Once more, unto the breach:
If Economists were baseball players, many of ’em would have been sent down to the minor leagues a long time ago. They’ve nearly all been wrong, and for a quite a long while.
It ain’t called the Dismal Science for nuthin’.
Consensus expectations for job creation have overshot the mark by significant amounts; Some of Wall Street’s better known economists (including one I respect from Chicago) have been off — and consistently so, by some 95%. I’m hard pressed to recall whence the practitioners of the Dismal Arts have been so dependably wrong, and to such a large degree.
Many commentators have been grappling with the ongoing bad forecasting. Paul Krugman took the CEA to task for their projections, accusing the President’s advisors of a “corrupted policy process, in which political propaganda takes the place of professional analysis.”
Pointing out the CEA is wrong
click for larger chart
Source: New York Times
Krugman himself has been accused of politicizing the process, with the meek explanantion that the “CEA has in essence been predicting a return to trend.”
Of course, that same excuse was commonly given by Perma-Bull strategists in the beginning of the Bear market. “Hey, we were only forecasting a return to the previous trend.” And, it takes skills and perceptiveness to know when not to default to a “return to prior trend.” If not, then why even have the CEA or economic advisors? Just throw up any old chart of any phenomena, track the prior trend, assume a reversion. Um, on second thought, perhaps not. Obviously, this is an intellectually foolish excuse, failing as it does to recognize changing market and econmic conditions in the post-bubble environment. (I have too much respect for this writer to assume its merely anti-Krugman, so let’s call it a bad argument and move on).
James Galbraith has suggested that there has been no recovery at all, and hence, the lack of job creation should come as no surprise. This is also belied by the evidence: expanding manfacturing, increased consumption, rising GDP. This is clearly a post-recession recovery, albeit an unusual and less than satisfying one.
Tipping Point?
click for larger chart
Source: Salon
Galbraith claims Krugman’s proclamations — as well as those of his accusers — are “Not Proven.” Using a 13 year chart, he makes the more nuanced observation that “the Bush forecast did not imply unusually rapid job growth for an economic expansion. To the contrary, the failure of the jobs forecast did not occur because economic recovery forecasts were abnormal. They were not. So far as we can tell, it did not occur because someone cooked the books, under instruction or otherwise [although DeLong fisks that assumption].” Instead, writes Galbraith, “Bush’s jobs forecast failed because a jobs recovery never began at all.”
I come from a somewhat different perspective, somewhat askew from these: The failure of the White House economists does not lie in faking a prediction. It lies in failing to understand what the problems are in the first place. They erred by not recognizing the post-bubble environment as unique. Most of all, they failed to respond to these new circumstances appropriately.
Instead, the economy has been treated to an updated version of Reagan’s economic policy, despite a radically different economic environment.
Let me bottom line it for you: The excesses of the Bubble were immense, and have yet to be fully worked off. It will take years to fully get past all of the underutilized capacity from the massive overinvestment created during the late 90s. This has been a Frankenstein recovery — jolted into spasmodic motion by massive economic stimulus; Whether that creates true economic life or merely a grotesque monstrosity has yet to be determined. But it is no surprise to those of us who have been following this line of thinking for a long time that this recovery is not typical.
The key, from this analytical perspective, has been the consensus failure from within the ranks of economists — left and right — to recognize that the usual rules of a cyclical recovery do not apply in a post bubble economic environment.
This continues to be a significant issue in this election year.
UPDATE: March 20, 2004 7:42am
Prof Brad DeLong questions how the administration can forecast real GDP growth below other forecasters, but payroll growth above? The CEA made several strange assumptions to reach their conclusions, and have failed to defend these asusmptions, according to DeLong.
If you have any further curiousity about how these numbers get crunched, and what the analytical shortcomings of that process are, its worth the heavy lifting: “Administration Employment Forecasts Once Again.”
Sources:
Promises, Promises
PAUL KRUGMAN
NY Times, March 9, 2004
http://www.nytimes.com/2004/03/09/opinion/09KRUG.html
Krugman vs the CEA
Alex Tabarrok
Marginal Revolution, March 15, 2004 at 08:01 AM
http://www.marginalrevolution.com/marginalrevolution/2004/03/forecasting_emp.html
Behind the jobs debacle
Bush’s jobs forecast failed because there’s been no jobs recovery at all
James K. Galbraith
Salon, March 15, 2004
http://www.salon.com/news/feature/2004/03/15/economy/index.html
Heh, it’s kinda ironic if you ask me. James Galbraith’s chart that is. He says the president’s projections weren’t that high and then uses a chart that shows job growth during the Clinton years. Now, I know it’s not so simple, but what some people might see when they look at this is, “Boy, the economy sure was better under Clinton, wasn’t it?”
And I completely agree with your assessment. To the Republicans these days, every economic problem is a nail for their Supply Side hammer. Budget surplus? Income tax cuts for the rich! Deficits? Eliminate the estate tax for the rich! Unemployment? Divident tax cuts for the rich! Inflation? Deflation? Dollar crisis? You get the idea. It’s really unbelievable that a lunatic like Grover Nordquist gets to dictate policy.
Repeat After me, Economist Alchemist, Economist Alchemist
As far as I’m concerned Economists have about as much credibility these days as Alchemists. Barry L. Ritholtz compares them to baseball players at The Big Picture: Why Job Forecasts Keep Failing. If Economists were baseball players, most of ’em…
one — a dumb correction, but I think I was a frustrated copy editor in a prior lifetime — it’s “once more unto the breach” (or close up the wall with our dead yadda yadda). cf http://www.bartleby.com/70/2931.html
two, Krugman (and De Long, whom on this subject he is channeling) aren’t being political. Galbraith’s chart looks clever and all, but the CEA’s numbers Just Don’t Add Up. cf most recently http://www.j-bradford-delong.net/movable_type/2004_archives/000498.html
three, I’ve been playing some old LPs tonight, and would just like to remark that _Entertainment!_ (Gang of Four) holds up damned well after all these years.
I’m not sure that that chart was Krugman’s only evidence of a highly politicized process – it was just the easiest way of explaining to a large audience.
The whole jobs debate is idiotic. The reason there has been no recent increase in jobs is that US industry spent the last 20 years intentionally eliminating them–through downsizing, consolidation, mergers and outsourcing. It’s not like a factory that eliminates the third shift during a slowdown and reinstates it when business picks up: The jobs (and in many cases the organizations themselves) have been eliminated. Permanently. Whether or not you believe the economy is growing (personally, I don’t), unemployment will only improve if new jobs are created…and adding a new box onto the organization chart is anathema to US managers and investors.
Rob is oversimplifying.
Jobs were created all thru the late 90s — you can argue that some of them were artifices of the bubble. But real jobs were created.
The economy is growing, tho you can certainly argue its a function of massive stimulus, and not a real or normal expansion.
Speaking of a Keynesian-New Deal stimulus:
After an Exodus of Jobs, a Recovery in Taiwan
http://www.nytimes.com/2004/03/19/business/worldbusiness/19jobs.html
By KEITH BRADSHER
TAIPEI, Taiwan – Many Americans are becoming alarmed as factories and jobs disappear to China. But by Taiwan’s standards, American losses so far have been modest.
Manufacturing here has shrunk to only a quarter of the economy from half in the late 1980’s, as tens of thousands of companies shifted operations across the Taiwan Strait to the mainland.
Unemployment more than tripled, from 1.5 percent through the early 1990’s to 5.2 percent in 2002. Entire industries, like the manufacture of many plastic products, largely vanished, lured by Chinese wages that are a fifth of those in Taiwan.
But while the economy here still has troubles, there are signs that Taiwan has turned the corner. The economy has grown rapidly since a SARS virus outbreak was quelled last June, and unemployment has dropped abruptly, to 4.5 percent, in the last few months.
The recovery may provide lessons, economists say, for the United States and the European Union as they struggle to compete with China and other low-wage countries.
Many jobs have come from surging exports, especially of high-technology products. There have also been more jobs in marketing, logistics and other tasks related to managing operations on the Chinese mainland, using expertise not yet available there. Heavy government spending to build roads, dams, rail and subway lines and other infrastructure projects in Taiwan has played a lesser but important role in increasing employment….
The problem is simply fiscal policy that has stimulated growth and not spurred job creation. We are not running out of work.
I agree with Anne’s last point — stimulus creates expansion, but not necessarily new jobs. The concern is what happens when the stimulus dissipates.
“The concern is what happens when the stimulus dissipates.”
Since the stimulus effect of the tax cuts will dampen after this spring, we have to hope there has already enough demand created to allow a typical cyclical recovery from here. Bond investors are still doubtful. There will be moderate external stimulus, because only China and India are growing strongly enough to add much demand for us.
So, has enough been done? Just the question the Federal Reserve is worrying over.
What puzzles me is the bond market. We are in a bull market that began September 30, 1981. Investors who have stayed in long term corporates and not been frightened by analysts who have been bearish on bonds month after month are happy as clams. But, with the 10 year treasury yield below 4% there is really no reason to keep bonds. So, bond lovers had better be awfully creative.
Oh, Anne from Brown . . . won’t you please leave a real email address?
That way, we could correspond . . . You’re tittillating economic snippets leave me thirsty for more . . .
I don’t say there was “no recovery;” I can read the GDP report.
I say: “Bush’s jobs forecast failed because a jobs recovery never began at all.” The word “jobs” is in that sentence for a reason.
My argument is actually quite close to your own. The deeper problem was a failure to understand the particular character of the 1991 recession, which goes back to the boom and bubble that brought it on.
But it is the job of the CEA to understand these things, in my view. And the job of the President is to act on them.
An old-fashioned view, perhaps.
James G.
Not old fashioned at all — one would expect a President (or CEA or even the Pentagon) to actually understand any problems, prior to fashioning a solution.
In the present case, there’s simply no recognition to the unique post bubble situation at hand. Instead, we see a Reaganite approach to a completely different set of problems than RR faced.
Have a look at Bush’s Reagan Moment? http://bigpicture.typepad.com/comments/2003/10/bushs_reagan_mo.html
You’ll see the same “frozen in amber” approach to economics that Clarke complained about in global affairs — a cold war mentality, despite the lack of a USSR or even state opponent.
That’s dogma for you . . .