April 05, 2012
The Recovery According to Ed “We are not in a recession” Lazear
In Tuesday’s WSJ, Edward Lazear argued that we are now experiencing the “Worst Economic Recovery in History”. Before dissecting this remarkable document, it would behoove the reader to recall that while he was Chair of George W. Bush’s Council of Economic Advisers, he stated unequivocally in May 2008 (also in the pages of the WSJ):
"The data are pretty clear that we are not in a recession."
He wrote this less than five months before US GDP took a remarkable dive; in 2008Q4 q/q growth was -8.9 percent SAAR. In the available series, this loss was only exceeded in 1958Q1 (-10.4 percent). Despite Professor Lazear’s less than stellar record on reading the data, we should assess his statement at face value.
Was the Slow Recovery Such a Surprise?
Indeed, that was the expectation [that the economy was in rapid catch-up mode and would eventually regain all that had been lost]. As economist Victor Zarnowitz of the University of Chicago argued many years ago, the strength of the recovery is related to the depth of the recession. Big recessions are followed by robust recoveries, presumably because more idle resources are available to be tapped. Unfortunately, the current post-recession period has not followed the pattern.
The 2007-09 recession was induced by a financial crisis and some, most notably economists Carmen Reinhart and Kenneth Rogoff (authors of "This Time is Different: Eight Centuries of Financial Folly"), argue that financial crises pose more difficult recovery problems than do policy-induced recessions.
After recounting the Reinhart-Rogoff thesis, Lazear essentially dismisses it, apparently in favor of John Taylor’s argument that the crisis was Fed induced.
I want to take exception to the argument that the expectation was for a rapid recovery. In fact Econbrowser readers will recall my August 6, 2008 post, ”Synergies of the unpleasant kind: recessions, credit crunches and housing busts”, in which I cited IMF research by Stijn Claessens, M. Ayhan Kose and Marco E. Terrones:
... If these statistics, based on a large number of episodes, provide any guidance, they suggest that the adjustments of credit and housing markets in the United States are only in the early stages relative to historical norms and might still take a long time. The earlier episodes suggest that the process of adjustment in the United States might persist in the coming months with further difficulties in credit markets and drops in house prices. This could bode consequently poor for the path of overall output, which, as we showed, falls more in recessions associated with credit crunches and house price busts than in recessions without such events.
Interestingly, the increase in unemployment has been substantially below what one would have expected given the financial crisis. This point was noted in the last Economic Report of the President.
Figure 1-3 from CEA, Economic Report of the President, 2012, p.28.
Why was the increase in unemployment relatively muted? As the IMF noted in Chapter 3 of its April 2009 World Economic Outlook (p. 104):
Fiscal stimulus appears to be particularly helpful during recessions associated with financial crises. Stimulus is also associated with stronger recoveries; however, the impact of fiscal policy on the strength of the recovery is found to be smaller for economies that have higher levels of public debt.
In other words, Professor Lazear might have thought the conventional wisdom was for a quick bounceback, but there were a number of non-fringe observers that thought otherwise.
Professor Lazear’s most disingenuous moment comes here:
The Great Depression started with major economic contractions in 1930, '31, '32 and '33. In the three following years, the economy rebounded strongly with growth rates of 11%, 9% and 13%, respectively
The sheer scope of the output collapse in 1930-33 is not conveyed by this quote, so here is a graph to place matters in context:
Figure 1: Log GDP, Ch.2005$, rescaled to base year, current recession/recovery (blue), and Great Depression (red). Source: Measuring Worth through 2010, and BEA for 2011, and author’s calculations.
When output declines by one-third, one would be surprised if subsequently output didn’t increase by double digits. That doesn't mean one would want a 30% decline in GDP just to get that subsequently rapid growth.
Evaluating the Recovery We Have, and Not the Recovery We Wish We Had
So, why did Professor Lazear write this article now? I think some of has to do with trying to burnish his forecasting credentials, after his resounding forecasting failure in 2008 (perhaps coming second only to Don Luskin!). But I think it has more to do with an attempt to distract attention from the accumulating evidence of a sustained, albeit extremely modest and fragile, recovery, than setting the record straight.
Figure 2: Real GDP (blue bars), and monthly GDP from e-forecasting (red), and Macroeconomic Advisers (green). NBER defined recession dates shaded gray. Source: BEA, 2011Q4 3rd release, e-forecasting (3/19), Macroeconomic Advisers (3/15), and NBER.
Figure 3: Philadelphia Fed leading index (blue, left scale) and annualized m/m private payroll growth rate, both seasonally adjusted. March observation (red triangle) is implied Bloomberg consensus as of 4/4/12. NBER defined recession dates shaded gray. Source: Philadelphia Fed via FRED (as of 4/3), BLS via FRED, Bloomberg, and NBER.
GDP is recovering, private payroll growth in March is estimated to be in excess of 200,000 according to Bloomberg, and the Philadelphia Fed’s leading index (released 4/3) is at the highest levels since February 1993. (As an aside, the bivariate VECM I estimated  yields forecasted monthly private employment growth averaging in excess of 200,000 per month throughout 2012. [inserted "averaging" since model is quarterly -- 4/6, 7:30am Pacific]
The Regulatory Uncertainty and/or Burden Thesis, Yet Again
The final piece of data-deficient analysis in Professor Lazear’s piece:
Are there other factors that may have contributed to the slow recovery that we are experiencing? It would be difficult to argue that government polices over the past three years have enhanced confidence in the U.S. business environment. Threats of higher taxes, the constantly increasing regulatory burden, the failure to pursue an aggressive trade policy that will open markets to U.S. exports, and the enormous increase in government spending all are growth impediments. Policies have focused on short-run changes and gimmicks—recall cash for clunkers and first-time home buyer credits—rather than on creating conditions that are favorable to investment that raise productivity and wages.
As I noted in this post, when reputable academics attempt to quantify economic uncertainty, they point primarily to fiscal(particularly tax) uncertainty (Baker, Davis and Bloom, 2011). And claims to find a relationship between regulatory burden and macroeconomic activity have been found wanting (to say the least). And of course, “the enormous increase in government spending” depends on one’s definition of “enormous”. Here’s my take.
Professor Lazear's Forecasting Record in Context
Looking back in time, I also noted that Professor Lazear criticized the ARRA in July 2009, purportedly because the spending would occur after the need for it was over, thereby illustrating in yet another case his penchant for definitive statements that ultimately proved wrong.
Update, 8:30PM Pacific: Reader MarkOhio notes that the mean forecasts from the SPF for the succeeding quarters were positive. Still, 23 respondents in the May 2008 WSJ survey forecasted negative growth for 2008Q2.
Figure 4: Quarter on quarter SAAR growth forecasts for 2008Q2, from Wall Street Journal May 2008 survey. Source: WSJ.
In fact the modal forecast is negative 1%. So, I think Professor Lazear could have been more circumspect.
Update, 7:30PM Pacific, 4/6: What Did Ed Lazear Know as of May 8, 2008?
Reader James Kahn asserts Ed Lazear’s strong declaration of no-recession was justified, given the data of the time. Reader Jeff criticizes my post as: “another installation in a long series by Menzie "I spew politicized nonsense under the guise of legitimate academic research” Chinn.” Let me remind people of what Ed Lazear knew as of May 8, 2008, relying upon the St. Louis Fed ALFRED database, and let them decide whether an unconditional no-recession statement was reasonable.
Figure 5: Log nonfarm payroll employment (blue), industrial production (red), real retail sales (green), and real disposable income excluding transfers (purple), all normalized to zero at 2007M12; data available as of May 8, 2008. Source: St. Louis Fed ALFRED database, and author’s calculations.
Posted by Menzie Chinn at April 5, 2012 05:07 PMdigg this | reddit
Professor Lazear was in good company. The Survey of Professional Forecasters (see http://www.phil.frb.org/research-and-data/real-time-center/survey-of-professional-forecasters/data-files/RGDP/) in 2008:Q2 had the following projections for GDP growth for next four quarters (mean forecast):
Clearly, like Lazear, the consensus was way off. Have economists made any progress developing a better model to forecast economic growth?
Posted by: MarkOhio at April 5, 2012 06:09 PM
Meanwhile, we're allowing a bumbling idiot who said numerous, equally or more stupid things to be chief central planner for the economy.
Posted by: W.C. Varones at April 5, 2012 06:31 PM
Just looked at the 30 quotes, and I would contend that at least half are either clearly correct or at worst uncertain. The main ones where Bernanke was clearly wrong were his remarks in the past about the housing market and its relation with the rest of the market. Almost all of what he has said since the crash fully hit in late 2008 has been on the money, shall we say.
The most important one of all is #2, that Fed actions in late 2008 prevented us from experiencing what happened in 1931, when what had been essentially an unpleasant recession turned into the Great Depression through the most thorough-goiong international financial collapse that we have ever seen. One can claim that would not have happened without the extraordinary actions the Fed took then, documented well by JDH at the time, but there is every reason to believe that he and the Fed did indeed save us from such an outcome.
A major error that you and your link make in several places very clearly is to confuse the monetary base with the money supply. In short, your link is extremely ignorant and makes a major fool of himself with this effort to smear Bernanke.
Posted by: Barkley Rosser at April 6, 2012 01:22 AM
Thanks for the incredibly thorough rebuttal of Lazear's oped. I guess putting his forecasting skills in the same league as Don Luskin's will really get the message across to him. Ouch!
Posted by: pgl at April 6, 2012 05:57 AM
A minor correction... alas, PGL is not at Angry Bear as stated in the post, though you do link to the correct site (EconoSpeak) for his post.
Posted by: Mike Kimel at April 6, 2012 06:06 AM
After the 2010 elections the Republicans and President Obama came to an agreement to continue the Bush tax cuts. Predictions from the mercantilists were for increased disaster. The President Obama began to talk tax cuts of all things. His favorite tax to be cut - the payroll tax. So the payroll tax was reduced. Ben Bernanke shifted from a QE posture to a wait-and-see posture, but still pouring out enough "green" to keep interest rates low enough to make Knut Wicksell puke. So, after the failure of stimulus, QE, and massive expansion of the FED balance sheet, we finally see some small tax relief. We also find the House, now under Republican control, pulling back on the reins of spending. And Menzie crows that he is seeing a very slow recovery. He is totally blind to the changes that have taken place since the fall of 2010 and hopes we will too. He points back to the failure and claims victory by ignoring the changes that came from the will of the electorate.
Menzie love to attack he fellow economists for their errors in judgement. Should he face his own?
That last point drives my skepticism about demands for a much greater role for tax cuts as opposed to spending, as suggested by some.
Posted by Menzie Chinn at January 26, 2009 07:10 PM
Menzie's solution in 2009, more spending and no tax cuts. What if instead of the government following Menzie's advice we had seen the changes we saw in 2010 enacted in 2008 or 2009? Imagine stopping the bleeding two years earlier! How many homes would have been saved? How many people would still have their life savings?
Now consider that we are seeing positive movement in our economy with very teeny, tiny reductions in taxing and spending wedges. Hold on tight. Once the obstructionists are moved out of the way in November 2012 recovery will begin to roar almost immediately, perhaps even earlier if Obamacare is struck down and the polls turn against the President.
Then prepare yourself for articles from Menzie explaining how his recommendations of 4 years earlier have finally kicked in. Isn't blind faith wonderful?
Posted by: Ricardo at April 6, 2012 06:22 AM
Is there anyone anywhere who believes that academic economists can forecast anything meaningful? Why pick on this dude? Some sort of professorial point scoring?
Please, Professor Chinn, bear in mind Keynes's hope that economists could become as useful as dentists. Then ask which group the country would miss more today.
Anyway, why aren't you out and about trashing Gov. Walker? Ideals demand action.
Posted by: c thomson at April 6, 2012 06:30 AM
Menzie-> (As an aside, the bivariate VECM I estimated  yields forecasted monthly private employment growth in excess of 200,000 per month throughout 2012.)
CNBC-> Private sector jobs were up 121,000 vs. 233,000 in February. The unemployment rate was 8.2 percent in March vs. 8.3 percent in February. http://www.cnbc.com/id/46975031
The household survey shows a decline of 31k in March.
Posted by: tj at April 6, 2012 06:35 AM
Menzie: you are much too kind to Prof. Lazear when you quote his infamous statement that "we are not in a recession."
An objective economist would put this in historical context by noting that the NBER's Business Cycle Dating Committee (see www.nber.org) determined that the US economy had indeed been in a recession for six months at the time of his statement.
Posted by: Simon van Norden at April 6, 2012 07:23 AM
I agree and I was focused on the forecasting quotes as this post was about Lazear's forecasting ability.
For a brief, entertaining, and more concise and on-point collection of Bernanke's greatest hits, see here.
Posted by: W.C. Varones at April 6, 2012 07:24 AM
MarkOhio: I have added a graph showing professional forecaster assessments for the quarter contemporanous with Professor Lazear's May 2008 statement. I think a lot of economists were more circumspect than Professor Lazear.
tj: Yes, good point -- I should have added "averaging", since the VECM (if you had checked) is on a quarterly basis. I have fixed that now. For your information, average net private job creation is 210,000 in 2012Q1.
Mike Kimel: Thanks, have fixed now.
c thomson: I think it speaks volumes when you define as "trashing" the tabulation of factual and analytic errors. I would hate to see "analysis" conducted the way you define it.
Posted by: Menzie Chinn at April 6, 2012 07:48 AM
"It would be difficult to argue that government polices over the past three years have enhanced confidence in the U.S. business environment."
I find it easy to argue that govt. guarantees for US automakers enhanced business confidence.
It is similarly easy to argue that published financial stress tests and replenishment of the FIDC reserve fund enhanced confidence in the business environment.
Also easy is arguing that stable interest rates enhanced confidence in the business environment.
The VIX looks to be about half of what it was 3 years ago, and the SP500 is up by something like 50% over that time, both of which are consistent with strong improvements in business confidence.
Not a very hard argument at all, really....perhaps Lazear accidently omitted the word "not" from his sentence.
Posted by: Simon van Norden at April 6, 2012 07:48 AM
"I find it easy to argue that govt. guarantees for US automakers enhanced business confidence."
Except if you are Ford. Or Honda. Or Toyota. There is no doubt that these automakers have had their sales diminished because they have to compete with the bailed out automakers. GM, in particular, stole sales from Honda and Toyota during the tsunami aftermath. Ford would be making money hand over fist if GM no longer existed.
Honda, in particular, looks like it is having difficulty competing with the bailed out automakers. Their new models show evidence of severe cost cutting (not unlike what GM and Ford were forced to do during the '70s and early '80s).
We don't know what the counterfactual would be if GM were not bailed out. If they had ceased operations, undoubtedly Ford, Honda, and Toyota would be taking up the slack right now. Considering how much overcapacity there is in the auto industry, perhaps this would have been a better outcome. With so much of Honda and Toyota's production in the US these days, it might have been net positive for the US overall.
Posted by: Buzzcut at April 6, 2012 08:01 AM
Simon van Norden: "the NBER's Business Cycle Dating Committee (see www.nber.org) determined that the US economy had indeed been in a recession for six months at the time of his statement."
The NBER didn't declare the recession until November 28, 2008, more than six months after Lazear's statement.
If you want to discuss terrible forecasting, perhaps we could go to the Obama administrations infamous chart of what the unemployment rate would do with and without the stimulus, and the shifting goalposts that followed this failure.
Posted by: James Kahn at April 6, 2012 08:03 AM
Tut-tut Professor Chinn - do you seriously think that an issue of L-T politics - the role of public sector unions - can be rationally decided in the manner of analysing trends in electric consumption? Esp. since the union issue is all muddled up with dozens of other issues.
Since we can't forecast next year's GDP with any precision or the inflation rate or whatever, on what basis would you analyse such matters that involve the next ten years or longer? And why should the electorate pay the least attention? (Luckily of course they don't.)
Posted by: c thomson at April 6, 2012 08:04 AM
Dear Professor Chinn & Hamilton,
In one of your future analyses I hope you will consider discussing Phil Gramm's and Steve McMillin’s opinion piece, “The Real Causes of Income Inequality” which is in the 4-6-2012 edition of the WSJ.
Posted by: AS at April 6, 2012 08:10 AM
The article overstates the strength of the recovery by looking at absolute levels. So real GDP has finally eclipsed its level from four years ago. That means it is roughly 15 percent below where a 3.5% trendline would have taken us. Similarly, while employment has been rising modestly, the employment-population ratio has been stagnant at a low level (now 58.5% versus generally around 63% in the previous expansion since late 2009). And to anticipate a response, only a small part of that (maybe 1%) is attributable to demographics.
There has been very little recover at all, just a bottoming out. You need growth substantially above trend to get back to full employment, and both GDP and employment have failed to do that.
Posted by: James Kahn at April 6, 2012 08:55 AM
now, what would be really facinating is a regresion showing me how these people have any credibility left. my guess is that nothing statistically significant comes out of the model.
Posted by: dwb at April 6, 2012 09:19 AM
James Kahn: Perhaps you missed the phrase, "albeit extremely modest and fragile". Well, I do know about the catch-up issue, and have stressed on several occasions, e.g., most recently    .
Posted by: Menzie Chinn at April 6, 2012 09:30 AM
My mistake. I thought you were talking about monthly employment.
It looks to me like employment and GDP are starting to roll over. I would not be surprised if those who are calling for a soft Q2 are correct. If some economic activity got pulled in to Q1 from Q2 due to weather, then your 200k average might still end up being on the high side.
HH survey employment dropped by 31k and the stock of U dropped by about 4 times that amount. Not in the labor force increased by 333k. That suggests many workers who were looking for work last month, gave up looking this month and are now classified as not in the labor force.
Comparing March 2012 to March 2011 shows that the stock of people not in the labor force is growing more rapidly than the stock of employed workers.
It looks like a lose-lose for the incumbents on the campaign trail. If employment starts to increase at a more rapid pace, then those not in the labor force will flow back into unemployment and the u rate will stagnate in the upper 7's or 8's through the November elections.
At the same time, more rapid economic growth will drive up the price of gas going into November. Not good either for incumbents.
If we don't get an increase in economic activity then things stay as they are or get worse. Lose-Lose situation based on the headline unemployment rate.
Those are my 'forecasts' :)
Posted by: tj at April 6, 2012 09:35 AM
I saw "extremely modest and fragile," but if you're going to bash Lazear for his depiction of the non-recovery, what exactly is your point? There's a pretty fine line between extremely modest and what Lazear described. It seems that all you can do is ridicule him for missing a recession which wasn't called by the NBER until 7 months later. And you ignore the unemployment rate forecast that the Obama administration made that I alluded to in my previous comment, which shows that in fact they did anticipate a stronger recovery as of 2009.
Posted by: James Kahn at April 6, 2012 10:39 AM
I did not read your list as it was headed by a claim that Bernanke was wrong about everything, which is clearly not the case, even if we can ding on him for some things, particularly his pollyannaish views about the housing market.
Oh, you really think that a bout of austerity would make the recovery be more like James Kahn would like it to be? The evidence so far from UK and Greece and some other places is far from encouraging on that one.
As it is, during the past year the part of the economy that has been in the worst shape, even worse than housing construction, has been state and local governments, the major locations of ongoing outright job loss (which may have finally ceased). This was clearly due to a combo of their balanced budget rules and the ending of the fed fisc stim support they were initially getting from Obama. If that support had continued, we would almost certainly have seen much better performance last year on both the growth and the employment fronts.
Posted by: Barkley Rosser at April 6, 2012 11:02 AM
c thomson "Is there anyone anywhere who believes that academic economists can forecast anything meaningful? Why pick on this dude?"
1) The "Dude" was CEA chair at the time of his statement.
2) I believe economists can forecast many meaningful variables (GDP growth, inflation, govt. deficits) at short horizons. There's lots of formal, published, peer-reviewed statistical evidence (a.k.a. "facts") to back this up, if you're interested.
3) The "Dude" was not forecasting. He was claiming to do something much easier; describe the current condition of the economy.
Posted by: Simon van Norden at April 6, 2012 11:04 AM
Yield curve forecasting did a good job of forecasting the December 2007 recession beginning.
Posted by: westslope at April 6, 2012 11:08 AM
James Kahn: I'm bashing Professor Lazear for claiming, against all evidence, that expectations were for a strong recovery. That is just plainly not the consensus. If you want to argue it was, well, that's your right to re-write history -- just don't do it on Econbrowser.
Let me add that having served on CEA staff, I know the Chair has lots of data at his/her hands. He could not have been ignorant of these studies, and the soft data. After all, as I showed in the histogram (Figure 4), half of WSJ survey respondents now-casted negative growth in May 2008 for 2008Q2. Anybody who states so definitively that "we are not in a recession" with that information at hand is either being deluded or mendacious. You take your pick.
Posted by: Menzie Chinn at April 6, 2012 11:12 AM
I'm not sure why you seem to think that Ed's forecast was so absurd in May of 2008. As you say this was a full 5 months before GDP really started falling. In the quarters preceding this we saw a mix of minimal declines or modest growth. If you are going to seriously critic Ed's forecast you have to put a little more effort into it than to simply say he was wrong on an ex-post basis. In your opinion, exactly what piece of data or sign did Ed fail to recognize in May that clearly demonstrated the ensuing fall in GDP 5 months later? And if you are going to start talking about the financial crisis, you'll need to a little more specific than "financial crisis are bad" argument. Why did GDP suddenly fall in late 2008 when the housing crash started back in early 2007? Why did the TED spread suddenly jump in late 2008 when it was falling or flat the 10 months before? If it was so clear that an extended recession was coming in May of 2008 why did it take until September of 2008 for the capital markets to react? Unless you can come up with suitable answers to these questions, I afraid this post is another installation in a long series by Menzie "I spew politicized nonsense under the guise of legitimate academic research” Chinn.
Posted by: Jeff at April 6, 2012 11:21 AM
- so if we could only let so many businesses collapse that we'd left with near-monopolies, this would restore business confidence? Sounds like a case of "What is good for Ford is good for America."
- so with the supply-chain disruptions caused by the Tsunami (and flooding in Thailand) reducing Japanese production capacity, you think there is still substantial overcapacity in autos?
James Kahn: Yes, the NBER Business Cycle Dating Committee does not rush to judgement about serious things like recessions. They know how important credibility and reliability is. They understand the politically charged environment in the months before a presidential election. When someone in a position of authority like that of a CEA chair issues reckless statements in a partisan atmosphere, it damages the credibility of the institutions he works with, as well as his own. I don't think that's a good thing. You?
Posted by: Simon van Norden at April 6, 2012 11:25 AM
Jeff: If you check this post, roughly contemporaneous with Lazear's comment, then you will see why I thought recession likely.
Posted by: Menzie Chinn at April 6, 2012 11:29 AM
James Kahn If you want to talk about when NBER formerly called the recession, it was actually before Romer & Bernstein started their work on the fiscal stimuls package. So either you have to give special credit and kudos to Romer & Bernstein for recognizing that the economy was already in recession or you have to admit the obvious...which is that everyone with half a brain already knew the economy was in recession. The only thing NBER did was pin down the start date. And speaking of the Romer & Bernstein paper, they actually got the turning point right. They predicted June 2009 and that's what NBER later determined to be the end of the recession. Romer & Bernstein went wrong on two counts. First, they had to operate based on the initial GDP estimates for 4Q2008, and those ended up being three times as bad as initially estimated. I suspect Romer & Bernstein would have pushed for a stronger stimulus if the BEA had better GDP data at the time. Second, they tried to dummy down the analysis, so they expressed the turnaround in terms of the unemployment rate, which is what lay people and reporters intuitively understand. If you've actually read the paper, then you should know that they were really talking about the predicted turning point and the GDP growth rate. If you correct for the intercept bias due to BEA's underestimate of the output gap, then Romer & Bernstein got it about right.
Buzzcut Ford insisted on the GM and Chrysler bailout because Ford understood that if GM and Chrysler collapsed, so too would Ford. The reason is that they share common suppliers.
Jeff Perhaps you don't recall, but in the spring of 2008 the Bush Administration pushed through tax cuts based on the premise that the economy was in recession. And the Fed had been cutting interest rates long before Lazear's forecast. The Fed knew the economy was in recession...go look at the history of the federal funds rate. In the spring of 2008 plenty of people were already talking about the Fed hitting the zero lower bound...again, that was one of the arguments in favor of the spring 2008 rebates.
Given Lazear's penchant for coming back from the dead only to make one bad forecast after another , I propose that we start calling him Lazarus. Sort of in keeping with the Easter holiday.
Posted by: 2slugbaits at April 6, 2012 01:02 PM
Simon van Norden: I think "reckless" is a bit strong, as other commenters have pointed out, since he was not so far out in the distribution of mainstream forecasts. Were all those professionals "now-casting" positive growth either "deluded or mendacious"? And it's not obvious to me that a CEA chair should be so much less cautious about publicly declaring a recession than the NBER.
But if that was reckless, what was Christina Romer's
forecast about the recovery in January 2009, when she had already been nominated to be head of the CEA? How does that square with: "I'm bashing Professor Lazear for claiming, against all evidence, that expectations were for a strong recovery." And lest it appear otherwise, I'm not bashing Christina Romer here, I'm just suggesting that Lazear was neither the first nor last CEA chair (or Fed chair) to miss the beginning of a recession, and the bashing of him seems rather selective.
Speaking of the Fed, here's what they said in their April 30, 2008 release: "The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity." Having spent over a decade at the Fed myself, I know that they have access to quite a bit of data themselves.
Posted by: James Kahn at April 6, 2012 01:12 PM
Governments stats generally lag along. They are no perfect. They miss sometimes(depth of the last trough fwiw, was understated).
Looks like the recovery is strong enough along now they can get a steady state of progress. Just not at the speed some people want.
About the same as the 90's and 00's.
Posted by: The Rage at April 6, 2012 01:15 PM
Sometimes I think Ricardo is Herbert Hoover's ghost wandering the face of the earth waiting for the capitalist to live up to his expectations and ride in and save the day, but enough about blind faith.
Posted by: Frank in midtown at April 6, 2012 01:21 PM
2slugbaits: I've already commented about this, but the Fed's public statements as of May 2008 projected moderate growth. Since we're talking about Lazear's public statement, that's a fair comparison. As for the Romer-Bernstein paper, it's hard to read it as anything but emphasizing jobs and the labor market. Employment didn't bottom out until February 2010, and didn't really start to exhibit sustained growth until October 2010. That's not getting it "about right."
And why would we give special kudos to them for recognizing a recession after the NBER had called it?
Posted by: James Kahn at April 6, 2012 01:27 PM
To reemphasize the point made by 2slug, there was a massive collapse of GDP in Q4 2008 at an 8.9% rate that was not known until after Romer et al got going. They simply did not have the correct information on what the base was.
You are wrong about the TED spread being flat for 10 months previously. There was a major uptick in it during the March, 2008 at the time of the Bear Stearns collapse. One could argue that Lazear was feeling pleased after that situation was gotten more or less under control and the TED spread came back down and felt confident to make the forecast that he did. However, it remains the case that he was way out of line with other forecasters, and much more wrong than they were, as most were way understating how bad things were going to get (including both Menzie and Jim).
Posted by: Barkley Rosser at April 6, 2012 01:41 PM
James Kahn Romer & Bernstein did their analysis in Nov 2008, which was before the NBER call. The NBER call in early December. Their paper was embargoed until 9 January 2009, but they had completed their analysis long before that. Unlike many college students they did not start to work on it the day before and then pull an all nighter. The bit about jobs and the labor market is the sales part of the paper. Go read the actual analysis, the projected changes in quarterly multipliers, the predicted turning point in GDP, etc. That's the part that they got right. As I said before, they got the peak unemployment number wrong because we now know that the intercept value on their chart was too low. The output gap was much bigger than the BEA and BLS data indicated at the time.
I didn't think adults actually interpreted the unemployment path shown on their chart quite that literally. If that's how you interpreted it, then presumably you believe that there is no lag between the time when GDP bottoms out and when unemployment bottoms out. Is that what you believe? That GDP and unemployment turn simultaneously??? I agree that the "econ for dummies" chart shows unemployment peaking in June 2009, but if you read the paper it's pretty clear from the context that they were using the unemployment rate as an intuitive proxy for when GDP would turn around and the output gap would start to close. As a marketing strategy it was a bad idea, but their underlying analysis was correct.
Posted by: 2slugbaits at April 6, 2012 02:05 PM
Barkley, it's hard to buy that there weren't strong indicators of a collapse in 4th quarter 2008, but that wasn't my point. It seems that people are not judging Romer and Lazear by the same standards. One might almost think there's a political agenda. Beyond that, it's a stretch to claim that, even adjusting the base, that Romer/Bernstein weren't wildly optimistic about the timing and speed of the recovery. Again, my point is not to criticize them, just to put in perspective the Lazear-bashing.
Posted by: James Kahn at April 6, 2012 02:14 PM
"Reckless" seems like a good word here (although "mendacious" or "incompetent" have their strong points.) You know enough to understand the difference between (a) making a point forecast and (b) saying the uncertainty around your point forecast is small. It seems to me you are arguing that Lazear's point forecast wasn't "so far" out in the distribution of point forecasts. I do not understand why you insist on missing the point; Lazear argued things were "clear". Anyone can be far off the mark during times of high uncertainty. I'm sure you'll agree that's quite different from being very wrong after you state that data are "clear."
I'm not sure why you're bringing Romer up...feel free if you want, but I don't think I've made any claim (explicit or implicit) about her...or Democratic or Republican administrations...please remind me if I've overlooked something, but it looks to me like you've got a partisan axe to grind.
Posted by: Simon van Norden at April 6, 2012 04:06 PM
I'm not sure how saying that the same standards should be applied to CEAs of both Democratic and Republican administrations (and to the Fed) implies "a partisan axe to grind," but if my point hasn't registered by now, it's obviously not going to.
Posted by: James Kahn at April 6, 2012 04:30 PM
James Kahn: Let me re-quote Professor Lazear:
"The data are pretty clear that we are not in a recession."
That is as definitive a statement as is made in macro. Contrast that with the Bernstein-Romer study. I challenge you to find an equally definitive statement in that document.
Posted by: Menzie Chinn at April 6, 2012 04:41 PM
Menzie: The link you provided only hurts your position. In it, you gave no definitive statements, predictions, or warnings of what was on the horizon. It merely suggested you had a slightly negative outlook. In no way what so ever did it suggest that an annualized drop in GDP of over nine percent was on the horizon. Without that drop Ed's prediction could have proven to be correct and your slightly negative inclination could have been wrong. And so my point is, on what grounds can you legitimately criticize Ed's prediction when you both (and everyone else) got it wrong? The only difference between you and Ed is that you were slightly left of the zero and he was slightly to the right. Hardly anything to boast about.
Posted by: Jeff at April 6, 2012 05:50 PM
Edward Lazear ... stated unequivocally in May 2008 (also in the pages of the WSJ): "The data are pretty clear that we are not in a recession."
Econbrowser, more than two months later, with data for the May quarter in, July 31, 2008:
Not quite a recession
The Bureau of Economic Analysis reported today that U.S. real GDP grew at a 1.9% annual rate in the second quarter of 2008, less than many analysts had been predicting a week ago, but substantially better than the 6-month-ahead predictions for that number that we were hearing back in January.
Today's report contained some good news. The main reason that the final GDP number was weaker than predicted was the big drawdown in inventories. Without that negative contribution from inventories, real final sales grew at a robust 3.8% annual rate...
In economics it is very notoriously difficult to predict the present, much less the future. If Econbrowser wishes to deride others' inability to do it, Econbrowser should do better.
BTW, *after* Lehman failed (yet another two months later) the Fed at its next meeting decided to keep rates stable -- avoid reducing them -- explaining: "Inflation has been high ... the inflation outlook remains highly uncertain".
*At that very moment* the CPI and PCE were in a deflationary plunge with prices falling at 8% annual rate (and the real economy plunging at a 9% annual rate).
Being that the Fed is that poor at predicting the present, even using all its vast resources and data on hand, I don't hold Econbrowser's error against it. Perhaps Econbrowser should be as generous to others.
Posted by: Jim Glass at April 6, 2012 06:02 PM
Jeff: I didn't say I foresaw a 9% drop. But I was not so arrogant (or mendacious) to rule out a recession, with the four key indicators the BCDC look at were trending down. For your benefit I have added a graph. Would you have made an unconditional no-recession call with that data?
Posted by: Menzie Chinn at April 6, 2012 06:04 PM
Menzie asks: "Would you have made an unconditional no-recession call with that data?"
But, is that the best question to be asking? From reading the comments we can determine that one economist was technically correct and another was a better futurist. Is being a good futurist important in a political chair which measures and influences economic impacts? That is of course compared to the apolitical teaching chair the good futurist held/holds?
Menzie, if you were sitting in Lazear's chair at the time of your prediction, would it have been more like his or yours?
I don't want to take us further down the road of comparing administrations' lies, but that appears to where you have taken us.
Your unmitigated political bias shows. Even again.
Posted by: CoRev at April 7, 2012 05:56 AM
Jim Glass: Comparing this blog's record to Lazear's seems fair. But let's fairly represent both.
1) I've yet to hear anyone suggest that Lazear's 2008 quote was taken out of context. (Anyone want to defend Lazear that way? This would be good time to make your case....)
2) I don't speak for Econbrowser, but as a reader, I think you're distorting things in two important ways. First, I don't think there is an "Econobrowser" view....I think Menzie Chinn writes posts and Jim Hamilton writes posts. Menzie is criticizing Lazear, but Hamilton wrote the post you're linking to. Where's the inconsistency? Second, Jim Hamilton seems to me to be very precise, transparent and consistent in his views on the state of the economy. When I look at his historical record I see that from Jan. 8 2008 until 30 Aug. 2009 his emoticon was a "frownie" (not even neutral....this is worse than neutral.) In retrospect, that looks like a pretty accurate evaluation. It also looks much unlike Lazear's statement. Given the emoticon's prominent position as a summary of Jim's assessments, could you please explain again how you come to the conclusion that his views and those of Lazear's were similar in mid-2008?
Posted by: Simon van Norden at April 7, 2012 06:11 AM
James Kahn: Glad to hear you don't have a partisan axe to grind....but please help me understand what you're saying....that you're happy with both Lazear's and Romer's statements? or that you agree with Menzie (and most of the comments here) that Lazear's statement was reckless/mendacious/incompetent? I thought this was the kind of things that professional empirical economists would agree on....
Posted by: Simon van Norden at April 7, 2012 06:22 AM
James Kahn: "So real GDP is roughly 15 percent below where a 3.5% trendline would have taken us."
I've put this question before to Menzie and it probably deserves repeating here...what kind of confidence interval do you think we need to put around the trendlines we use to assess recent economic growth? To put it another way, what's the economically meaningful standard error to put around your 15% gap?
Posted by: Simon van Norden at April 7, 2012 06:34 AM
CoRev: I regret I do not understand your point. Who's correct, who's the futurist? Professor Lazear was incorrect at the time (see the Figure 5 I have added in the latest update). He remains incorrect now. I did not ever state unequivocally there would be a recession, before the NBER BCDC declaration; I merely lacked the hubris (and/or mendacity) to declare no-recession. And for that I am possessed of "unmitigated political bias"? Okey-dokey.
You might also want to see what Martin Feldstein had to say about the duties of the CEA, here.
Posted by: Menzie Chinn at April 7, 2012 07:28 AM
James Kahn Perhaps you would be able to explain this rationale for the 2008 tax rebate:
Bernanke now admits falling home prices, higher-than-expected energy costs, and a weak stock performance are expected to drag down U.S. growth this year. Consumer spending is falling, and the unemployment rate edged up by a "disappointing" 0.3 percentage points in December, to 5.0%, while new jobs declined. The Fed chairman acknowledged the central bank has "consistently underestimated" the impact of rising oil prices and other commodities on the U.S. economy.
One problem Bernanke may not be able to overcome: He lacks the swagger and devout following of his predecessor, Alan Greenspan. Combined with worse-than-expected earnings and economic data, the markets are having a tough time taking Bernanke at his word.
"He doesn't have the street cred yet," said David Wyss, chief economist of Standard & Poor's, which like BusinessWeek is owned by The McGraw-Hill Companies (MHP). "Bernanke is still saying he thinks the U.S. will escape recession; most people on the Street think we are already in one. Maybe nobody's sure Bernanke is wrong, but the markets think he is."
Got that? In January 2008 "the Street" was already sure we were in a recession even if Bernanke was only wishy-washy. And if "the Street" was already sure we were in a recession, then I don't think commenters here can claim that just about everyone didn't think we were in a recession.
This was in January 2008. Bernanke was cautiously optimisitic that coordinated fiscal and monetary action might be able to avert a recession. Bernanke turned out to be wrong about that, but it's certainly unfair to pretend that he was sure there wouldn't be a recession. Afterall, Bernanke made those comments while testifying before Congress. His testimony supported a call for fiscal relief because the Fed was concerned about a deteriorating economic condition. And people were very much concerned that the Fed would hit the zero bound. One of the rationales for the 2008 tax rebate was concern that the Fed would soon "run out of bullets." And a few weeks later even Fox News was on board with the likelihood of a recession:
Congress, facing the prospect of an election-year recession, passed an emergency plan Thursday that rushes rebates of $600 to $1,200 to most taxpayers and $300 checks to disabled veterans, the elderly and other low-income people. President Bush indicated he would sign the measure.
House passage by a 380-34 vote came a few hours after Senate leaders ended a drawn-out stalemate over the bill. The $168 billion plan is intended to provide cash for people to spend and tax relief for businesses to make new investments — boosts for an economy battered by a housing downturn and a credit crunch.
All of this was known months before Lazear confidently asserted that there would be no recession. It's very hard to reconcile the strong support for the 2008 tax cut with the belief that all was well with the economy in the spring of 2008. But yet that's exactly what Lazear was trying to do.
Posted by: 2slugbaits at April 7, 2012 07:58 AM
Menzie requests: " "
His reference says: "How Advice Is Given
The CEA chairman gives advice directly to the President and to the senior members of the administration. There is also a broader role of trying to shape public understanding of the economic issues...."
So the role of the Pres. of the CEA is traditionally internal to the administration. Menzie insists that the role should be less mendacious in forestalling a potential recession. Why?
That's not the role, moreover, that's not the goal of a public article/pronouncement, which is to try to influence public opinion. (Also from your reference.)
I ask again: "Menzie, if you were sitting in Lazear's chair at the time of your prediction, would it have been more like his or yours?" Positive or negative? I'll wait.
Posted by: CoRev at April 7, 2012 08:52 AM
CoRev: I would have said "The NBER BCDC determines the dates of business cycle troughs and peaks. The currently available data do not definitively point in a given direction, but clearly we could do better."
Let me re-iterate, given what is plotted in Figure 5, and what I know about data revisions, I would not have said: "The data are pretty clear that we are not in a recession."
Posted by: Menzie Chinn at April 7, 2012 09:22 AM
CoRev: I must confess, I don't understand: "Menzie insists that the role should be less mendacious in forestalling a potential recession." Let me turn around your statement. Are you saying that CEA officials should lie in order instill confidence in the economy?
Posted by: Menzie Chinn at April 7, 2012 10:26 AM
I agree that Bernstein-Romer can be taken to task at least somewhat for being overly pollyannaish about the likely future path of unemployment in their report, even as I defended them for doing their report at a time when the evidence was not yet in on how bad things were. At the time I thought things were worse than they thought and was unhappy about their report.
I am also one who called loudly on Econospeak in mid-summer that there was going to be a hard crash in the near future (did not pinpoint a particular time), but failed to forecast how bad the resulting recession would be from that hard crash. I was also one who had been noisily declaring that there was a housing bubble that would go down and cause lots of problems for several years, indeed from a time period when Jim Hamilton (an old student of the misspecified fundamental argument regarding bubbles) was still skeptical on that matter.
I think the issue with Lazear may be less that he was so out of it back in May 2008 (which he clearly was), but that now he is parading around as an expert forecaster and being taken very seriously as such by all sorts of people when he is making somewhat questionable forecasts at this time that appear to have a partisan tinge to them. I may be wrong about that however.
Posted by: Barkley Rosser at April 7, 2012 12:03 PM
Menzie, for heaven's sake if you were in his seat at that time you would deliberately trash the economy by claiming an unannounced recession? For what reason? Truth? What if the economy recovered?
Neither of you two at that time were prescient. You, except for now several years later, appear to be making that claim with your "lie" comment.
Posted by: CoRev at April 7, 2012 01:01 PM
Folks, instead of bashing and contra-bashing : better you close your eyes and play the Kindergarten-game "I can see the future".
Posted by: Johannes at April 7, 2012 02:05 PM
CoRev: So, I will put you down as "ok to lie". I am not surprised. I think you and I have very different conceptions of what public servants should do.
Posted by: Menzie Chinn at April 7, 2012 03:04 PM
James Kahn: "The article overstates the strength of the recovery by looking at absolute levels. So real GDP has finally eclipsed its level from four years ago. That means it is roughly 15 percent below where a 3.5% trendline would have taken us."
Potential GDP is not growing at a 3.5% per annum rate. See the original criticism of Lazear from Brad DeLong and my follow-up. Yes the recovery is painfully slow but the GDP gap is declining by any reasonable measure. I'm a little stunned that you would write this sentence of light of the discussion around Lazear's ridiculous oped.
Posted by: pgl at April 7, 2012 03:41 PM
Menzie, that's the weakest response you have had in a long while. You have still to answer the question: "if you were in his seat at that time you would deliberately trash the economy by claiming an unannounced recession? For what reason? Truth?"
There are several options, which would you choose? We know what Lazear said.
Posted by: CoRev at April 7, 2012 04:31 PM
CoRev: I would be truthful, and state as I indicated in my 9:22AM comment. That would not be trashing the economy, despite your hyperbolic assertions.
Posted by: Menzie Chinn at April 7, 2012 04:37 PM
I'm curious at to how indefinite continual compounding GDP growth over the long term is assumed. At the "normative" 3% growth rate, you get a doubling of the economy every 24 years or so. How many possible iterations of that can happen before limits on resources, population, and capital occurs?
Does anyone really believe that the economy will be 16 times larger, in current dollars, than it was in 2000?
Posted by: SecondLook at April 7, 2012 04:49 PM
It was pretty obvious that the economy was facing severe headwinds since the Bear Stearns collapse. Ironically, Hillary Clinton's loss of the Democratic nomination probably lost a bipartisan agreement to the gas tax holiday, since Obama denounced it as a gimmick. But it would have been conceivable had A) more aggressive forms of stimulus implemented (gas tax holiday, infrastructure 'shovel-ready' investment, more lump-sum tax cuts) and B) Lehman Brothers hadn't filed for bankruptcy preventing a world-wide and domestic financial crisis. Both were possible, but more stimulus may or may not have happened, and the Lehman shock could have been avoided under different management. Anyhow though, it's impossible to deny that recession was likely in May '08. But most people, I believe, thought it would be of the '91 and '01 recession variety, not something hovering between '29 and '81.
Posted by: KainIIIC at April 7, 2012 09:01 PM
The question seems to be: who was less wrong in May 2008?
I will restate what I think is a more relevant question for economists: have we made any progress since May 2008 to develop more accurate models that may do a better job of predicting the next recession?
Posted by: MarkOhio at April 8, 2012 06:33 AM
It will be very hard to answer that question until we see more recessions.
Posted by: Simon van Norden at April 8, 2012 07:49 AM
Jim Glass: Comparing this blog's record to Lazear's seems fair. But let's fairly represent both.
By all means, let's be fair.
Lazear is quoted as saying, on May 8: "The data are pretty clear that we are not in a recession."
He is personally attacked for saying that, with the claim: [a CEA chair] who states so definitively that "we are not in a recession" with that information at hand is either being deluded or mendacious. You take your pick. "Deluded or mendacious" are words of personal attack, slurs on another's character, as are the followups such as "reckless/mendacious/incompetent" etc.
This is not merely stating someone was wrong. It is a personal attack on character. Let's start off being fair by recognizing that what has to be justified is the personal attack. OK?
1) I've yet to hear anyone suggest that Lazear's 2008 quote was taken out of context
How does the word "unconditional" (emphasized!) get attached to it?
From that WSJ story following the quote:
But the official declaration of a recession would likely be made after the fact by the National Bureau of Economic Research. And Mr. Lazear said just two areas of the economy are showing the type of deterioration that the NBER would consider recession range: retail sales and manufacturing ... "I would be very surprised if the NBER, looking back at this period, would date this as a recession"
So, Simon: Imagine someone asks *you* about what currently available data say. Your response is, "The data say X, but some of the data goes the other way, and the final determination will be made later, after more data come in, by someone else. Though if they then don't agree with what I just said, I will be surprised."
Let's be fair. Is your response there an unconditional claim of "X"?
Is it a fair representation of that by others to say: "Simon recklessly said, 'I say, X unconditionally!'" ?
As to the rhetorical claim that "with all that information" to be wrong one must be "deluded or mendacious", well let's see.
Econbrowser, three months later, with three months more information, looking back at the BEA data for all Q2 in retrospect, said: "Not quite a recession". Is being wrong with even *more* data not being *more* deluded or mendacious?
Let's look at the Federal Reserve. The charge against Lazear's character is that he said: "The data are pretty clear that we are not in a recession." He wrote this less than five months before US GDP took a remarkable dive
Put aside for a moment the fairness of attacking him for judging conditions on May 8 without considering what would happen five months later.
Remember that the outright deflation of the plunge part of the dive started a good two months *before* the Fed -- at its post-Lehman meeting! -- decided to hold rates steady, citing inflation risk.
Now consider the *vast* data and analytic resources of the Fed. At least Lazear's reading of the data for conditions in March was plausible enough to coincide with Econbrowser's reading even more data to reach the same conclusion three months later.
But the Fed -- geeze!-- well after the great plunge was actually plunging they still didn't know it! Do we say: "With all that vast data, to be so wrong Bernanke and the FOMC had to be deluded and mendacious ... reckless/mendacious/incompetent ... damaging the credibility of the institutions they works with, as well as their own."
If one is to be fair and consistent, how does one not?
Well, I don't need say it because I know that predicting the *present* is very difficult. All the time people -- the Fed, Econbrowser, Lazear -- make judgments based on what the data say at the moment, which turn out to be wrong when more data arrives later ... a possibility Lazear specifically acknowledged in making his supposedly "unconditional" claim in the WSJ story. I'm fair because I treat all such people the same. I don't say: "A, you predicted the present hideously wrong, to our great cost, you get a free pass. B, you predicted it wrong, proving you are a damned reckless incompetent liar. C, you later confirmed what B said, you are a friend, you get a free pass."
Why do so many people feel the emotional need to believe and prove that others they disagree with are *evil*? At best it is adolescent, at worst it can be pretty damn bad in its own right.
There actually is a serious policy issue in all this: the great difficulty of knowing even the present -- as shown by *all* these parties -- and the complications this creates for policy setting. But the serious issue becomes hiddene behind all the enemy slurring.
Bottom line: Lazear's reading of the data as of May 8 was entirely credible and reasonable, as shown by the Econbrowser reading of much more data to the very same conclusion three months later. Thus, to justify calling Lazear's reading malignant and incompetent, an extra claim must be added that it was recklessly "unconditional".
That is bullspit, bunk. Is ... 'The final judgment will be made later, with more data, by someone else, though if it is different than mine today I will be surprised' ... an unconditional statement? (If it isn't, is making the claim that *it is* either deluded or mendacious? You decide.)
Hey, you can quote me: "The data are pretty clear that the Buffalo Bills will not win the next Super Bowl. If they do, I will be very surprised." Did I just make an unconditional statement?
Posted by: Jim Glass at April 8, 2012 03:12 PM
Jim Glass: Look...at...Figure 5. I note you have not commented on it. See also this post for the four series NBER BCDC looks at plus MA's monthly GDP series. Tell me if you still think the data are "pretty clear".
But I don't expect any more honest and sensible analysis from somebody who wrote on 1/12/2009:
For the record, the Minneapolis Fed compares the depth of the current recession to prior post-war recessions after the same period of time.
It ranks the current recession by change in employment as "median", and by change in output as "mildest".
So it's not the end of the world, nor Great Depression II, yet.
Posted by: Menzie Chinn at April 8, 2012 04:47 PM
1) I don't have access to the Lazear's original press release (anyone got it?) so until I can find that I'll stick with the direct quote that you also reference extensively.
2) I did not use the word "unconditional" in any of my comments; if you object to its use, perhaps you could direct those comments to someone who used it.
3) If someone were to ask me what the currently available data say about a recession, I would lecture them (possibly at length) about how much uncertainty surrounds real-time output gaps and other business cycle indicators. I would shamelessly plug my published work on the subject. I would give them links to the course I taught central bankers on real-time detrending and data revision. I might make that into a nice segue into how data revision can sometimes complicate detrending and then shamelessly plug my published work on modelling data revision and its role in understanding the forecast performance of the Bank of England density forecasts. The odds that I would say that the data say something *clearly* about the current state of business cycle are slim, simply because most of the time the data do not speak clearly.
4) How can I be fair and consistent when I condemn Prof. Lazear and not the Fed? I don't think the Fed in 2008 were saying that the data clearly showed what the economy was doing or that they would be very surprised if anyone later declared the economy to be in a recession. I think that difference is important. I think that's what really made Lazear's statement stand out.
5) I'm sorry if my criticisms of Prof. Lazear struck some readers as hypocritical given that my comment did not equally criticize Romer, or the Fed, or Krugman, or someone else they feel deserves criticism....but the blog post was about Lazear.
6) You are continuing, in the face of the clear evidence that I cited, to claim that several months later this blog shared Lazear's view of "clearly no recession." Jim's summary indicator (bearish) throughout 2008 and much of 2009 contradicts you.
7) "There actually is a serious policy issue in all this: the great difficulty of knowing even the present -- as shown by *all* these parties -- and the complications this creates for policy setting. But the serious issue becomes hiddene behind all the enemy slurring." We agree! But how do you reconcile that view with your very next line, claiming that someone who thinks that the data show something clearly is credible and reasonable?
Posted by: Simon van Norden at April 8, 2012 07:13 PM
I think you have to give Lazear a "reasonable doubt" acquittal for his 2008 comments but not for his recent ones. Your charts are not compatible with US being "in" recession in May 2008. Of course, a proper forecaster would have seen it coming.
Posted by: Daphne Millar at April 8, 2012 11:08 PM
Yes. The next recession(s) will be the proof in the pudding for any new and improved economic models. Would appreciate any references you (or others) can provide. In the end, no one cares about who was right or wrong about the last recession. I do care if we have learned something that will help us better anticipate the next one. Certainly, some economists somewhere must be working on that problem.
Posted by: MarkOhio at April 9, 2012 04:36 AM
This "Recession in Perspective" link is well worth clicking on--indeed, I have bookmarked it.
It is supportive of Lazear's thesis: "Worst Economic Recovery in History", or more precisely, "Worst, or Maybe the Second Worst, Economic Recovery since 1948".
Interesting that the worst recovery in output was the second oil shock. And here we are, oil prices again pressing, DOW off a hundred this morning and the oil supply looking to peak out in the next 18 months or so...
Posted by: Steven Kopits at April 9, 2012 06:41 AM
@Frank in midtown:
"Sometimes I think Ricardo is Herbert Hoover's ghost.."
Having read some various of his selections, it seems to me more plausible that this "Ricardo" is actually Anne from Ben Edlund's classic drama The Tick (see issue #10, "Some Obstacles and a Partial Resolution"), going poorly-disguised as Ricardo. The real Ricardo wouldn't dream of writing stuff like this one does. I mean, I'd like to give him credit as some sort of economist, but he makes more sense if you think of him as a colony of minute life-forms on a meteorite in an absurdist comic series.
Posted by: Anonymous at April 9, 2012 10:54 AM
Sorry I am so late in responding but I have been out of pocket.
First, if you have followed my posts you will know that I do not promote austerity, but I do believe that government spending is out of control. Millions could be saved by just eliminating duplicate programs. A recommendation for a study was overwhelmingly accepted by the Senate but when a bill was introduced to actually combine the duplicate programs it was voted down. Then a suggestion for another study was also voted down. Bottomline is that the House and the Senate, Democrats and Republicans love to spend other people's money. So yes there are a lot of cuts that could be made that no one would even notice (except those lining their pockets) if there was the political will.
My second comment is has it ever dawned on you that reductions in state and government employment might actually be one of the primary reasons we are seeing small signs of recovery. We all know that government jobs pay more than the private sector and we also know that most are political appointments, not to mention the number of employees doing duplicate jobs in different departments. Your bureaucracy at work.
Posted by: Ricardo at April 9, 2012 01:48 PM
Frank In Midtown wrote:
Sometimes I think Ricardo is Herbert Hoover's ghost wandering the face of the earth waiting for the capitalist to live up to his expectations and ride in and save the day, but enough about blind faith.
You really need to study more about Herbert Hoover. If you actually knew anything about him you would understand that he was the quintessential big-spending, stimulus-promoting, central planner. One of his first actions as president was to promote the Smoot-Hawley tariff causing the stock market crash of 1929. Then after the crash he called all the major businessmen together and threatened them with government sanctions if they lowered wages or lowered prices. Then in 1930 he actually signed the Smoot-Hawley tariff creating the most severe trade war in world history and the Great Depression was rolling. Then he called the state leaders together and jawboned them into massive public spending programs (as if they needed much encouragement). Then as he was driving the economy into the ground drove in the final nail in the coffin when he exercised the greatest stupidity of any president by implementing the greatest tax increase the country had seen up to that time.
If you think this is what I am promoting you need to take a reading comprehension course.
Posted by: Ricardo at April 9, 2012 02:09 PM
Lazear obviously hit a nerve with Menzie. Menzie and other supporters of the President understand very well how vulnerable Obama is on the economy. Lazear's points are clear: 1) Real growth has been sub-par in this recovery compared to previous recoveries; and 2) We need pro-growth polices, not Obama's social engineering. Lazear could have also pointed to the unemployment rate or the employment to population ratio, but maybe he's saving that for another day. Obama's economics supporters, understanding how potent this argument is, will try very hard to obfuscate by attacking the motives of people making it or by raising irrelevant questions such as whether the current weak recovery was anticipated or not. Lazear's argument is just an updated version of "it's the economy stupid." Clinton was propelled into the white house by remembering this simple motto. Romney will be too if he just keeps repeating the GDP and employment numbers and reminding voters about Obama's polices. If Romney and his advisors can stay focused, Menzie, Krugman, Delong and others will rage in vain on the internet, but they won't be able to stop Obama from taking Jimmy Carter's place. Menzie's hysterical reaction to Lazear suggests he fears this may be coming.
Posted by: Rick Stryker at April 9, 2012 06:51 PM
There's an easy and objective way to get a better sense of how reasonable Lazear's May 2008 evaluation of the data was (and I'm kicking myself for not thinking of it earlier.)
The good guys at the FRB Philadelphia run the Survey of Professional Forecasters (SPF) quarterly and publish the results. Luckily for us, they not only keep all the archival data on line (right down to the individual responses), but they also include questions on the probability of a contraction in real GDP in the current quarter. True, that's not precisely a recession, but it's close.
As it happens, they released their 2008Q2 results 13 May 2008. They found that forecasters were generally more pessimistic about the prospects for economic growth than they had been in the previous quarterly survey. On the probability of negative growth question, they had 45 valid survey responses. 26/45 put the odds of a contraction in 2008Q2 at 50% or higher. 40/45 put the odds at 25% or higher.
It's fair to say that forecasters in 2008Q2 were unusually worried about economic contraction, that a majority of them put the odds at over 50% and that very few were confident that the economy was not contracting at the time.
Other factors Lazear must have been looking at were the latest real GDP growth estimates. The 30 April 2008 release put real growth in 2007Q4 and 2008Q1 at 0.6% (Q/Q, annual rates). Since then, those figures have been revised to 1.7% and -1.8% respectively. Put another way, there was no catastrophic uncharacteristic downward revision. Instead, he was looking at recent estimates of very low growth and hearing many forecasters give high probabilities of economic contraction.
Posted by: Simon van Norden at April 9, 2012 08:08 PM
I fully agree that there are plenty of reasonable spending cuts that could be made to the federal government, and that a variety of special interests from both parties block these. I am not one who thinks more deficits are necessarily better at all.
OTOH, I see no reason to buy into your argument about state and local governments. The recovery may be doing better than Lazear claims, but it is still pretty slow. And a lot of what the state and local governments do is not waste and many of the cutbacks are for infrastructure that would have helped the economy in the longer run.
Posted by: Barkley Rosser at April 10, 2012 10:46 AM
Jim Glass: In citing Jim Hamilton's post, you (tellingly) fail to quote:
...With the latest release of the 2008:Q2 GDP numbers, I've now calculated our recession indicator index for 2008:Q1, which turns out to be 38.4%. Based on a historical analysis of the algorithm, I would not declare a recession to have begun unless the indicator rises above 66%. ...
Posted by: Menzie Chinn at April 10, 2012 09:12 PM
Thanks for a very reasonable response.
A basic difference between your assumption and mine is that you assume that government is better at creating infrastructure than the private sector. I, on the other hand, believe that government inherently cannot efficiently invest funds.
A properly functioning economic system needs a price system and a profit-loss system to allocate scarce resources. Government is immune to both. The GSA fiasco demonstrates that government workers have no concept of waste because their "income" is not dependent on the service they give, but on the amount that can be extracted from the taxpayer. So profit-loss is meaningless in government spending. And when profit-loss is meaningless prices become meaningless. Government secrues what it wants with little regard to price, both paying suppliers more or forcing suppliers to take less depending on a bureaucrats opinion rather than on economic forces.
This is not to say that government is corrupt (though it obviously is) but that the very nature of government prevents it from functioning as well as the private sector.
I refer those who would like to explore this more to Ludwig Von Mises writings on the inability of socialist economic systems to calculate.
Posted by: Ricardo at April 11, 2012 05:52 AM