May 15, 2009
Ready, Shoot, Aim
Or, how ignorance sometimes invalidates a critique.
I am always amazed at how often people jump to the most paranoid interpretations. One case in point is this article by Evan Newmark entitled Mean Street: Obama's Big Fat Fibbing Budget on WSJ's Deal Journal:
Is the White House lying to the American public about the economy? Or, if not outright lying, is it being awfully stingy with the truth?
You have to wonder.
After all, the Obama economic team is full of very smart people. And they have to see the same things that you and I see.
They see April's lousy retail numbers and record foreclosure rate. They see unemployment at 8.9%, state tax revenues facing double-digit declines, and a 14% fall in home prices last quarter.
So how can National Economic Council boss Larry Summers, Council of Economic Advisers chief Christina Romer or Treasury Secretary Tim Geithner still believe in a 7.9% unemployment rate and 3.2% GDP growth for 2010, as the President budgeted in late February?
I have been struggling to answer this for weeks and the best theory I can come up with is, simply, they don’t. As I figure it, the Obama economic team is biding time, slowly leaking the ugly truth about its flawed budget as quietly as possible.
(The subtitle of this article by Evan Newmark is "Mean Street", but maybe just plain "mean" is better).
Either Mr. Newmark didn't struggle very hard, or this is an incredibly disingenuous remark. Or this blogpost reflects an incredible degree of ignorance about how the U.S. government conducts the forecasting/budgeting process. If Mr. Newmark had bothered to ask a few people knowledgeable in the process, he would find out that the government makes two official forecasts per year, associated with the budget process. This has been true for years, and over different administrations of both political persuasions. In between, government analysts might have different views about the true state of the economy, but no new forecast is produced.
The reason why this is the case is that the forecasts are the outcome of a careful deliberative process conducted by the Troika of the Council of Economic Advisers (CEA), the Treasury and the Office of Management and Budget (OMB). These forecasts in turn form the basis for official budget numbers, and projections for agencies throughout the U.S. government. Because so many things depend upon these forecasts, everybody has to agree on the information set to be used (so you will see that the forecasts come with caveats indicating that the predictions are based upon data available at a certain date). From Economic Projections and the Budget Outlook (Feb. 28):
The Administration's economic assumptions were largely completed in early January and finalized on February 3rd. Therefore, the appropriate comparison is to other forecasts completed at the same time. The key summary variable for budget purposes is the rate of real GDP growth. Below we show comparisons to three alternative forecasts:
Another forecast comes out with the Mid-Session Review in late July, when the an update on the budget is mandated. Strangely, Mr. Newmark seems to know these constraints.
And by the summer, when the Office of Management and Budget revisits its budget assumptions, the Obama economic mess will be apparent to all.
Too bad he didn't incorporate this information in his thinking. This process of events outrunning forecasts happens all the time (think back to February 2004 when the employment growth forecasts came out and were out of date because the forecasts were finalized in end-November). It just happens that this year, the new information has been coming in fast and furious.
Speaking of which, here is a graphical depiction of the current situation, and the economic outlook as reported by the WSJ survey of forecasters.
Figure 1: Log real GDP for advance 2009Q1 (bold blue), for final 2008Q4 (teal), WSJ mean May forecast (red bold square), trimmed high and low (pink lines), WSJ mean April forecast (purple triangle). NBER defined recession start date gray dashed line. Top 5 and bottom 5 top 2009-10 forecasts (out of 55) trimmed. Source: BEA, GDP advance 2009Q1 release, 2008Q4 final release, WSJ forecasts, and NBER.
I'll note that despite the worse than expected 2009Q1 advance growth rate, forecasters in May on average seem to be anticipating that GDP will be at the same levels they expected it would be in 2009Q4 as of April.
Posted by Menzie Chinn at May 15, 2009 08:50 PMdigg this | reddit
WSJ's commentaries have completely degenerated after the sale to Murdoch. Most of them esp. the regulars are not worth reading.
Posted by: HZ at May 15, 2009 09:55 PM
From the Survey of Professional Forecasters:
On the jobs front, the forecasters project job losses in the current quarter at a rate of 521,500 per month. They also see a reduction in jobs of 282,500 per month in the third quarter and 104,700 in the fourth quarter of 2009. They previously projected monthly job losses of 311,200, 202,100, and 43,000 in the second quarter, the third quarter, and the fourth quarter of 2009, respectively
These results are interesting too. I hope that job losses would turn out to be around 40,000 in the 4th quarter. This fact will be consistent with lower weekly jobless claims, of course.
Posted by: Rk at May 16, 2009 01:20 AM
I've always disliked the WSJ's desperately partisan editorial pages, since long before Murdoch took over, but in this argument the WSJ columnist seems more honest than you do in your retort, Menzie, sorry. I very much doubt you are naive enough not to know that Obama's forecasts for the 2010 budget were blatantly disingenuous from day one. He forecast a sharp recovery from previously forecast 2009 levels at a time when those 2009 levels had already shown themselves to to be far too optimistic.
Posted by: Tom at May 16, 2009 06:56 AM
"I've always disliked the WSJ's desperately partisan editorial pages"
Uhhhh huh. Isn't that what the editorial pages are for...editorializing? Contrast that to the desperately partisan "news pages" of the NYT.
Posted by: JohnnyKeynes at May 16, 2009 08:47 AM
I think the point (of lying or stinginess with truth) is still valid, every time one can question whether the present figures (unemployment, tax revenues, liquidity, credit default rates, bank losses, demise in home prices, etc.) sustain the validity of a budget model and the current perception of forecasters.
If the figures jump out of any average consensus...its a responsibility to acknowledge timely and hence make adjustments faster, if we are talking of a country's stability -as is the circumstantial case for the USA, then it becomes preponderant.
...The hypothesis of a lag in the accuracy of the budget still is valid. If not, how can Roubini estimate...
"This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow from -6 per cent in the last two quarters, US growth will still be negative (around -1.5 to -2 per cent) in the second half of the year (compared to the bullish consensus of +2 per cent).
Moreover, growth next year will be so weak (0.5 to 1 per cent, as opposed to the consensus of 2 per cent or more) and unemployment so high (above 10 per cent) that it will still feel like a recession.
He goes on to say..."It is said that the International Monetary Fund, which earlier this year revised upward its estimate of bank losses, from $1 trillion to $2.2 trillion, will announce a new estimate of $3.1 trillion for US assets and $0.9 trillion for foreign assets, figures very close to my own".
Do I smell something biased in the critique to the WSJ's?
[edited by JDH]
Posted by: Salman Rushdie at May 16, 2009 10:57 AM
Tom: You're free to make your judgments regarding who is more honest. For your information, I did do a comparison of roughly contemporaneous forecasts. See this post. I doubt that this will force a re-evaluation on your part, but at least I have laid out the case in a coherent fashion.
Posted by: Menzie Chinn at May 16, 2009 12:58 PM
I will give Obama some credit. He at least recognizes that the exploding deficits that he has created are unsustainable.
Posted by: Rich Berger at May 16, 2009 02:22 PM
Rich- The deficits he created? I suppose he inherited a perfectly balanced set of books that weren't going to be in massive deficit due to the collapse in economic activity and therefore revenue?
Posted by: Bemethal at May 16, 2009 04:41 PM
"I am always amazed at how often people jump to the most paranoid interpretations."
You never seemed that particularly amazed when it was done as a matter of partisan course over the last 8 years, when it was typical fare in the NY and LA Times and other major and influential publications. The WSJ piece may be disingenuous in shaping fact to fit a message, but it's a little late in the game to have a tantrum about that kind of behavior.
Posted by: PM at May 16, 2009 04:58 PM
PM: Well, after some time, I've decided the case for WMD's was hyped...But seriously, if I had seen a similar mischaracterization of the Troika process in the Bush Administration, I would have made the same point. I can't speak for others.
Posted by: Menzie Chinn at May 16, 2009 06:42 PM
How about Peter, Jarrod, and Austan issue a reply to this article?
Posted by: Babinich at May 16, 2009 07:36 PM
The situation keeps getting better...
When will the 'Best and the Brightest' honestly attack the true problem instead of making rising health care costs the boogieman?
Posted by: Babinich at May 17, 2009 04:33 AM
What is the missing item in your post - could it be spending? Did Bush push through the unnecessary $787 BN "stimulus"? Did Bush present a 2010 budget larded with additional spending?
Posted by: Rich Berger at May 17, 2009 05:58 AM
Rich Berger: I am happy to have you on record regarding the stimulus. Assume you are in agreement on the earlier $150 billion stimulus. Regarding the previous $500 billion plus in Iraq theater of operations related expenditures, mostly funded through supplementals, to whom should we direct the thanks. And about that 4.5 ppts shift in cyclically adjusted budget balance toward deficit in 2001?
Posted by: Menzie Chinn at May 17, 2009 08:59 AM
Wouldn't it be better compare originalforecasts to actuals rather than other similar forecasts? By this I mean original forecasts. Not those revised months and months after the originals. Policy is made more on the originals than on the historical. It would be utter folly to forecast on data 3-5 years old.
They already govern by looking in the rear view mirror. It would be absurd to change to the "way back" machine. But then again who would question the absurdity of government central planning....?
Posted by: DickF at May 17, 2009 10:04 AM
If you are referring to the Bush spring '08 stimulus, I agree (I thought it was closer to $200B). As far as the cost of the war or the drop in the surplus projections, those are red herrings.
At some point,"it's Bush's fault" is not going to work for an answer. Obama inherited a deficit this FY, but has blown far past it. I don't think he really cares.
Posted by: Rich Berger at May 18, 2009 09:23 AM
As one who has consistently thought the 'consensus' forecasts were too rosy, I have to ask whether the professional forecasters know much about macroeconomics. Using recent recession experiences for data points is as bad in my view as worrying about what would happen if China refused to fund the fiscal stimulus.
Obama's administration at least has the excuse that they tried to be optimistic for political reasons.
Posted by: don at May 18, 2009 12:40 PM
Enough with the blame game. Yes, Bush's 8 years didn't do much to avoid deficit spending. Yes, Obama's budget increases that deficit in the short term. What we should be focusing on is where we are now and where we're going. All signs are pointing to a recovery; I think we can all agree that the world isn't ending just as it never ends in any recession/depression. I think it hardly matters that Obama's budget is more optimistic than "most economists" in regards to how soon the recovery will come. I think what matters is that recovery is coming. And, I'd like to think that fiscal and monetary policy since the last regime change has had something to do with that.
Posted by: ryan at May 20, 2009 10:55 AM
I don't mean to be nasty, I just have no stomach at all for partisan economists. Every party and every politician is routinely disingenuous. Every sensible person who has lived more than a couple dozen years knows this. It's silly to try to defend Obama against the claim that his 2010 budget is disingenous. Of course it's disingenous, and blatantly so. Governments always overestimate revenues during recessions. It would be news if there were an exception to that rule, but I haven't heard of such a case, anytime, anywhere. We are certainly blowing way past the forecast deficit of 12.9% of GDP in FY2009.
Posted by: Tom at May 22, 2009 02:02 PM
It really is hard to defend Obama for a 3.2% economic growth in 2010. 3.2% just happens to be the exact long term economic growth rate over the past 70 years or so. It really is some weak forecasting, he just took and average, did no analysis and used it, likely because the analysis would have told him a lesser number and made his budgets look even worse.
Posted by: Wisconsin at May 31, 2009 09:09 PM