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
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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.
click for larger chart
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.”
NY Times, March 9, 2004
Krugman vs the CEA
Marginal Revolution, March 15, 2004 at 08:01 AM
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
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