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March 8, 2013

Latest Posts from Economist's View


Latest Posts from Economist's View


Posted: 23 Feb 2013 12:03 AM PST
Posted: 22 Feb 2013 04:24 PM PST
David Altig admits to "overly rosy projections" about the course of the economy (which can cause policy to be too timid), and he tries to explain how this can happen. I can't really claim the high ground here. My first post for CBS MoneyWatch in November 2009 explained why employment might not fully recover until 2013. I was very pessimistic relative to most, and wondered at the time if I was being too pessimistic in saying it could be four years, but of course it turned out I wasn't pessimistic enough (I suppose I could argue that I relied in part upon an SF Fed forecast for the recovery timing, but that's not much of a defense since I didn't question the forecast in the post). My main message was that it was going to be a long time before employment recovered and policy needed to do more to help, much more, (that's still true) so I was at least pushing in the right direction:
Nature Abhors an Output Gap, macroblog: In The Washington Post, Neil Irwin highlights a shortcoming that I know all too well... In fact I don't think Irwin's indictment is overly harsh, and he is on the right track when he offers up this explanation for the last several years' persistently overly rosy projections:
Economic forecasters tend to look at past experience and extrapolate; in the past, when there has been a recession, the very forces that caused the recession become unwound, sowing the seeds for expansion...
Here is a basic fact about macroeconomic forecasting. The truly powerful driver of forecasts is mean reversion, which is the tendency of models to predict that gross domestic product (GDP) will move toward an average trend over time. This fact holds true whether we are talking about formal statistical analysis or the intuitive judgmental adjustments that all forecasters apply to their formal statistical models.
Forecasters are not completely robotic, of course. Irwin is correct when he says "forecasters tend to look at past experience and extrapolate, but forecasters do leaven past experience with incoming details that alter judgments about what is the mean—the "normal state," if you will—to which the economy will converge. But whatever is that normal state, our models insist that we will converge to it.
Nothing illustrates this property of forecasting reality better than this chart, which supplements the latest economic projections from the Congressional Budget Office:
130222a
The potential GDP line in that chart is the level of production that represents the structural path of the economy. Forecasters, no matter where they think that potential GDP line might be, all believe actual GDP will eventually move back to it. "Output gaps"—the shaded area representing the cumulative miss of actual GDP relative to its potential—simply won't last forever. And if that means GDP growth has to accelerate in the future (as it does when GDP today is below its potential)—well, that's just the way it is.
Unfortunately, potential GDP is not so simple to divine. We have to guess (or, more generously, estimate) what it is. That guessing game has been harder than usual over the past several years. Here is the record of the CBO's potential GDP since 2009:
130222b
I think this picture is a fairly representative record of how views about the potential level of U.S. GDP has evolved over the past several years. ...
This much, in any event, is clear: Given any starting point where the level of GDP is below its potential level—that is, given an output gap—forecasts will include a bounce back in GDP growth above its long-run average, at least for a while. That's just the way it works.
If, contrary to conventional wisdom, you believe that the true output gaps are much smaller than suggested in the CBO picture above, you might want to take the under on a bet to whether GDP forecasts will prove too optimistic once again.
Posted: 22 Feb 2013 11:28 AM PST
Tim Duy:
Bernanke Not Afraid of Bubbles, by Tim Duy: Yesterday I wrote:
For now, our default should be that Federal Reserve Chairman Ben Bernanke shares the view that the real benefits of QE outweigh the imaginary costs. As long is that is true, then Williams will be correct - expect asset purchases to continue at the current pace deep into this year. What we are looking for, then, are signs that Bernanke's commitment is wavering as much as that of some of his colleagues.
Today it was leaked (via Bloomberg):
Federal Reserve Chairman Ben S. Bernanke minimized concerns that the central bank's easy monetary policy has spawned economically-risky asset bubbles in comments at a meeting with dealers and investors this month, according to three people with knowledge of the discussions.
The people, who asked not to be identified because the talks were private, said Bernanke made the remarks at a meeting in early February with the Treasury Borrowing Advisory Committee. Fed spokeswoman Michelle Smith declined to comment.
The Fed chairman brushed off the risks of asset bubbles in response to a presentation on the subject from the group, one person said. Among the concerns raised, according to this person, were rising farmland prices and the growth of mortgage real estate investment trusts. Falling yields on speculative- grade bonds also were mentioned as a potential concern, two people said.
So, for now at least, it appears that Bernanke dismisses one of the oft-discussed risks of the current stance of monetary policy, that of investors "reaching for yield."
Posted: 22 Feb 2013 11:28 AM PST
I was going to post this earlier today, but decided not to:
Jon Chait is unhappy with David Brooks:
David Brooks, Obama Plan Birther: ... David Brooks today ... lashes out at the obstinacy of the Republican Party and its refusal to compromise on the deficit. But he has to balance it out by asserting that President Obama, too, lacks any such plan...
This is demonstrably false. Whatever you think about the substantive merits of Obama's plan, it does exist. ...
So is Steve Benen:
When false claims drive the debate: As best as I can tell, New York Times columnist David Brooks is a well-connected pundit. Powerful people return his phone calls, and when he wants information from top governmental offices, Brooks tends to get it.
And with this in mind, it's puzzling that Brooks based his entire column today on an easily-checked error. The conservative pundit insists President Obama "declines to come up with a proposal to address" next week's sequester mess, adding, "The president hasn't actually come up with a proposal to avert sequestration."
I'll never understand how conservative media personalities get factual claims like this so very wrong. If Brooks doesn't like Obama's sequester alternative, fine; he can write a column explaining his concerns. But why pretend the president's detailed, already published plan, built on mutual concessions from both sides, doesn't exist? ...
But this addition, via Brad DeLong, changes my mind -- this is worth echoing:
Ezra Klein Smacks Down David Brooks: "Centrism" Weblogging, by Brad DeLong: Unbelievable:
David Brooks: In my ideal world, the Obama administration would do something Clintonesque… a budget policy… like… Robert Rubin… and if the Republicans rejected that, moderates like me would say that's awful…
Ezra Klein: I've read Robert Rubin's tax plan. He wants $1.8 trillion in new revenues. The White House… is down to $1.2 trillion…. [T]he White House's offer seems more centrist…. People say the White House should do something centrist like Simpson-Bowles, even though their plan has less in tax hikes and less in defense cuts…
At this point David Brooks has a choice: he can say "I am an idiot who does not know what I am talking about"; or he can change the subject.
Guess what he does?
David Brooks: My first reaction is I'm not a huge fan of Simpson-Bowles anymore; I used to be. Among others, you persuaded me the tax reform scheme in theirs is not the best. Simpson-Bowles just doesn't do enough on entitlements…
If I were running the New York Times, I would look at this and immediately say: We need to get Brooks out of our pages yesterday if not before, and we need an Ezra Klein of our own very badly.
Why oh why can't we have a better press corps?
The context: Does Obama have a plan? A conversation with David Brooks: ...
A much longer take:
Ezra Klein: In the column, you said that the Obama administration doesn't have a plan to replace the sequester. I feel like I've had to spend a substantial portion of my life reading their various budgets and plans to replace the sequester, and my sense is that you've had to do this, too. So, what am I missing?
David Brooks: First, the column was a bit of an over-the-top… I probably went a bit too far when saying the president didn't have a response to the sequester…. I was unfair…. [But] there's no scorable plan they've come up with, at least this time around… it would serve the country well if they put out something specific….
EK: CBO did score the president's budget, and almost all of their proposals are drawn from that. I find, in general, that legislators often ask Elmendorf if he's scored things from the White House and then crow about the fact that he hasn't, when all that's really going on is CBO doesn't score everything the president does or says.
DB: If you look at the charts I've seen, they're targets that, say, cut x from agriculture spending, and specifically how you do that is vague…. I think having something concrete and standalone is the way for the president to go… he's got a responsibility…. I don't think he's given us a document that would anchor the debate in a boring, managerial framework so we can have a debate over substance.
EK: On that point, one theme in your column, and in a lot of columns these days, is this idea that the president should, on the one hand, be putting forward centrist policies, and on the other hand, that if he's putting forward policies that the Republican Party won't agree to, those policies don't count, as they're nothing more than political ploys… it seems a bit dangerous and strange to say the boundaries of the discussion should be set by the agenda that lost the last election.
DB: In my ideal world, the Obama administration would do something Clintonesque: They'd govern from the center; they'd have a budget policy that looked a lot more like what Robert Rubin would describe, and if the Republicans rejected that, moderates like me would say that's awful…
EK: But I've read Robert Rubin's tax plan. He wants $1.8 trillion in new revenues. The White House, these days, is down to $1.2 trillion. I'm with Rubin on this one, but given our two political parties, the White House's offer seems more centrist…. People say the White House should do something centrist like Simpson-Bowles, even though their plan has less in tax hikes and less in defense cuts….
DB: My first reaction is I'm not a huge fan of Simpson-Bowles anymore; I used to be. Among others, you persuaded me the tax reform scheme in theirs is not the best. Simpson-Bowles just doesn't do enough on entitlements…. I agree with you [that Republicans] shouldn't be given veto power over the debate, but I still think that if you look at what moderates want the administration to do, they have not gone far enough.
EK: What would be far enough, in your view? What would you like to see them offer?
DB: My fantasy package, and I'm not running for office, would include a progressive consumption tax, and it would have chained CPI, and it would have a pretty big means-test of Medicare. I'd direct you to Yuval Levin's piece in the Times a few days ago, which seemed sensible.
EK: On the topic of deals Republicans should take, I'm completely confused by their stance on the sequester…. They want to reduce the deficit, cut entitlements, protect defense, simplify the tax code by cutting out various expenditures, and lower rates…. Republicans could get four of their five goals by striking a sequester deal, and they could always cut tax rates later, whenever they get into power. What am I missing?
DB: Here's something I'm confused by: how much they still believe in top rate reductions. I would say in the conservative economist world I think I know almost nobody… super motivated by top rate reductions anymore. I don't think that's true with Republican members of Congress. I think there's a lag between the wonks and the legislators. The second thing is, for them, the big issue is overall size of government. When they try to explain why growth is so slow, it's because we're saddled with this large, unproductive public sector, and they need to bring that down. And cutting tax expenditures would generate money for a bigger more unproductive public sector.
EK: So, then, what do you see as the White House's motivating theory?
DB: If I were to capsulize their theory, it's lets stabilize the debt over 10 years, maybe do some things that would make it better beyond the 10-year window, but let's not try to take care of the long-term debt issue all at once. Achieve a floor and then focus on growth and equity. And I guess my response would be, as the [International Monetary Fund] and others have said, if you don't lay the groundwork for a long-term debt solution now, it gets immeasurably harder every year you wait. I agree there are three big issues — equity, growth and debt — and it's hard to address all three at the same time. But that's what we need to do. ...
Posted: 22 Feb 2013 06:09 AM PST
Kevin O'Rourke:
The good news: confidence is just around the corner, by Kevin O'Rourke, Irish Economy Blog: You might have thought that the disastrous but wholly unsurprising eurozone GDP numbers indicate that the bloc is in a bad way, and will continue to be so until the current macroeconomic policy mix is jettisoned.
Happily, Olli "Don't mention the multiplier" Rehn has good news for us:
The current situation can be summarised like this: we have disappointing hard data from the end of last year, some more encouraging soft data in the recent past and growing investor confidence in the future.
Thank goodness for that.
As noted in the comments of the post, Rehn also says:
Rehn urged nations to keep cutting budgets and overhauling their economies in the face of slowing growth. In a statement, he said any shift away from fiscal consolidation would prolong the downturn.
"The decisive policy action undertaken recently is paving the way for a return to recovery," Rehn said. "We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is under way, delaying the needed upswing in growth and job creation."
See also "A week after official figures showed a steep fall in euro-zone output in late 2012 the European Commission has added to the gloom by unveiling some gloomy forecasts for 2013. ..."
Posted: 22 Feb 2013 06:03 AM PST
Some evidence that Obamacare is reducing the rate of increase in the cost of health insurance:
Big health insurance rate hikes are plummeting, by Sarah Kliff: The number of double-digit rate increases requested by health insurers has plummeted over the past four years, according to a Friday report from the Obama administration.
Researchers combed through data available from the 15 states that publicly post all requests for rate increases in the individual market. They found that, in 2009, 74 percent of all requests came in above 10 percent. By 2012, that number had fallen to 35 percent. Preliminary data for 2013, which only cover a handful of states, shows 14 percent of rate increases asking for a double-digit bump. Here's what this looks like in chart form:
Does Obamacare get credit? The administration thinks so...
One other possible explanation: Over this time period, there has also been a big slowdown in the rate of health care cost growth. That began in 2009, so it's not completely impossible that the health insurance industry, noticing that trend, began pricing individual market products at lower rates.
The administration has considered that idea though and looked at the large group market to test it. If the health cost slowdown really was driving lower premiums, the thinking went, it would show up across all insurance products. It didn't...
Speaking of Obamacare, from Brad DeLong: Douglas Holtz-Eakin and Avik Roy: "You Know All That Stuff We Have Been Saying for Four Years? Nevermind!", and from Paul Krugman: More Swiss Myths.

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