The Unassuming Economist

From a new post by Chris Dillow:

“Simon has a good discussion on whether fiscal or monetary policy is better at stabilizing output. I’d suggest, though, that neither is in practice particularly good and that what we need instead are stronger automatic stabilizers.

I say so for a simple reason: recessions are unpredictable. Back in 2000 Prakash Loungani studied the record of private sector consensus forecasts for GDP and concluded that “the record of failure to predict recessions is virtually unblemished” – a fact which remained true thereafter.

The ECB, for example, raised rates in 2007 and 2008, oblivious to the impending disaster. The Bank of England did little better. In February 2008, its “fan chart” attached only a slight probability to GDP failing in year-on-year terms at any time in 2008 or 2009 when in fact it fell 6.1% in the following 12 months. Because of this, it didn’t cut Bank Rate to 0.5% until March 2009.

Given that it takes around two years for changes in interest rates to have its maximum effect upon output, this means that monetary policy does a better job of repairing the economy after a recession than it does of preventing recession in the first place. And of course, as there’s no evidence that governments can predict recessions any better than the private sector or central banks, the same is true for fiscal policy.

All this suggests to me that if we want to stabilize in the face of unpredictable recessions, we need not just discretionary monetary or fiscal policy but rather better automatic stabilizers.”

A new IMF working paper finds that “both nonfiscal (external and internal imbalances) and fiscal variables help predict crises among advanced and emerging economies.”

“Our analysis identifies robust indicators of vulnerabilities that can help signal a high probability of the onset of a crisis in the near future. Building early warning indicators that help predict future fiscal crises is inherently difficult, including because countries may take mitigating action as they see the growing vulnerabilities. However, we find that some types of vulnerabilities are consistently relevant to explain fiscal crises. This raises the question why governments do not act as they see signals. In large measure they do, as crises among advanced economies are rare. Still, the occurrence of crises may reflect overly optimistic projections about the future (e.g., economic growth, cost of debt), and as such governments underestimate the risks and fail to take mitigating measures. Another possibility could be that other shocks or crisis (e.g., banking) could lead to fiscal pressures”

A new BloombergQuint post by Simon Kennedy notes my research on forecasting recessions that “Indeed, a 2014 study by Prakash Loungani of the International Monetary Fund found that not one of the 49 recessions suffered around the world in 2009 had been predicted by a consensus of economists a year earlier. Further back, he discovered only two of the 60 recessions of the 1990s were anticipated a year in advance.”

It also summarizes the views of many economists:

“Given our past record in predicting the economic impact of technology, economists will probably get this wrong again. Today, weak productivity growth seems puzzling at a time of great new technological innovations. But in the past, it took decades for electricity or cars or computers to be fully integrated into our production processes and business practices and to boost productivity growth. Likewise, the internet of things or artificial intelligence will take time to be similarly integrated and to be visible in our measures of productivity. While being well aware that, in the 1930s, [John Maynard] Keynes famously predicted that automation would lead to a three-hour working day, my sense is that this process is likely to speed up and surprise on the positive side.”—Peter Praet, Chief Economist at the European Central Bank

Continue reading here. My latest paper is available here.

A new post by Timothy Taylor says that “Making predictions is hard, especially about the future. It’s a comment that seems to have been attributed to everyone from Nostradamus to Niels Bohr to Yogi Berra. But it’s deeply true. Most of us have a tendency to make statements about the future with a high level of self-belief, avoid later reconsidering how wrong we were, and then make more statements. […] The questions of how to predict for what you don’t expect, and how to plan for what you don’t expect, are admittedly difficult. The ability to pivot smoothly to face the new challenge may be  one of the most underrated skills in politics and management. ”

Continue reading here.

From the most recent EIU global forecast: