can't"

Letting the cat out of the bag.

Zero Hedge
Greenspan Explains The Fed's Miserable Track Record: "We Didn't Forecast Better Because We Can't"

Tyler Durden

Brian Romanchuk — The Track Record Of Recession Forecasting

One of the more entertaining robust empirical observations in economics is the inability of the consensus to forecast recessions. However, we need to move beyond name-calling, and accept that this tells us something about recessions. From the perspective of post-Keynesian economics, an inability to forecast the timing of recessions is roughly what one should expect. Since recessions are the most significant part of the cycle, this inability calls into question naive beliefs that economics can be “scientific” in the same manner as short-term weather forecasting.…

Bond Economics
The Track Record Of Recession Forecasting

Brian Romanchuk

Alexei Lossan — What will Russia be like in 2030?

Gathered at a forum in the heart of Siberia, leading Russian economists have outlined their vision for the country's future. Discussions at the Krasnoyarsk Economic Forum focused on issues including decentralization, developing food technologies and healthcare.

Russia Beyond the Headlines
What will Russia be like in 2030?

Alexei Lossan, Rbth

ProGrowthLiberal — Krugman v. Mankiw on Rubio’s Tax Cut – Show Me the Model

Greg Mankiw of Team Republican tries to counter an attack from Paul Krugman on Rubio’s tax cut for the rich, which may come as breathing spell from the flap over that “analysis” by Gerald Friedman (my two cents on that flap in a bit).…

Econospeak
Krugman v. Mankiw on Rubio’s Tax Cut – Show Me the Model

ProGrowthLiberal

Rhys Bidder — Are Wages Useful in Forecasting Price Inflation?

In this Letter I summarize what research can tell us about whether or not wage data are, in fact, informative for future price inflation. Overall, the literature suggests that wages do not provide significant additional information beyond what can already be gleaned from other sources, including prices themselves.

These results do not imply that wages and prices are unrelated. Certainly they are tied together in the long run, and wage data will surely contain some information for future price inflation. However, after incorporating information from prices and activity measures, the marginal additional benefit of using wage data appears small.

What are the implications of this evidence? Figure 2 shows various common ways to measure wage pressure. Some of these measures have weakened in recent months, after hints of strength earlier in the year. Many market participants have watched these series closely, attempting to divine their implications for inflation. Many interpreted the earlier firmness as suggesting an imminent uptick in inflation and, likewise, the recent weakness as suggesting subdued price inflation in the future. However, this discussion suggests that one should not necessarily draw such conclusions. For example, rising wage measures might simply increase labor’s share of the fruits of production and squeeze profits without much effect on price inflation.

FRBSF Economic Letter
Are Wages Useful in Forecasting Price Inflation?
Rhys Bidder
ht Mark Thoma at Economist's View

Brian Romanchuk— U.S. Economic Growth - Mediocrity Rules

In summary, the dependence upon non-measured variables, of which we have little certainty as to their values, is a severe drawback of modern mainstream macro.

Bond Economics
U.S. Economic Growth - Mediocrity Rules
Brian Romanchuk

Brian Romanchuk — Why Chartblogging Is Superior To Mainstream Macro

Orthodox-heterodox economic squabbling has once again erupted on the internet. As always, the mainstream argument is that their methodologies are superior because they are based on mathematical models. My main area of interest is the quantitative end of economics, so I do not pay too much attention to some of the purely literary approaches to economics. But even so, I believe that mathematical and statistical methods are being applied incorrectly by mainstream economists, and so whatever modelling advantage they have is largely illusionary. I illustrate this with a few examples, including an explanation why I believe the mainstream debate about the "natural rate" of interest is largely meaningless.…

Nice brief summary, not wonkish.

Bond Economics
Why Chartblogging Is Superior To Mainstream Macro
Brian Romanchuk

Noah Smith — Did macro theory fail us in the crisis?

This is a useful article. Pay particular attention to point 4.

I feel like if you have models for everything, you don't actually have any models at all. Without a way of choosing between models, your near-infinite stable of models turns into one big giant mega-model that can give anyone any results he wants. Worried about a financial crisis? Pull out a model that tells you a financial crisis could be looming. Worried about inflation? Pull out a model where inflation is a big danger. And so on.

I'm kinda going to agree with Noah about this. If macro theory presumes a model that predicted the crisis precisely based on assumptions and deductive logic, what he says is true. No mathematical model predicted the crisis with precision. Moreover, there will likely never be such an econometric model for reasons that Keynes explained.

But what this says is that macro theory is not very relevant to the real world, and policy makers should not be looking to macro theory  for guidance, other than peripherally.

Business people understand this. If macro theory were useful in business forecasting and operations, businesses would be hiring macroeconomists and competing away the best ones with huge salary offers. The fact that this is not happening is all you need to know about the practical usefulness of macro theory based on formalized models.

I think that this shows how there needs to be a distinction drawn between macroeconomics as a theoretical discipline and political economy as a policy science that combines economics with political science, sociology, history, law and government, and psychology — all disciplines that deal with the real world empirically — and other relevant methodological disciplines like applied mathematics, systems theory, philosophy of science, and analytic philosophy.

Does this mean that theoretical macro is a waste of time? No. Theoretical pursuits have their place. But they should know their place and not represent themselves as something they are not.

If you ever want macro models to actually be useful, it's not enough to just wave your hands and say "all models are wrong". It's not enough to treat models as ways to "organize our thinking". You've got to have a way to take them to data and decide if you should keep them around, send them back to the shop for alterations, or burn them in a fire.

What it means is that macroeconomists should not be assumed to be especially qualified as policy advisors based on their knowledge of macro theory. Those seeking policy advise should look elsewhere, or at least at least much more broadly.

Noahpinion
Did macro theory fail us in the crisis?
Noah Smith | Assistant Professor of Finance, Stony Brook University

Detroit Dan — Something's Rotten

In a poll of 67 economists in April 2014, every single one of them predicted that the 10-year Treasury yield (U.S. government bonds) would rise in the next six months. Every one of them was extremely wrong. The 10-year yield fell sharply for six months (and has fallen even more steeply in the 7th - 9th months). I have invested my life savings in long term U.S. Treasury bonds, and saw these predictions when they were made. Yet I never seriously considered changing my position. I was somewhat intimidated, but after a bit of thought concluded that I was right to believe that the 10-year yields would move in the opposite direction of 100% of economists. My faith has been rewarded handsomely, as yields have plunged, and my investment (PRULX - a long term U.S. Treasury bond mutual fund) has soared. Either I am a freak genius, or there is something dreadfully wrong with "economists".

Mindorenyo
Something's Rotten
Detroit Dan

Podcast for Dec 5

Russia situatiion, stocks, economy, euro,

Podcast for Dec 5.

Brian Romanchuk — For Fiscal Policy, The Future Is Now

The problem with modern analysis of fiscal policy is that it has fallen into the trap of following a certain conventional wisdom: it has to be very forward looking, in fact it is meant to have an analysis horizon longer than the expected lifetime of the Universe (depending upon the cosmological model). Upon reflection, I think the correct philosophy was the one expressed by the famed American Football coach George Allen: The Future Is Now.…

Bond Economics
For Fiscal Policy, The Future Is Now
Brian Romanchuk

Lars P. Syll — Econometric forecasting — a retrospective assessment

The kinds of laws and relations that econom(etr)ics has established, are laws and relations about entities in models that presuppose causal mechanisms being atomistic and additive. When causal mechanisms operate in real world social target systems they only do it in ever-changing and unstable combinations where the whole is more than a mechanical sum of parts. If economic regularities obtain they do it (as a rule) only because we engineered them for that purpose. Outside man-made “nomological machines” they are rare, or even non-existant. Unfortunately that also makes most of the achievements of econometrics – as most of contemporary endeavours of economic theoretical modeling – rather useless.

Lars P. Syll’s Blog

Econometric forecasting — a retrospective assessmentLars P. Syll | Professor, Malmo University