Don't Trust Economists
Jenson Hagen
I attended an economic seminar almost two years ago where state economist Tom Potiowsky was forecasting a rapid return to stable economic levels. I sat in the audience and rolled my eyes the entire time at his assertions. His graphs showed the economy bouncing like a basketball right back up to normal in no time.
His tune has changed lately with a strong downward revision of state revenue forecasts. He should get used to downward revisions.
Gary Shilling is the one economist I have come across that understands the situation. This video clip and Yahoo Finance article speaks truth to reality.
We have a tremendous amount of activity about to begin and continue until mid-2012. In contrast to the sub-prime mess we just went through, we are now about to face a mountain of commercial building loans, Alt-A mortgages and option arm mortgages expected to go bad. That will again place strain on the financial sector and the state's coffers.
Our dollar is being suspended by Treasury purchases made by foreign countries. They have the means to buy our Treasuries because we have outsourced so much economic activity. Because we have been outsourcing so much economic activity we need to stimulate our economy using debt. Since we stimulate our economy using debt, we prevent the dollar from dropping in value. If the dollar dropped in value, our exports would become more attractive and it would become less attractive to import products made by outsourced manufacturing companies.
I don't see us bouncing right back anytime soon if you get my drift . . .
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10:07 p.m.
Aug 23, '10
IMHO
That's like saying don't trust meteorologists.
Economics is a pretty speculative field, with lots of disagreement and opposing theories. And unlike meteorology, in economics, you are pretty sure to run into some things that have never been seen before.
9:30 a.m.
Aug 24, '10
Thanks for sharing more bad news and your own brand of pessimism. Just what we needed.
9:36 a.m.
Aug 24, '10
Nothing wrong with the post. The headline is overbroad, though it got my attention.
Economists tend to deal in the world of probabilities when projecting into the future, hence they get things wrong sometimes. I've generally found Potiowsky's work pretty credible and decent, and I've been impressed with his ability to field questions from legislators who have no economics training and answer them with wit and clarity. Of course, he was off on this one (or rather, his team was off this one).
"Ask five economists and you'll get five different answers - six if one went to Harvard." - Edgar R. Fiedler
And as always, easier to criticize than to do. Do you want to take a stab at projecting our income? I sure don't.
10:33 a.m.
Aug 24, '10
I believe listing to, and dissecting the different views of economists can be helpful. Often times, each one has a unique perspective on a particular nugget of the economy that he/she has studied or understands well. I think it's important to view forecasts as forecasts, and not simply as fact.
I also find it enlighting when an economist provides some ideas or thoughts on what a community/state can do to begin to pull itself out of a recession. Regardless of the accuracy of an economic forecast, what's often most important is to learn from the mistakes of the past, identify your weaknesses, and plan accordingly.
10:45 a.m.
Aug 24, '10
Yeah, the title is an error. I cut a huge section of the post out and was too quick to hit post before changing the title.
The point of the title is that economists purposely make the economy sound rosier than it really is because they don't want to negatively impact consumer sentiment. But it makes hard to trust in what they say. It's rare to find an economist that will speak to the reality of the situation, namely that we're in a huge mess and will be for years to come.
11:00 a.m.
Aug 24, '10
So perhaps you should have entitled the post, "Gloom and Doom". What is the point of that on a blog for progressive politics?
6:08 p.m.
Aug 25, '10
Jenson
Do you have any evidence for this? You promote Schilling, who writes for the NY Times (and makes boatloads of money on his housing index) for saying quite the opposite.
Nouriel Roubani is the toast of the profession right now because he forecast a housing downturn when few others did.
Krugman has a Nobel, a sort of prestigious award, and has been warning of an economic bust since at least 2004.
I just don't know on what you base your claims. A single story about the Oregon state economist is not very convincing.
11:53 a.m.
Aug 24, '10
Two related comments:
(1) From the link to the video:
"Shilling's forecast is that U.S. GDP growth will average just 2% for the next 10 years. That isn't terrible but is a long way from the 3.3% growth he says is necessary to keep the unemployment rate steady." If so, when are we going to wake up that foreign emerging markets are growing at 6% to 10%, and that, for our Oregon economy to grow, we need to export more. We need to shift our mindset and go after more than our share of those foreign markets.
(2) There is a link between real estate, immigration and our economy. A Wall Street Journal blog reports (here):
"Right now, there are about 2.5 million vacant homes in the country – 650,000 of them are for sale, 900,000 of them for rent and 950,000 of them being kept off the market. This so-called shadow inventory is being held by investors waiting for prices to appreciate, as well as bank-owned foreclosures that have not yet been listed for sale
"Excess supply started to climb dramatically in 2006, according to ING research, and the average increase in households in the U.S. is about 1.4 million per year. Mr. Brosen, using a fairly conservative projection of 500,000 for the number of housing starts in 2010 (the Commerce department says 549,000), predicts that new households can absorb 900,000 units of the “excess” supply in a year. By that calculation, it should take 2.5 years to clear excess supply and get back on track."
On the up side, if the US let more foreigners into the US, that excess of housing supply could clear more quickly. On the downside, if the US decides to send illegal immigrants home, that could greatly increase the excess housing supply and further prolong bad economic times.
4:25 p.m.
Aug 24, '10
It's all a question of which economists you listen to and what their motivations are.
For example, while the standard line re. the subprime crisis and crash of the economy is that "no one saw it coming," there most certainly were economists who did see it coming (for example, Dean Baker in identifying the housing bubble back in '04).
Similarly, Paul Krugman, among others, has been very much on target re. the inadequacy of the first stimulus bill (far too small) and the subsequent economic and political consequences.
1:16 a.m.
Aug 25, '10
"no one saw it coming"
The book "The Big Short" puts the lie to that claim. There were people who saw it coming -- and bet big on it.
They are all very wealthy now.
10:54 a.m.
Aug 25, '10
I agree - it's a fine read; and some of those who made it big should also be in jail for the scams they ran.
4:27 p.m.
Aug 24, '10
Actually I think this is a great post. Sometimes gloom and doom are reality and responsibility. I think the reason for a post like this on a progressive blog is to move the conversation in a direction of proscriptions and cures that will actually work.
Here's what I would like to see come of information like this on a blog like this: An alarmed progressive Oregon legislator going to the state economic team and asking "given the most conservative broadly accepted revenue outlook amongst you guys, what is the actual amount of tax increases that Oregon would need to implement in order to break even in the next bi-annum cycle, if spending per capita stayed constant at 2008 levels?"
We seem to be starving for big picture numbers that can define the realistic parameters we have to work within, and that is allowing the conversation to drift into all kinds of intellectual bramble.
Folks would kick and scream at hearing it, but after they calmed down we might actually be able start a real conversation about what powers we would be willing to give government to improve the situation on our behalf.
8:22 p.m.
Aug 25, '10
The state needs to get a handle on the revenue predictions, i agree. However, not for the purpose of foisting yet more taxes. Rather to begin a sane and logical discussion about where to begin the cuts.
What additional powers would I give state government to improve the situation? Easy; none.
11:38 a.m.
Aug 25, '10
A more interesting perspective is why Tom Potiowsky must use the Global Insight forecasts as the basis for the revenue forecasts.
Global Insight is the largest provider of forecasts and using these forecasts is stipulated by legislators or the executive branch in many states. Tom does a lot of things to that base, but because so many government units use the same forecasts all those forecast errors are correlated. Because all those forecast errors are correlated, all those actions are correlated. Those are a lot of correlated fiscal mistakes by a lot of states.
You should be talking to James Diffley over at Global Insight, not Tom, about how the reactions to his forecast errors are included in his forecasts.
As a side note, I was forced to use these forecasts in CA and OK and found them no better than a basic time-series model.