Matt Nolan

Growth forecasts and government

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I was just reading a post on forecasts for US economic growth at Econbrowser. In it the author says: “However, even back in December, the White House forecast was slightly more optimistic than the private sector consensus”. This ‘overconfidence’ in the economy seems to have been a common theme in US public sector forecasts over recent years.

Compare this to Treasury forecasts of the New Zealand economy, which have been consistently below the private sector consensus – that is the reason why tax revenues have consistently surprised on the upside in New Zealand.

Here we have two government authorities, one which constantly overstates economic growth and one which understates economic growth. Why do you think we have this difference?

Update:  My brief thoughts are below the flap:

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Matt Nolan

Fed cuts rates to 3.0%, GDP growth poor

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As the market expected the Fed cut its Federal Funds rate to 3.0% (down 50 basis points), a full 125 basis points lower than it was at the last meeting.  In the accompanying statement they touched on all the issues that they have previously complained about:  Weak housing market, softening labour market, and the erratic credit market.  The main issue for the Fed appears to be liquidity, as the idea of a financial accelerator comes into play.

They did also mention inflation – they said that they expect it to moderate.  However, any upside shocks on the inflation front could cause concern for the Fed.

On the GDP side the market received a downside surprise, with a growth estimate for the December quarter of 0.6% (this is equivalent to approximately 0.15% quarterly, seasonally adjusted growth).  A poor turnout for residential investment and a strong de-stocking in inventories were the main driver of this easing in growth.  A good description of the data is given by Econbrowser.

What does this mean for New Zealand?  Well our dollar jumped half a cent against the US$ as the yield gap rose, we are now pushing $0.79US again.  The market didn’t seem terribly phased by the GDP figure, given underlying ‘strength’ in consumption and exports.  As a result, commodity prices should hold up at least a little longer 😉

Matt Nolan

Ten things people will say economists said

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Over at the Big Picture they are discussing how silly the decoupling thesis is (the idea that that world economic growth now functions separately from US economic growth). Near the end they mention ten things that seemingly intelligent people have said, that have turned out to be complete rubbish, namely:

  1. The Yield Curve no longer matters
  2. Earnings at an unusually high % of GDP are sustainable
  3. The Business Cycle has been defeated
  4. Ignore sentiment readings, the population is just upset about Iraq
  5. Real Income gains are irrelevant
  6. Mean reversion no longer applies
  7. Supply side tax cuts pay for themselves
  8. Dow Theory is a quaint antiquity
  9. The (so-called) Fed Model “proves” equities are significantly undervalued
  10. Despite commodity prices, there is no Inflation.

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jamesz

Of prostitutes, police and power

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Matt observes that some crimes are not worth reporting, and it is probably sub-optimal for the police to do anything about them if they are reported. The flipside of that is the cost to society of criminalising behaviour and then refusing to enforce the rules. Sudhir Venkatesh and Steven Levitt’s new paper on prostitution in Chicago finds that the power imbalance created by its criminality imposes large costs on the industry’s workers. Via Foreign Policy:

They estimate that roughly 3 percent of all tricks performed by prostitutes who aren’t working with pimps are freebies given to police to avoid arrest… leading the authors to conclude that “a prostitute is more likely to have sex with a police officer than to get officially arrested by one.”When freebies given to gang members are factored in, about one in 20 tricks go solely for protection and the “privilege” of plying their trade. When freebies given to gang members are factored in, about one in 20 tricks go solely for protection and the “privilege” of plying their trade.

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Matt Nolan

Fed cuts rates to 4.25%

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The US Federal Reserve cut their cash rate and discount rate by 25 basis points. In the statement the Fed said the following about inflation:

“Readings on core inflation have improved modestly this year, but elevated energy and commodity prices, among other factors, may put upward pressure on inflation … some inflation risks remain”

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Matt Nolan

Will a fiscal stimulus in the US not be inflationary?

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According to Martin Feldstein (hat tip Greg Mankiw):

“Even if the Fed decides that it should not cut rates further at the present time, it would not raise rates to offset the stimulus effect of the fiscal change. From the Fed’s point of view, the tax cuts can provide a desirable short-run stimulus without the inflationary impact that would result from a lower interest rate and an increase in the stock of money.”

Just because Martin Feldstein is a far, far, better economist then I will ever be does not mean that I have to agree with him, and here’s why.

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