While often on Mondays at the Washington Post, Robert J. Samuelson is spouting VSP lines about how we must be responsible and cut Social Security benefits. However, today he has written on “What economists don’t know,” which comes across as a pretty big spanking for economists, among whom he does not make much differentiation. We are all pretty much as ignorant as each other and just plain not willing to admit it, given that we are also all (actually here he admits not all) trying to “gain and retain political relevance and power.” Shame on us! (or at least some of us)
OK OK, before digging into his more specific complaints, of course I and others here at Econospeak agree that there is a lot that economists do not know, pretty much all of us, and there is also an Establishment that poses as knowing much more than it does that has fallen on its face on quite a few occasions, but nevertheless just keeps putting itself forward as knowing more than others, in many cases indeed apparently out of a pursuit for “political relevance and power.” Indeed, we like to think that we have exposed this Establishment for its high crimes and misdemeanors, at least on a few occasions, even if we ourselves sometimes make erroneous remarks as well on various matters (and, of course, we get visited by good old Egmont from time to time, whose denunciations of all economists except for himself and maybe one or two others makes Samuelson’s complaints look like high praise).
Also, it must be admitted that RJS does say complimentary things about most economists he deals with as being “extremely smart” and “public spirited” and “generous with their time,” albeit “with a few exceptions.” But then there is the bottom line that “many economists (and this applies across the political spectrum) often don’t know what they are talking about.” Ouch.
Which brings us to his specific complaints, with some of them valid and some of them not so much. It is curious that what he starts out with, taking up the first two paragraphs of the column, is just plain silly, not a worthy complaint at all, quite silly actually. He lambastes us for job growth in the last month in the US being 40 percent higher at 263,000 rather than a reported consensus forecast by economists of 190,000. He goes on to say that in general economists have been doing a terrible job of explaining job growth and why and how it has gone on for so long and more. I am sorry, but this is a joke.
To the extent economists messed up on forecasting what happened economically this past month, it was on the larger matter of GDP growth, with most forecasting a rate in the 2-2.5 percent range, which if if that had come to pass in the middle of that, would be consistent with the forecasted job growth. Instead we had a growth rate of 3.2 percent, which was consistent with the actual job growh. So the problem was the with the GDP forecast, with the basic model of relations between GDP growth and job growth holding up reasonably well. As it is, while one does not hear about this from some sources, the main sources for the unforecasted higher growth are events likely to be temporary and disappearing in the next month, most notably a 0.7 percent increase in inventories, with another 0.2 o 0.3 percent of similar one-shot items. Unsurprisingly these brought the unforecasted extra job growth, although somehow RJS misses that.
As for explaining the long run of job growth, well, it is the same matter. GDP has been steadily growing for nearly a decade now since the Great Recession bottomed out. The job growth that has gone along with that GDP growth has been about what was expected. Again, if there is a mystery, it is why the economy has continued to grow, but despite some ruffles and bangs, nothing has hit it hard enough to knock it off its momentum. Indeed, while the unemployment rate has reached a half century low, the employment rate still remains below previous highs as labor force participation has not recovered from its declines in the Great Recession. And the real mystery, unmentioned by RJS at all, is why real wages have been so slow to increase, although they have begun to pick up somewhat more recently, at least nominal ones.
In short, Samuelson’s big charge out the door pretty much falls flat in a pile of nonsense. Really not much to see here in terms of bad economic forecasting.
The next variable he gets worked up about is interest rates, declaring that they have “plunged to historically low levels,” with, of course, economists failing to explain this. As it is, if one looks at real interest rates this is just plain wrong. Real interest rates in the US have bounced around quite a bit over time, even going into negative territory during several periods of time in the past. However, since 2015 real interest rates in the US have been nearly steady at about 2 percent, about the longer run average. Not much to see on this.
Of course, nominal rates are lower than we have seen for a long time, but again RJS has missed the boat. The mystery is low inflation, although he does get to this, except not so much to wonder about low inflation now, but instead to claim economists failed to forecast the high inflation of the 1970s. He may be right about this in general, although I know that I personally back in 1973 when the first oil price shock hit forecast very publicly that this would lead to higher inflation, which indeed did arrive. But then, I was just a grad student then, not someone whispering in RJS’s ear.
Samuelson then moves on more into territory where he has more grounds for complaining, forecasting and explaining productivity trends. I shall grant him on this one. I have never made any effort to forecast that one, and I think few economists try too hard, although many of us have made efforts to explain such changes ex post, more or less successfully. Yes, this is important, but this is an area where I do not think lots of economists are strutting about too pompously claiming they are really good at this, although I know some do.
He finally gets to the Big One, the one that had Queen Elizabeth upset: the crash and Great Recession. Yes, most economists did indeed fall on their faces forecasting that, with the explanations also taking a long time getting made in reasonable ways. Yep, he has grounds on this one.
Of course this is now an area where I and some others here will puff up and say, ah ha! there were some who saw it coming and tried to get attention to it, only to be ignored by The Establishment as well as pompous economic journalists like Robert J. Samuelson. But most of these were heterodox, often Post Keynesian, characters like Dean Baker and Steve Keen and Robert Shiller and, well, me, along with quite few others as well. On this one, Samuelson should look at himself as a partly guilty party. He may be a victim of listening to these erroneous Establishment VSPs that he regularly listens to, but maybe he could have paid a bit more attention to the other voices? I mean, once the housing bubble peaked it became increasingly obvious that there was trouble in River City, and more attention should have been paid attention to it, especially by Robert J. Samuelson himself.
If he were serious, he would be examining the economists who predicted correctly. Instead, he is pretending that they didn’t exist.
Where do you get the real rate of 2% ? The highest I see is the 30 year TIPS rate of 0.94 now and never over 1.4 % since June 2014. I also note TIPS have higher expected returns compared to nominal treasuries, because they are less liquid.
I’d say continued wage stagnation is a real puzzle (might it have something to do with the decline of unions maybe ?). Wage growth is slowly moving up. I think the short run expectations augmented Phillips curve has always had a surprisingly low slope (and surveys say expectations are currently anchored).
Shiller is hardly a fringe figure. I mean he did get a Sveriges Riksbank prize after all. I’d also give Krugman half credit on the housing bubble.
The thing which I find really alarming is that standard macro models still have no housing sector. It was decided to work on interesting problems related to financial frictions and to continue to lump together residential and business investment (as well as fixed and inventory investment).
There is still a huge gap between talking about reality macro and academic macro. Really very disappointing even after all these decades of sterility of academic macro.