Menzie Chinn back on February 20, 2016 had some fun with the defenders of that awful paper by Gerald Friedman (who never even bothered to estimate potential GDP as of 2016 and how it might grow over a decade):
One thing that should be remembered is that the trend line extrapolated from 1984-2007 implies that the output gap as of 2015Q4 is …-18%...I want to stress that estimating potential GDP and the output gap is a difficult task.
It is a difficult task and perhaps the CBO estimate of the gap is understating it. But to pretend the potential GDP would continue to grow by some akin to 3.4% from 2000 to 2015 is just absurd. Well it seems this crowd has “updated” their trend line analysis.
J. W. Mason writes:
This alternative measure gives a very similar estimate for the output gap as simply looking at the pre-2008 forecasts or extrapolating from the pre-2008 trend. “Our estimates imply that U.S. output remains almost 10 percentage points below potential output, leaving ample room for policymakers to close the gap through demand-side policies if they so chose to.”
The ‘alternative measure’ comes from an interesting
new paper:
The fact that most of the persistent declines in output since the Great Recession have parlayed into equivalent declines in measures of potential output is commonly interpreted as implying that output will not return to previous trends. Using a variety of estimates of potential output for the U.S. and other countries, we show that these estimates respond gradually not only to supply-side shocks but also respond to demand shocks that have only transitory effects on output. Observing a revision in measures of potential output therefore says little about whether concurrent changes in actual output are likely to be permanent or not. In contrast, some structural VAR methodologies can avoid these shortcomings, even in real-time. This approach points toward a more limited decline in potential output following the Great Recession.
While it is true that this new paper suggests that the output gap may be as large as 10%, Mason’s back flip is not justified for two reasons. First of all, the authors of this new paper are very critical of any crude trend line analysis. But more importantly – notice how the Gerald Friedman crowd substantially changed its tune on what trend line they should be using. Alas – the level of intellectual dishonesty in defense of what Gerald Friedman wrote a year and a half ago may be worse than the original paper.
I don't really want to engage with this guy but for the record my Roosevelt paper was reviewed by Obama CEA chair Jason Furman and Laurence Ball before being published. Note also that the paper was commissioned and published by the Roosevelt Institute, which is in no way part of this imaginary pro-Sanders crowd. Before publishing the paper I presented it to a group including Furman, Dean Baker, Josh Bivens, Lawrence Mishel and a number of other people with solid macro credentials. In my mind the positive response of this group counts for a lot more than one grumpy pseudonymous blogger. You can disagree with me on the substance all you want but if there's a lone crank in this discussion it ain't me.
ReplyDeleteSubstantively, the trend line is one small piece of an 80 page paper, which I encourage people to read for themselves. The point I care about is that there are many lines of evidence that would lead us to believe there is an output gap on the order of 10 percent of GDP and therefore an urgent need for a major stimulus program of some kind. This is the question that matters for people's lives. I'm not going to spend a lot of time relitigating the debates of the primary but I would note that the CEA chairs in their letter categorically dismissed the possibility of a gap on that scale. If you accept that number then you should write that on the central question they (and you) were mistaken. Or you can argue that the Coibion et al paper is wrong. But you will have to make that case on the merits.
Interestingly - the promises of high output growth come from the Republican economist side as well. Brad DeLong, however, thinks the right is engaged in some CBO bashing as well:
ReplyDeletehttp://www.bradford-delong.com/2017/08/michael-strain-stop-bashing-the-cbo-republicans-bloomberg-stop-bashing-the-cbo-republicans-a-word-to-the-wise-from.html
Look - I'm all for new research and intend to read J.W. Mason's entire paper. But let's put aside Trumpian hyperbole - please!
For the record – Mason’s Executive Summary starts with:
ReplyDelete“This paper critically examines the widely held view that the U.S. economy is today operating at close to potential. The paper makes five core arguments. First, GDP remains well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10 percent below the Congressional Budget Office’s (CBO) 2006forecast, and shows no signs of returning to the predicted level.”
There are a lot of people who are suggesting we are not near full employment but to open with a trend line as well as a decade old forecast sort of makes my point. But yes – this is a good point:
“the fall in the employment-population ratio over the past decade is not due to demographics. At most,40 percent can be attributed to the aging population, while the remainder represents declining employment rates within age groups, particularly younger ones. Third, the exceptionally slow productivity growth of the past decade can be understood as the result of weak demand, including the equally exceptionally weak growth of investment spending.”
I have often made the same argument as has others such as Brad DeLong. Noting we are below full employment is not novel. Doing so with trend line analysis is weak analysis.
The issue is that the CBO and the Fed both estimate where the economy is in terms of potential output. The Fed bases policies that impact our lives using these as justification. And Congress sort of does also, or at least tries to use what the CBO tells them as justification when they find it convenient to do so.
ReplyDeleteSo what do you do when you think they are coming up with the wrong estimates and basing policy on those estimates that will turn out to be harmful? You- PGL- do not seem to have a high opinion of trend line based analysis. What methods other than that do you favor? If you can get past the fact that Bill Mitchell is an MMT type economist and read his latest analysis of the US economy (I expect another one soon), I would wonder where you disagree. I promise you will not become brainwashed immediately if you manage to read it!
http://bilbo.economicoutlook.net/blog/?p=36414
Jerry - I will be the first to concede that people's lives are very adversely harmed if the FED restrains aggregate demand prematurely. In fact, I have written a few posts noting that I think we still have a sizable output gap and raising interest rates now is a very bad mistake.
ReplyDeleteI will simply repeat what Menzie said - this requires a lot of thought. And maybe the CBO estimate needs serious revision. I just wish people like JW Mason would stop demeaning people who do the hard work and join us in actually doing the hard work. And no - what ever estimates I might conjure up are amateurish at best.
BTW I would love to see what Bill Mitchell has written on this so if Jerry has a link - it would be most appreciated.
ReplyDeleteCrap perma-bears, the EPOP fall is absolutely due to demographics. This same shit has happened over 300 years of the bourgeois era. up and down. Cohorts change, the US itself is in the baby-bust peak spending era. Of course you don't grow 3.4%. Who knows what we really have grown. Betcha this expansion like the others gets upward revisions and a "firmer" GDP than you thought.
ReplyDeleteBack up in the post-war boom era, the U-6 had to fall to 7% before nominal wage growth accelerated. Now it is probably about 8% while the 90's expansion it peaked at 9%. We are damn close. The fall of the $$$$$$$ is another sign with inflationist Republican agenda(devalued currency, low tariffs). The money supply expansion that started in 2009 is pushing out into the global economy and pushing up asset prices. This is a big part of the problem of controlling these money supply surges as they mature by central banks that causes booms and headaches. You guys are data lagging again. Big time.
My guess the output gap is 1%, probably going under .5% next year which is essentially full employment.
I have no confidence in my ability to transmit links, hopefully this attempt will be successful.
ReplyDeletehttp://bilbo.economicoutlook.net/blog/?p=36414
Jerry - thanks for the link. That is detailed and excellent discussion of how to read the labor market data from BLS. He and I on the same page with respect to viewing from the perspective of the employment to population ratio. I think he would basically agree with me and Brad DeLong in suggesting we should have this ratio reached 62% before declaring full employment. And as I read JW Mason - he is echoing what we have noted.
ReplyDeleteFor starters, don't use 16+ epop Use 25-54 which gets around baby boomer retirements and late entrance by millenials. That data continues to lagby several points.
ReplyDeleteFor 61 years, with the exception of a six-month period in the depths of the early-80s recession, the country managed to have average weeks unemployed rates under 20 weeks. Often it was closer to 10 weeks, sometimes even less. We are still at 25 weeks. I would like to see the "we are already at full eployment" explain how that is not an indicator demonstrating rather starkly that we are not een lose to full employment.
Part-time for economic reasons is still considerably higher than what it has been in periods that have been considered full employent. (The data is absolute numbers, but the rate is relatiely high, too.) If we were at full employment, that nuber would be about a million lower.
And then there's the stagnant wage data.
Is it really the best discussion for PGL to start with attacking Mason for "back flips," and being part of a "crowd" engaged in "intellectual dishonesty" who write "awful papers?" What is the purpose of such invective? How about a tough but reasoned and less hyperbolic discussion?
ReplyDelete