The Unassuming Economist

From a new post by Mohamed A. El-Erian:

“[…] the reputation of mainstream economists has taken a beating in the last 10 years. The bulk of them failed to predict the 2008 crisis that almost tipped the global economy into a multiyear depression. They also didn’t foresee the aftermath.

Most made the mistake of treating the crisis as a cyclical shock and forecast a V-type growth snapback. They were prisoners of an excessive mean-reversion mindset: They acknowledged that growth was taking a huge hit due to severe financial dislocations, but they forecast that economic activity would bounce back strongly and inclusively.

Instead, the experience of advanced economies more closely resembled an “L,” in which they got stuck in a “new normal” characterized by a prolonged period of low and insufficiently inclusive growth.

The damage goes well beyond lost output, diminished consumer welfare, widespread economic insecurity and a worsening of the inequality of income, wealth and opportunity. The shortfalls fueled the politics of anger, along with a heightened mistrust of the establishment, institutions and expert opinion.

This, in turn, has diminished the credibility of economics. Meanwhile, many students have complained to me that the mainstream economics they are taught is divorced from real-world relevance. It is only a matter of time before the funding for economic research risks becoming a casualty.

Yet this huge failure has not been the result of ignorance about the limitations of the discipline, nor is it the consequence of a lack of new, disruptive ideas.

Here are some reasons for the erosion of the insights and predictive powers of mainstream economics:

• The proliferation of oversimplifying assumptions, including those that sideline many elements of real-world behaviors and interactions, in an effort to make models seem more “scientific.” This leads to overreliance on excessively abstract estimation techniques and approaches.
• Insufficient consideration of financial linkages and little allowance, if any, for the possibility that financial dislocations can disrupt the economy.
• Poor and grudging adoption of important insights from behavioral science, along with excessive hesitation to develop multidisciplinary approaches.
• An oversimplification of uncertainty and the ways it influences economic interactions.
• Overemphasis of equilibrium conditions and mean reversion, a trend that reduces the understanding of transitions, structural changes and tipping points.”

“Two decades ago, the economics profession concluded that trade with developing countries was not seriously hurting unskilled workers in developed countries.” A new post by Adrian Wood argues that “the debate from which that consensus emerged came to an end prematurely. Even now, the evidence does not permit any firm conclusion about the contribution of globalisation to the economic misfortunes of less-educated people in developed countries. Had there been less consensus among economists, more might have been done, sooner, to mitigate the social costs of globalisation.”

From a new post by Timothy Taylor:

“How much would you be willing to pay, in actual money, for an additional 30 years of life expectancy?”

“Fuchs and Eggleston are especially focused on the inequality of life expectancy. So they look at where the age of death falls for the 20th and the 80 percentile of this distribution. Then they calculate how the age of death at these percentiles has evolved over time. It’s a little tricky to eyeball this result from the graph (and the authors provide more specific statistical meaures), but the inequality from 80th to 20th percentile diminished somewhat between about 1950 and 2000, but since then the degree of inequality hasn’t changed much.”

A new IMF country report says that “Poverty and income inequality are high in Israel compared with peers, being exacerbated by the lower labor participation and productivity of some population groups, such as the Israeli-Arab and Haredi populations and non-Haredi Jewish women. Israel’s low redistribution of income through the budget limits its impact on reducing poverty and inequality. Given the projected rise in the share of the Haredi, and, to a lesser extent Arab, populations in coming decades, addressing the structural issues behind their low participation and productivity is an urgent matter.”

New Blogs:

Global Economy: Good News for Now but Trade Tensions a Threat – IMF Blog by Maurice Obstfeld

Econometrics, Machine Learning, and Big Data – No Hesitations (Frank Diebold’s Blog)

2018’s Growing and Shrinking Economies – Focus Economics

A brief history of time series forecasting competitions – Hyndsight (Rob Hyndman’s Blog)

IJF special issue on “Forecasting for Social Good” – IIF Blog

Ghysels and Marcellino on Time-Series Forecasting – No Hesitations (Frank Diebold’s Blog)

What impact would a trade war between the U.S. and China have on their economies? – Focus Economics

What Information Does the Yield Curve Yield? – ECONOFACT

New Articles:

Forecasting US GNP growth: The role of uncertainty – Mawuli Segnon, Rangan Gupta, Stelios Bekiros, and Mark E. Wohar, Journal of Forecasting

Are macroeconomic density forecasts informative? – Michael P. Clements, International Journal of Forecasting

The role of accounting fundamentals and other information in analyst forecast errors – Danilo Monte‐Mor, Fernando Galdi, and Cristiano Costa, Journal of International Finance

What do professional forecasters actually predict? – Didier Nibbering, Richard Paap, and Michel van der Wel, International Journal of Forecasting

How well do economists forecast recessions? – Zidong An, Joao Jalles, and Prakash Loungani, International Finance

Evaluating the use of realtime data in forecasting output levels and recessionary events in the USA – Chrystalleni Aristidou, Kevin Lee, and Kalvinder Shields, Journal of the Royal Statistical Society