Barack Obama

Why Economists Overestimate Future Growth Just Like Politicians Do.

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Over at The Weekly Standard, Andrew Ferguson tucks into a new report by the Organization of Economic Cooperation and Development (OECD) cataloguing that group's own awful predictions about economic growth before, during, and after the global fiscal crisis. A snippet:

In May 2010, for example, with one-third of the calendar year already over, the OECD economists predicted the U.S. economy would grow 3.2 percent for the year. As it happened, gross domestic product grew 1.7 percent. Note that this is not a small error. That 1.5 percentage point spread between the two numbers means the original projection was off by nearly half. It's as if you thought you saw a car go by at 60 miles per hour while it was actually going 30.

Read Ferguson's whole take, which stresses that economists' "detachment from the real world of human activity is matched only by their enormous influence over it, and by their unearned assumption that this arrangement is well deserved." [Hat tip: Hot Air]

Take a few moments, too, to run through the OECD report itself, which is online here. Economics may be called the "dismal science," but the folks at the OECD (not to mention many boosters of President Barack Obama) are forever seeing the future through rose-colored scenarios: "GDP growth was overestimated on average across 2007-12," notes the report, "reflecting not only errors at the height of the financial crisis but also errors in the subsequent recovery."

In other words, don't stop believin' kids. Among the problems identified was the OECD's belief that highly regulated economies would respond to the crisis better precisely because of regulations:

Larger forecast errors over 2007-12 have occurred in countries with more stringent pre-crisis labour and product market regulations. In part this may reflect the weight given at the time to pre-crisis evidence that tight regulations could help to cushion economic shocks, together with insufficient attention being paid to the extent to which tighter regulations could delay necessary reallocations across sectors in the recovery phase. A third possibility is that it reflects a correlation between restrictive regulations and the pre-crisis build-up of imbalances that was not fully captured in forecasts.

Tighter regs might delay the ability of markets to sort things out? That's a meaningful concession to a basic point we've been making at Reason.com for some time.

Of course, the OECD isn't the only group making upbeat assessments. Remember the claims made by the Obama administration and its press cheerleaders regarding the stimulus? Here's a reminder from summer 2012:

Current unemployment in the good, old US of A? According to the government's latest number, it's at 6.7 percent (and with a lower labor-force participation rate that before the crisis started).

To add to a point made by the OECD: If tight regulations make it difficult for markets to respond to economic shocks and reallocate resources, there's also a huge role played by regime uncertainty. To the extent that a government is seen as constantly changing the rules of the game (sometimes in contradictory ways, as when the Federal Reserve pours money into banks but them pays them interest on reserves to keep that money sitting in vaults), it freezes most hopes of recovery. Government isn't the sole cause for the business cycle and for economic booms and busts (though its actions tend to make things more extreme, I'd argue). But government attempts to forestall, cushion, or mitigate upswings and downswings inject huge amounts of uncertainty that almost certainly freezes businesses. How can you plan for the next few years—or even the next few quarters—if you have no good idea on how much you'll be paying for employees' health care? Or what tax rates will be, or even what the federal budget will be? Etc. The sort of manic interventions into all aspects of the economy that started under Bush and keep on going under Obama aren't helping the recovery. They are making it take a helluva lot longer to happen.

That's one of the essential—and largely unlearned—lessons of FDR's New Deal. Constantly throwing up new interventions into the economy, however well intentioned, freezes things up instead of chilling folks out.

From 2008: "Obama's New New Deal: As bad as the old New Deal?"

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  1. I keep having to remind my friends who call me a conservative that I sold my business because of the regulatory buildup before Obama. Some came from W, some from HW, some from Reagan, just like some came from Clinton, some from Carter and some from LBJ.
    The worst of the bunch for my business was Bush I.

    1. Yep, Bush 1 expanded the EPA, created the wetlands nonsense and a whole new regulatory structure with ADA.

      Fuck that asshole!

      1. Fuck him with a rusty pitchfork!
        HAW HAW HAW!

      2. At least the ADA helps support a child molester and his lawyers.

        Trigger warning: Do not read unless you want to be enraged and have thoughts of vigilante action.

  2. It’s as if you thought you saw a car go by at 60 miles per hour while it was actually going 30.

    More like you predicted the car would fly by at 60MPH but instead it drove by under 30 with two wheels seemingly deliberately planted in that ditch.

    1. So your prediction was off by 50%, no big deal.

      The important thing was that you successfully installed your FastPass electronic toll collector.

      That is the important thing after all. Who really cares about the car’s performance? At this point what does it matter?

    2. …then writing an op-ed for the NYT about how even though the car looked like it was going 30, it was actually going 70, and would have been going 90 if only the Republicans would have gotten out of the way.

    3. What’s funny is that there are guys at Reason (I won’t mention any names, but it rhymes with Skeeter Duderman) who fancy themselves to be part of the economic wonk set and worship these “top men” economists who are so wrong most of the time.

  3. To the extent that a government is seen as constantly changing the rules of the game…it freezes most hopes of recovery.

    It freezes the people who would make a recovery actually happen.

  4. “SACRAMENTO — A legislative push to permit California’s public universities to once again consider race and ethnicity in admissions appears to be on life support after an intense backlash from Asian-American parents who fear it will make it harder for their children to get into good schools.

    “A planned referendum sailed through the state Senate in January without fanfare on a party-line vote, but three Asian-American Democrats who initially backed the measure are now calling for it to be “tabled” before the state Assembly has a chance to vote on it — a highly unusual move. And it seems unlikely to get the two-thirds majority in the Assembly without the support of the five Asian-Americans in the lower house….

    “In 1996, 61 percent of Asian Americans voted against the affirmative action ban and most Asian-American groups and associations opposed it as well, said Karthick Ramakrishnan, a political science professor at UC Riverside who directs the National Asian American Survey.

    “Acceptance rates dropped among Asian-American applicants, too, by 9 percentage points from 2004 to 2013. Last year, the rate was about 73 percent, which is still far higher than other ethnic minorities.”

    http://www.mercurynews.com/cal…..ction-life

  5. “Susan Patton made headlines when her letter to the editor was published in Princeton’s student newspaper last March….

    “Now, Patton (since dubbed the “Princeton Mom”) is releasing a book titled “Marry Smart,”…

    “I know that you want to believe that you have lots of time to develop a brilliant career and have a wonderful family. But you don’t. By the time you graduate from college, half of your childbearing years are behind you, and the years from 22 to 35 will pass much more quickly than you can imagine. And if you’re even able to conceive at age 35, yours will be considered a high-risk pregnancy. Don’t delay having children until after you’ve established your career. That may be too late. You can make up for lost time on the job, but if you miss your opportunity to have your own children, it’s gone and it’s irretrievable.

    “My response to the “But I haven’t seen the world yet” or “Aren’t your 20s all about having fun?” conjecture is that it’s all fun and games until somebody winds up a spinster with cats.”

    http://shine.yahoo.com/love-se…..25916.html

    1. By the time you graduate from college, half of your childbearing years are behind you, and the years from 22 to 35 will pass much more quickly than you can imagine.

      (Modern) childbearing years begin at age 9?

  6. “The Coming Wave of Commutations: Why You Should be Neither Shocked Nor Annoyed

    “…those in-the-know say hundreds, that ‘s right, hundreds are likely to be granted before President Obama leaves office….

    “It is time for the presidency to, once again, become engaged in the business of justice and our system of checks and balances – just as the Founders intended. Let the commutations land. Be at peace with the idea, America. Let the objections and complaints that are surely to follow 1) be filtered for partisanship and animosity toward the president and 2) be contained in the area of discourse where they deserve to be: around the edges, and only reflective of the timing of the President’s behavior and / or the quality of decision making in particular cases.”

    http://www.pardonpower.com/201…..Hg.twitter

    1. Are these commutations going to be like when Obama took everyone’s guns, seized their 401K’s, and locked all the white people up in FEMA camps?

        1. courtesy of youtube

  7. Related: David Stockman’s highly entertaining rant about Keynesian and Monetarist clowns:

    The Fed and the other major central banks have been planting time bombs all over the global financial system for years, but especially since their post-crisis money printing spree incepted in the fall of 2008. Now comes a new leader to the Eccles Building who is not only bubble-blind like her two predecessors, but is also apparently bubble-mute. Janet Yellen is pleased to speak of financial bubbles as a “misalignment of asset prices,” and professes not to espy any on the horizon.

    1. But there was nothing enlightened about the rolling national LBO over the decades since Professor Tobin’s unfortunate arrival in Washington. It was then?and always has been?just a cheap debt trick. During each successive business cycle’s stimulus phase, debt ratios were ratcheted up to higher and higher levels. But now we have hit peak debt in both the public and private sectors, and there is no ratchet left because balance sheets have been exhausted.

      The household sector data tell the story of the cheap debt trick which is now over. The relevant leverage ratio here is household debt to wage and salary income, because the NIPA “personal income” metric is now massively bloated by $2.5 trillion of transfer payments?-flows which come from debt and taxes, not production and supply.

      As shown below, the ratchet was powerful. During the 1980-1985 cycle, the household debt ratio jumped from 105% to 117% of wage and salary income; then it ratcheted from 130% to 147% during the 1990-1995 cycle; thereafter it climbed from 160% to 190% during 2000-2005; and it finally peaked out at almost 210% at the 2007 peak.

      1. Lots more at the link.

    2. http://research.stlouisfed.org/fred2/series/M2

      Please point out when this “spree” began on this chart.

      1. What is your point? The market is once again awash in debt.

      2. Oh, I see what you’re getting at. Check the Fed’s balance sheet.

        1. OK, that says assets of $3 trillion.

          Here is the liabilities side (from 2009).

          http://en.wikipedia.org/wiki/F…..LITIES.gif

          1. Actually, it’s $4 trillion now. And where do you think they get the money to purchase all that debt? You clowns are so blind; it’s just unbelievable.

            1. Not from taxpayers. They just create it from nothing.

              What is the big deal? No one is stealing anything. They buy assets with it.

              Someday they will sell the assets and destroy the proceeds.

              Net wash.

              1. “Not from taxpayers. They just create it from nothing.”

                BWAHAHAAHHAAHAHHAH

                YOU ACTUALLY SAID THAT!!!!

                GOD DAMN YOU’RE A FUCKING IDIOT!!!

                BWAHAHAHAHAAHAHHAHAHAHHHAHAHAHAHAH

              2. Re: Peter Caca,

                Not from taxpayers. They just create it from nothing[…] What is the big deal? No one is stealing anything.

                Yes, the Fed steals from previous production by lowering the purchasing power of the money.

                You simply don’t understand what is money, Caca. Money is the result of trade, and in order to trade, you must produce something first. ALL economic actors trade with money so they don’t have to trade their goods or services directly, which means money represents value already created.

                What the Fed does with its money creation is using money for which the Fed did not create value and did not trade. It is thus engaging in trading with value created by the rest of us, just as if it was taking a piece of each of the goods and services we created from us – that’s THEFT. Inflation IS theft. It’s a hidden tax but a tax nonetheless.

                1. And any profit created by the Fed is sent to the Treasury.

                  $80 billion last year.

                  1. Only $3.92 trillion to go then. And everyone who has had their wealth squandered by the Fed will not see a dime of that $80 billion “profit”.

                    Take a good hard look, folks: here we have a self-proclaimed classical liberal defending the government stealing from everyone – not just taxpayers – in order to profit itself.

              3. The big deal is that they have created another smoke and mirrors asset bubble that will again come crashing down and destroy savings, pension plans, etc. another massive deflation will occur. In the meantime, all of the benefits of this asset bubble are the bankers making a quick buck. The rest of us will once again be left holding the bag. Contents will be similar to those I get from picking up after my dog on long walks.

              4. As noted before, the government is counterfeiting the currency, causing monetary inflation, but temporarily stopping the bulk of price inflation by paying interest on bank reserves.

                Eventually that money will be loaned out, the inevitable price inflation will occur, and then less-savvy people will discover that much of their savings have been stolen.

                1. So Very Tired said it more succinctly upthread.

              5. Not from taxpayers. They just create it from nothing.

                /facepalm

                so so so stupid.

              6. Someday they will sell the assets and destroy the proceeds.

                DO WE GET UNICORNS TOO YOU FUCKING IDIOT?

              7. They just create it from nothing.

                What is the big deal? No one is stealing anything.

                Unbelievable. There you have it, folks. Monetarist thinking in all its glory.

  8. Missing airliner may have flown on for seven hours.

    Jesus H. Christ. That’s more than enough time for it to have gotten to Pakistan, Iran, or a lot of other places in the land of terrorism.

    The thought of what these sick animals might be planning to do it if they were able to save it has been keeping me up until the wee hours of the morning.

    1. “We do not know what has happened to the plane or if it has overflown Afghan air space. We do not have a radar. Go and ask the Americans,” said a senior Afghan official.

      LOL

    2. This can all still be explained by an electrical fire.

  9. OK wow, there is a dude that knows what is going on.

    http://www.Anon-VPN.com

  10. In May 2010, for example, with one-third of the calendar year already over, the OECD economists predicted the U.S. economy would grow 3.2 percent for the year. As it happened, gross domestic product grew 1.7 percent. Note that this is not a small error.

    With that in mind, going back to your question: “Why Economists Overestimate Future Growth Just Like Politicians Do?”, the reason is because those people are but a cadre of soothsayers, astrologers, diviners, augurers and chicken entrail-readers and NOT real economists.

    Government isn’t the sole cause for the business cycle and for economic booms and busts (though its actions tend to make things more extreme, I’d argue).

    Actually, government per s? is NOT the cause of economic booms and busts. Economic booms and busts are entirely caused by rapid increases in the money supply.

    1. More accurately, credit supply.

  11. But government attempts to forestall, cushion, or mitigate upswings and downswings inject huge amounts of uncertainty that almost certainly freezes businesses.

    Well, more than the uncertainty, the attempts by government to “cushion” or forestall economic recessions have the effect of making the inevitable correction much worse than it could be, as the many interventions in the market disrupts the revaluation process of assets and capital required to have ACCURATE prices and the conveying of reality to all economic actors. The uncertainty makes planning more difficult for businesses but the most destructive result of the interventions is the dislocation of prices vs. reality.

  12. sometimes in contradictory ways, as when the Federal Reserve pours money into banks but them pays them interest on reserves to keep that money sitting in vaults

    That’s not contradictory. That’s the government printing money to bill current bills, but temporarily forestalling the price inflation caused by the monetary inflation by paying banks interest to keep that money parked.

    In effect, the Obama administration loaned itself most of the money held in bank reserves via a counterfeiting scheme.

    1. In essence, instead of ‘honestly defrauding’ Americans with inflation, ObamaBernank is forestalling and worsening that inflation like crimping hose, letting it build up, and letting it rip. So it’s deception piled on theft. Being a reserve currency lets you do that for a while.

  13. That 1.5 percentage point spread between the two numbers means the original projection was off by nearly half.

    No it is off by 100%.

    Reality is where you start to measure not the fantasy that was wrong.

  14. The reason economists overestimate, and downright lie is because they face no consequences. The same goes for folks who advocate the government do various things. No one is risking their houses, or assets to fund what they advocate. They have unlimited funds extorted from individuals, and they also get to create money from nothing. Plus, legal tender laws are used to force an exchange partner to accept a media of exchange against their will.

    I’d like to see Paul Krugman try to rob someone’s gold and force them to use fiat dollars. Won’t be long before someone defends their property and kicks his @$$.

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