- How Much Trust Should We have in Economic Data?
- 'Underestimating Fiscal Policy Multipliers'
- Links for 10-09-2012
- 'Trimmed-Mean Inflation Statistics'
- One and Done
Posted: 09 Oct 2012 12:33 AM PDT
We are, as they say, live:
How Much Trust Should We have in Economic Data?: Perhaps it's not surprising that a political party unable to come to grips with the scientific evidence on global warming would extend its claim that the evidence is politically manipulated to other inconvenient truths. But the attack on the Bureau of Labor Statistics by some Republicans last Friday over its report of an improvement in the unemployment rate was still a bit of a shock.
The charge that employees at the BLS manipulated the employment numbers to favor Obama is nonsense as anyone familiar with the calculation of these numbers can attest, but it does bring up a good question. What factors should be considered when assessing the reliability of economic data? ...[continue reading]...
Posted: 09 Oct 2012 12:24 AM PDT
Antonio Fatás argues that fiscal policy multipliers are larger than the ideologues have led many people to believe:
Underestimating Fiscal Policy Multipliers, by Antonio Fatás: The October edition of the IMF World Economic Outlook is out with very strong warnings about risks to growth (full report can be found at the IMF web site). In Chapter 1 there is a nice analysis about whether in our most recent growth forecasts we have recently underestimated fiscal policy multipliers. ...
And the answer is yes and here is my reading of what has happened. About eleven years ago there was a series of academic papers that estimated fiscal policy multipliers. The conclusion of the earlier papers is that multipliers were somewhere in the range 1-1.5. ... This was the conclusion I reached together with my co-author back in 2001 (paper is available at my web site). This was also the conclusion of the paper written by Oliver Blanchard and Roberto Perotti written around the same time and available here. The academic literature on this issue grew very fast with a large number of papers confirming the earlier estimates but also with a set of other papers that challenge the size of fiscal multipliers. In particular, papers that used events such as wars tended to find smaller multipliers. Because this is about fiscal policy, the debate has not gone away and there are still those who believe that multipliers are close to zero or even negative...
Despite the debate, my reading of the literature up to that point was that there was a significant amount of consensus around multipliers being around or slightly above 1.
As soon as the 2008 crisis started the debate went from a simple academic discussion to an urgent policy issue. ... Since then the debate has become much more ideological than academic. We have had a series of additional academic papers that, if anything, suggest that multipliers are even larger than the initial estimates because of the special circumstances we are in (monetary policy stuck at the zero-lower bound and a deep recession caused by develeraging forces that reduce private demand).
But these new (and old) academic results have simply be displaced by the ideological debate that followed the fiscal policy stimulus of the 2008-2009 period, which somehow led to the conclusion that those policies did not work and that what we now needed was more austerity. And when over the last two years we forecasted GDP growth rates in the face of coordinated austerity by many governments we somehow forgot to consider that multipliers can be large.
This is what the IMF suggests now in their analysis, which, by the way, is also self critical. They look at their recent forecasts for global growth and they suggest that their model was implicitly using fiscal policy multipliers around 0.5 when measuring the impact of fiscal consolidation. Given that their GDP growth forecast has been overestimating growth, the IMF now wonders whether multipliers are higher than 0.5. The analysis in the current World Economic Outlook suggests that multipliers might be within the range 0.9 to 1.7. A range which happens to be very almost identical to the one produced by the early papers and confirmed by the most recent academic literature. It is also not far from what most economic models would predict given current economic conditions.
Posted: 09 Oct 2012 12:06 AM PDT
Posted: 08 Oct 2012 02:11 PM PDT
Preliminary evidence from Brent Meyer and Guhan Venkatu of the Cleveland Fed shows that the median CPI is a robust measure of underlying inflation trends:
Trimmed-Mean Inflation Statistics: Just Hit the One in the Middle Brent Meyer and Guhan Venkatu: This paper reinvestigates the performance of trimmed-mean inflation measures some 20 years since their inception, asking whether there is a particular trimmed-mean measure that dominates the median CPI. Unlike previous research, we evaluate the performance of symmetric and asymmetric trimmed-means using a well-known equality of prediction test. We find that there is a large swath of trimmed-means that have statistically indistinguishable performance. Also, while the swath of statistically similar trims changes slightly over different sample periods, it always includes the median CPI—an extreme trim that holds conceptual and computational advantages. We conclude with a simple forecasting exercise that highlights the advantage of the median CPI relative to other standard inflation measures.
In the introduction, they add:
In general, we find aggressive trimming (close to the median) that is not too asymmetric appears to deliver the best forecasts over the time periods we examine. However, these "optimal" trims vary slightly across periods and are never statistically superior to the median CPI. Given that the median CPI is conceptually easy for the public to understand and is easier to reproduce, we conclude that it is arguably a more useful measure of underlying inflation for forecasters and policymakers alike.
And they conclude the paper with:
While we originally set out to find a single superior trimmed-mean measure, we could not conclude as such. In fact, it appears that a large swath of candidate trims hold statistically indistinguishable forecasting ability. That said, in general, the best performing trims over a variety of time periods appear to be somewhat aggressive and almost always include symmetric trims. Of this set, the median CPI stands out, not for any superior forecasting performance, but because of its conceptual and computational simplicity—when in doubt, hit the one in the middle.
Interestingly, and contrary to Dolmas (2005) we were unable to find any convincing evidence that would lead us to choose an asymmetric trim. While his results are based on components of the PCE chain-price index, a large part (roughly 75% of the initial release) of the components comprising the PCE price index are directly imported from the CPI. It could be the case that the imputed PCE components are creating the discrepancy. The trimmed-mean PCE series currently produced by the Federal Reserve Bank of Dallas trims 24 percent from the lower tail and 31 percent from the upper tail of the PCE price-change distribution. This particular trim is relatively aggressive and is not overly asymmetric—two features consistent with the best performing trims in our tests.
Finally, even though we failed to best the median CPI in our first set of tests, it remains the case that the median CPI is generally a better forecaster of future inflation over policy-relevant time horizons (i.e. inflation over the next 2-3 years) than the headline and core CPI.
One note. They are not saying that trimmed or median statistics are the best way to measure the cost of living for a household. They are asking what variable has the most predictive power for future (untrimmed, non-core, i.e. headline) inflation ("specifically the annualized percent change in the headline CPI over the next 36 months," though the results for 24 months are similar). That turns out, in general, to be the median CPI.
Posted: 08 Oct 2012 11:41 AM PDT
I don't have much to say, just sitting here wondering why I let the election coverage, particularly on TV, drive me so crazy. One thing that really bothers me is to watch a guest lie outright -- these are cases where the facts are not in doubt -- and then see the guest invited back again and again just because he or she is entertaining and attracts viewers. The rule should be lie once, and you are done (if we don't book the entertaining liars, someone else will!). And "I didn't know" -- the convenient ignorance of the facts that allows false statements -- is no excuse. They are coming on the shows as experts and ought to know when the facts are in obvious disagreement with their claims.
And the eruption on Friday over the employment numbers, and the reporting that actually allowed there to be some doubt about whether manipulation of the report could occur, should have been embarrassing:
Enabling the jobs report conspiracy theory, by Brendan Nyhan: Media ethics pop quiz: When conspiracy theories started circulating on Twitter claiming that Friday's jobs report had been politically manipulated, what should reporters have done?
(a) Avoid covering a baseless and unsubstantiated charge and focus instead on the mainstream debate over the meaning and significance of the jobs report.
(b) Carefully cover the conspiracy theory as news, making clear that no credible evidence exists to support the claim.
(c) Write up "he said," "she said" news reports that treat the conspiracy theory as a matter of partisan dispute.
One can make a reasonable case for either (a) or (b), but several outlets chose (c) instead, writing up the charges in a format that is likely to help spread the myth and encourage more like it in the future. With incentives like these, should we be surprised that politicians and commentators keep making false claims? ...
The most significant damage was done ... when the meme jumped to mainstream news coverage and was treated credulously by reporters and commentators, who often framed it as a plausible contention that was in dispute between the parties. In particular, the lede to an appalling ABCNews.com story by Abby Ellin appeared to give credence to Welch's claim. Ellin stated that the surprisingly large decrease in unemployment "has raised suspicions that the White House might be cooking the books ahead of the election" and then spent five additional paragraphs detailing the charges before bothering to start refuting the claim in the seventh paragraph...
Another ABCNews.com story described the report as an "October surprise" —a term that usually connotes pre-election dirty tricks—and failed to directly refute claims it briefly described as "conspiracy theories," while a Reuters report framed the dispute as a "he said," "she said" dispute between Welch and his critics, even giving him the last word. ...
Reporters shouldn't be expected to avoid covering controversial claims in the news, but they can exercise judgment in the way they report on those claims. In doing so, the media can weaken the incentives for political elites to promote misinformation...
I don't have any grand points to make about this, no novel solutions to suggest, just frustration. I suppose I should take into account whether the generated controversy over the employment numbers actually helped the right, and I'm not sure it did. It gave the true believers -- the truthers of one form or another -- some red meat to chew on, but for reasonable, undecided voters it may have simply looked like one more example of the right becoming unhinged. After doing so much to overcome the perception of extremism by moving to the middle during the debate, the Romney camp may not have been very happy with that development.
But whether it helped, hurt, or didn't much matter, the news agencies still ought to be embarrassed that a claim with no evidence whatsoever backing it up -- just something some clown said on Twitter -- could end up being treated and reported on as if it is a question with some merit.