jamesz

Fiscal forecasting bias

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If you’ve read this blog much you’ll know how obsessed Matt is with independent fiscal forecasts. He has variously called for an independent body to cost parties’ election proposals — Peter Dunne’s with him on that one — and independent bodies to set tax rates and maintain medium-term fiscal balance. The two have been jointly brought to the fore by the arguments about Treasury’s PREFU economic forecasts and the ability of each major party to balance their budget. Each party has accused the other of wild optimism but I haven’t yet noticed people taking pot-shots at the PREFU forecasts themselves. But can we really trust the government’s forecasts?

A recent paper on just that topic (ht. Robin Hanson) has, conveniently for us, investigated whether governments’ economic forecasts tended to be systematically biased in any particular way. It turns out, slightly unsurprisingly, that they are almost always optimistic and more so in the medium run than the short run. That, in turn, leads to over-spending by governments and constant budget deficits relative to forecasts:

Over-optimism in predicting growth appears linked to over-optimism in predicting budget balances. On average, the upward bias in growth forecasts is 0.4 percent when looking one year ahead, 1.1 percent at the two-year horizon, and 1.8 percent at three years.

So that’s bad news for governments and bad news for Matt’s budget-balancing agency, you might think; but not so fast! Read more

Matt Nolan

Oil and scarcity, what’s to be done

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Rising and volatile oil prices suggest that oil scarcity is a important issue.  So what can be done?

Personally, I think nothing – the price represents scarcity, and unless we think there are asymmetric information issues regarding the stock of fuel then this is fine.  If we do believe these issues exist, then since fuel is a “non-perishable” we will see individuals/communities stockpile – again, there is no reason for government intervention.

Or so I agrue here.

Matt Nolan

Give me a real inflation measure

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A pet hate of mine is that we use CPI to discuss inflation – without recognising the pitfalls.  My solution would be to make a real inflation measure, which is something the dynamic factor model at the RBNZ is trying to do.

I discuss this reasoning in more detail in an article for Idealog here.

Matt Nolan

A guide to drinking responsibly

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With a three-day weekend coming up, and a Rugby World Cup final, I published an economist’s guide to drinking responsibly in the Dom last week.  You can read it here.  What are my tips?

So what tips do I have when it comes to drinking?  I have already mentioned only taking out a small amount of cash.  You can also dress down and not take your ID (depending on your age and the types of bars you go to), or you could take up a Saturday morning activity.  Feel free to thank me in advance for your much reduced hangover.

If you want to know how I got there, you’ll have to read the article 😉

jamesz

What’s the point of forecasts?

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Matt blogs every now and then defending economic forecasters and always seems to draw out at least a couple of comments slagging off forecasters for being inaccurate. His reponse is that it’s not the numbers that matter but the qualitative analysis of risks and market direction. His defence came to mind when I was reading a recent AEJ article about testing the performance of expert advisers.

The authors make the point — which isn’t central to their hypothesis — that there’s a difference between forecasters who get the numbers right and forecasters who are useful to their clients.

…a decision maker must take some default action even in the absence of any expert, and may not appreciate forecasts that suggest the same actions, even if they are provided by an informed expert. On the other hand, if forecasts lead to better decisions, the decision maker may appreciate them, even if they are provided by an uninformed expert.

All of which suggests that trying to judge economic forecasts by the accuracy of their predictions alone may miss much of the value that they provide. Of course, there is probably a correlation between the accuracy of the forecasts and the usefulness of the accompanying advice but the two need to be judged together by their usefulness to the forecasters’ clients. Given that people continue to purchase forecasts it appears that their value in improving decisions is far from negligible.

Matt Nolan

Brief thoughts on NZ’s debt position

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On Saturday I had an article in the Dominion Post on New Zealand’s debt levels, and why I think we need to spend a bit of time thinking about “why” this level of debt arose before yelling out for things like compulsory superannuation.  My conclusion was:

This issue deserves a much more in-depth analysis then the quick look over the statistics I have provided here.  It requires time looking over the data and trying to understand where there is a distortion in the market, either resulting from market or government policy failure.  Then any savings policies that are introduced should be based on our analysis of these distortions – not on the eagerness of fund managers to receive funds from compulsory savings schemes.

The article is here.  If anyone wants to quote from it or any such, please attribute it to the Dominion Post.

If you merely want to discuss it with me, do so in the comments.  Note, I am very tied down at the moment, so it will be a while till I respond to comments – however, in time I will 😛