Data and prediction

Via Scott Sumner we saw the following article that mentions economic data and economic predictions.  The statements that stood out to me were:

(Economic) predictions are, of course, the bread and butter of economic institutions. But can we believe them?

In recent years, some economists have begun to express doubts over predictions made from huge volumes of data, but they are in the minority. Most embrace the idea that more measurements mean better predictive abilities.

Hold up.

For one, as we have mentioned prediction is not the central element of what economists do – and even when they do predict the goal of such prediction is to give some view regarding risks and movements, not direct figures (it is more ordinal than cardinal in some sense).

Secondly, ever since the Lucas critique economists have been very nervous about predictions from large amounts of data without theory – I would say that the majority of economists doubt the usefulness of econometric models relying solely on huge amounts of data.

Economists would like data with less measurement error, that is closer to representing the true economic variables we discuss in theory – we aren’t looking for an infinite number of measures we can stick together to find a result.  An economist that doesn’t use theory to inform their discussions of the economic outlook, but uses lots of data, isn’t an economist – that is all.

Strategy spaces and monetary policy

Over at Worthwhile Canadian Initiative, Nick Rowe suggests that central banks should find something else to discuss instead of interest rates.  The analogy provided is that of oligopoly competition: namely how the Cournot-Nash and Bertrand games have exceedingly different outcomes, even though the only superficial difference is that one game involves choosing output and the other game involves choosing price.

However, in the same way I don’t believe the difference in these games is just the product of “framing”, I am not sure if the call to arms against using interest rates as a focal point is necessarily that compelling.

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Burgeoning government bureaucracy? Links

There is some suggestion that the size and scope of governments around the world has become excessive.  Two recent examples of this are:

The Standard has suggested that similar comparison in NZ could be a little out of whack, and in the most part I agree with them.  After all, Labour was elected to a third term on the promise of larger government, National was re-elected to keep it at that level, as a result I think society is suggesting that they want government to continue spending a quarter of our income.

However, I do disagree with them with regards to the idea that government spending didn’t markedly rise as a proportion of GDP in Labour’s third term – to me the GDP Statistics seem to suggest this was the big mover (with the recent increase solely the result of a recession, and “automatic stabilisers”):

On “the” fiscal stimulus

Over at Kiwiblog there is discussion of the Democrat loss in Massachusetts.  Reading through the piece David Farrar stated:

Priorities. Obama’s fiscal stimulus did little bar increase the deficit massively, and turn the country into deficit hawks. Unemployment went well beyond his worst forecasts

Now I found this statement unusal in that David’s writing is usually very balanced, and yet I do not find this statement balanced at all.  Why?

  1. We have no idea if Obama’s fiscal stimulus did anything until the data is all finalised.  In a couple of years researchers will be able to look over the data and discuss the design, implementation, and need of the scheme and reach an educated conclusion.  At the moment people can only present an opinion on the basis of ideology.
  2. Personally (going onto my ideology 😉 ), I think the fact that unemployment rose even further than expected was the result of the shock being larger than expected (and areas of the US economy being more fragile).  During the crisis the US government was able to borrow cheaply and use this borrowing to undertake investment when the cost of building this investment was cheap (thanks to the spare capacity in the economy) This sounds like a good thing to me …
  3. Unemployment as high as  10% indicates to me that there was a hole in demand – I do not believe that “structural” economic issues could be sufficient enough to warrant 1/10 people who want a job not being able to get a job.  With the Fed unwilling to soften its monetary stance further the government is in a position to be “consumer of last resort”.  Although I don’t really like the idea of this, in the face of sticky prices and a massive shock to the economy I have to concede that such a role exists in extreme circumstances.

As a result, if I had to guess I would say that the immediate crisis would have been worse if the stimulus hadn’t happened. This appears to be a moderate position among economists, between the “stimulus did nothing” and the “we needed more stimulus” extremes.

Now, we may find that the long run impact of this borrowing will be bad, and we may look back on the evidence and find that the scheme is flawed.  However, the point that “Obama’s fiscal stimulus did little bar increase the deficit massively” is an extreme view (that could potentially turn out to be true) – not an objective fact.

Tax working group: The corporate tax rate

The Tax Working Group has released their report, as you all already know.  The recommendations are as expected, so its not particularly exciting in that sense.

However, there are some issues I would like to discuss – lets start with the idea that we “urgently need to cut the corporate tax rate” if Australia does.

Currently there is talk that, if Aussie cuts the corporate tax rate to 30% we need to do the same immediately.  We are told this as if it is a self-evident truth, and told that if we don’t all investment will head to Australia.  This is a touch over the top.

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Need more behavioural relationships please

I started life as a microeconomist, which is why the sort of discussion about nominal shocks going on between Sumner, Kling, and Woolsey seems a little weird to me.

To horrendously oversimplify the positions in order to make this post easier to tie together, Sumner seems to state that the Fed needs to print money with a nominal GDP target in mind, Woolsey suggests that the Fed should change inflationary pressure given a set real GDP target, and Kling states that we only have real shocks and so the idea of a “nominal shock” is not of use.

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