Are private forecasts useful?

Tyler Cowen thinks about the industry for forecasts. He makes me wonder how much private work he's done, as I think he seems to really miss the point of private economic modeling.

I must say--remember that a firm will often purchase a number of difference forecasts, which will disagree, as well as produce their own forecasts. Does one expect a firm to "believe" all of these forecasts? I don't think so. Would a firm cherry-pick one forecast that they choose to believe? Then, why purchase the others?

No, I think forecasts are more used to consider a range of possibilities. None is particularly more believable  necessarily, but having a variety of forecasts gives us a starting point in talking about what may happen in the future and assumptions we may consider using.

Particularly in the light of the recent recession, there is a lot of distrust in models anyways, even if they're considered necessary.

In that vein, Free Exchange tells me about a new NBER paper actually taking a stab at the financial aspect of macroeconomic modeling.

HFT, education, pedigree, and health care

An interview about high frequency trading. Recently, I've been more and more interested in similar topics.

Does education hurt your real income or help it? Data can be tricky.

Tyler Cowen thinks about pedigree bias in economics. Economics professors in top schools are very likely to have come from top schools themselves.

SCSU Scholars talks about innovation in health care. I've mentioned this before--technological advances in health care are unlike others. The equipment hasn't gotten smaller or cheaper. There seems to be different incentives at play than economists typically assume. More, given two procedures that give similar results, a doctor will often choose the more expensive procedure, since he can charge more for it. Consumers, meanwhile, don't know their options.

Obama, unemployment, financial modelling, and a book

The New Yorker highlights Obama's economic staff. Romer, Summers, Orszag, Geithner, and Bernstein.

Also from the New Yorker, John Cassidy talks about the unemployment numbers and what we might expect in the future.

Mike Rorty makes a version of an argument that I made before. I'm eager to see what interesting papers will come out, though.

I recommend you read John Quiggin's book snippets. They're good reads.

Say's Law, finance in macro, the elderly, and Pfizer.

Say's Law has gotten a lot of attention recently! Nick Rowe, Robert Waldmann, and David Beckworth. Poor Say, these guys are just piling on. It's not Say's fault he assumed a barter economy! DeLong even invokes Friedman.

Thoma points us to another person talking about the need to take into account financial factors in macroeconomic models. My first reaction is, "Duh," but why haven't I seen any serious attempts to do just that? I've talked about this before. Thoma also provides us with a growing list of people talking about the state of macro. Interesting stuff.

The elderly are the reason why we have a national debt, says Bruce Bartlett. That'll get some people angry. I don't think he's particularly young, either. I wonder if he's banking on the idea that most of the elderly won't be online.

Bad business articles annoy me. Pfizer pays $2.3 billion to settle a lawsuit, but that's less than three weeks of sales. It seems that the author doesn't realize that this is a lot of their sales. He may want to look into how many weeks of profit it'll be. Pfizer's first quarter profit this year was$3.7 billion. That's right, they paid out two months of profit. Ouch.

Budget gaps, bank regulations, confidence, and forecasts.

The city of Houston needs to make up a $25 million budget gap. There was a budget gap of $103 million, but about $50 million was previously set aside for this sort of situation, with about $28 million more already planned to help try to reach the rest of the gap. $25 million is a lot better than $103 million!

A good, though lengthy, article on bank regulation in the Harvard Magazine.

Consumer confidence seems set to go higher and business confidence is loads better. Seems like consumers are looking at the unemployment rate while businesses are looking at stocks. Go figure.

The OECD predicts growth (or lack thereof) for some countries. Pretty decent news for the US--less so for Canada.

Bailout money, underwear, and good news.

Banks are paying back bailout money, with interest. Sounds like it was a pretty good deal!

Another strange economic indicator: underwear. The worse times are (and, presumably, the less money you have), the more willing you are to wear tattered underclothing. Who's gonna see? Also, people attempt to cut their own hair (with hilarious results).

Some regions are seeing potential growth! Seems a little early to be sure, though. Building contracts are up in the Houston area.

There is now increased productivity. Not a surprise, really. When firms lay people off or slow hiring (as they have been doing), they presumably hold on to more productive people in order to achieve this very effect--higher productivity at proportionally lower costs. This goes hand-in-hand with higher profits, which leads to all sorts of benefits in the economy. Yet another sign that we're in recovery mode.

Good news on the recession, sugar, bubbles, and new homes.

A few pieces from Capital Gains and Games. Some thoughts on the unemployment numbers--getting worse slower isn't getting better. Still, I prefer getting worse slower. Still, the prospect that the unemployment rate won't hit 10% is great. The deficit would have been the same under Bush (or McCain) and is likely going to be less than originally forecast. So, it was largely unavoidable. Still, I hope that our money was put to good use.

A reduction in the supply of sugar is causing prices to increase. If there are profits to be made, then we'd expect other firms enter the market. Good sign for South American and African sugar farmers?

The Business Pundit speculates at the next possible bubble to burst. Gold seems a little far fetched to me, as I always thought of gold as a back-up place to store wealth, which means that it'd be more of an effect than a cause of speculation.

Felix Salmon reminds us that a home is not an investment as Krugman buys a new place. I've seen it argued that people thinking of homes as investments is a part of what caused the housing crisis.

Some news on the recession

Ritholtz on Feldstein's double-dip warning. Mark Perry has some good news. The Chicago Fed Index and the Confence Board's index are both up. Double dip or slow, long recovery? We have to wait and see. The way to see it, as long as housing continues to get better, and credit markets recover, I don't see how a double-dip is likely. Employment may double-dip, if they're decide that holding on to excess qualified workers will take too long to pay off.

Houston median home prices reach a record high.

Here's a look at the state-by-state change in per capita income. We're down, overall, but some states are doing okay!

Drea, at the Business Pundit, shows us five industries doing well during the recession.

Healthcare, financial crisis, stimulus, and jobs.

Instead of the UK and Canada, Jonathan Cohn compares our future healthcare system to France and the Netherlands--whose plans he says is actually more similar to our proposed plans. It's a worthwhile read, I think.

Justin Fox points to an investment banker who says that the fault of the financial crisis should fall onto the people who bought toxic assets, not the people who created them. They should never believe that you can make a return on a riskless security. I still think there were many people at fault--after all, the true risk was not properly assessed by ratings agencies.

The French think they've done fiscal stimulus better than the Americans. Could be. Certainly, our more "free" system carries with it more risk and uncertainty. It's harder to get effective government action done here.

Catherine Rampell at Economix points out that the problem with the job market is a hiring slowdown, not layoffs.

Bernanke, job growth, healthcare, and fairness

FreeExchange voices their support of Bernanke. I think there hasn't been enough air time given to exactly what he has done and how it has helped the economy in the past year. In a similar vein, the NY Fed has provided a timeline of the financial crisis.

Michael Mandel reports on job growth over the past ten years. The graphs certainly do highlight the stark picture. Outside of healthcare, education, and the government, no sector has grown. Wow.

Donald Marron says that health is an R&D problem. There are a variety of problems with the current system, and a variety of solutions, and we're not sure how effective each solution would be. Marron seems to think we should take baby steps, and evaluate the progress of solutions as we go. An economist who wants more data? Shocking.

Fairness in economics. National economic policy isn't based solely on economic principles, nor are traditional mathematic economic principles the only factors that affect the economy. How people feel about their individual situations also affects their economic behaviors, including how fair they feel they are being treated. In short, we should take some lessons from sociology and psychology. Of course, this harkens back to a famous Keynes quote:

"The study of economics does not seem to require any specialized gifts of an unusually high order. Is it not, intellectually regarded, a very easy subject compared with the higher branches of philosophy or pure science? An easy subject at which few excel! The paradox finds its explanation, perhaps, in that the master-economist must possess a rare combination of gifts. He must be mathematician, historian, statesman, philosopher—in some degree. He must understand symbols and speak in words. He must contemplate the particular in terms of the general and touch abstract and concrete in the same flight of thought. He must study the present in the light of the past for the purposes of the future. No part of man’s nature of his institutions must lie entirely outside his regard. He must be purposeful and disinterested in a simultaneous mood; as aloof and incorruptible as an artist, yet sometimes as near to earth as a politician."

Finance, Scrabble, and productivity

Free Exchange challenges a Dean Baker statement in which Baker essentially claims that the current economic situation is due more in part to the housing bubble rather than the financial sector. Free Exchange points out that the two are tied together. In that vein, Mark Thoma quotes Krugman as saying that we need to get rid of so-called shadow banking.

On a lighter note, Jeff Ely applies auctions to Scrabble with interesting results.

Robert Waldeman hypothesizes that, in the 90s and naughts, the productivity increases were due to downsizing. It's an interesting idea--and quite possibly some of the story--but I think that, at best, it works in tandem with the standard theory. Who ever said that there could only be one reason for productivity increases in the 90s?

Clintonomics, macroeconomics, market research, and my search engine

An interview with Bill Clinton was too long, so the section on the economy was cut. Economix has it. It's pretty interesting to see Clinton's take on the situation, and he addresses the different arguments pretty well. Many have remarked that not only is this an interesting read, but it's also strange to hear an ex-president critique himself.

Matthew Yglesias continues the discussion of what's wrong with macroeconomics, mentioning that model which don't contain micro foundations are not considered. The microeconomic foundations provide a lot of useful ways to think about macroeconomics, I think, such that it seems logical that there should be a strong relationship between the two.

Rosengren, the head of the FRB-Boston, is calling for more research in markets, and their relationships to the economy as a whole. He points out that regardless of predicting the crisis, once the crisis was upon us, many forecasters mispredicted the size and length of the recession. This recession was of a different nature of those in the past, and we need to understand it better.

Oh, and I put together a custom Google search of economics blogs, with a few foreign policy ones thrown in. Not only is it accessible at that link, but it's also on my sidebar here now. Enjoy!

Credit rating, soda tax, education, and political definitions

Free Exchange wonders what we should do about credit rating agencies. Should we have more competition to ensure better, more reliable ratings? Or, will that cause people to just shop around for ratings?

Tim Haab talks about a soda tax, and quizzes us on it. Personally, I wouldn't mind swallowing the three cents per twelve ounces (pardon the pun).

Newmark's Door points to a paper that emphasizes the importance of education in helping low-wage workers. Really, this surprises no one, but it should continue to get airtime as long as there aren't many educational options to low-wage workers.

William Easterly tries to apply more broad definitions of "liberal" and "conservative" to US politics--definitions which hold more internationally. Really, I think this isn't important. In the US, "liberal" and "conservative" are more titles than descriptive adjectives. Though it's good to be aware of what the terms actually mean, it's also good to be aware that the real definitions don't apply.

When Krugman makes me roll my eyes.

Krugman had a pretty grim outlook of the possibilities of the stress tests before, as I mentioned before, referring to an interview he had. Now he says that "everyone knew" that the banks would be all right. It seems to me that he makes a lot of leaps of logic.

Here's some other commentary on the stress tests.

Stress tests, immigration, trade balances, R&D

A basic explanation of the bank stress tests. Apparently, most of the banks are doing well.

Would legalizing immigrants improve the economy? I don't think this is a tough question for most economists, though they'd probably disagree on the degree to which it would help.

Some interest graphs on US trade. The trade balance is improving very quickly, helping the dollar, and lowering import prices. Menzie Chinn with a more advanced econometric analysis. I guess we'll see how this plays out in GDP forecasts.

On news of Obama announcing he wants to raise R&D spending, here's a graph showing R&D spending as a percentage of GDP, for the US and some other places. I'd be curious to see a longer term graph. It looks like the US spends very little on R&D, as a percentage of GDP, compared to other countries. I've seen research saying that government R&D isn't very effective, but if economic growth is tied to technological growth (which few economists diagree), then increasing R&D spending sounds like a good idea, in general.

Chile, debates, housing, oil and recessions, and cognitive skills

Rodrik talks about the Chilean Minister of Finance. He saved during the boom, although it was unpopular, and is now spending the massive savings. Why don't more countries do this?

Alex Tabarrok talks about the debates at Intelligence Squared. I like the concept of the website, though. Get experts to debate issues and provide podcasts. People vote on winners.

Jon Lansner talks about housing, via CR. Prices should bottom out late next year.

James Hamilton points out the connection between oil price spikes and recessions. That's really interesting research.

Some research shows that people with higher cognitive skills perform better economically. Moreover, to the extent that this is a genetic trait, evolution may play a factor in separating people with of cognitive skill levels.

Development, Obama's international policies, education, Microsoft, LPB, and the CBO.

Some research on the impact of the financial crisis on developing countries. Menzie Chinn breaks down the first chapter of a piece from the IMF.

Mankiw celebrates that Obama has improved his platform on international economic issues.

The US apparently spends the most money per grade point in education. Solutions? Why not figure out where the most bang-for-buck comes from, and restructure spending?

Some interesting numbers behind Microsoft. Could they be losing their massive market share? Maybe, but they'll still be a big player.

Kotlikoff and Leamer propose Limited Purpose Banking. Banks wouldn't hold assets, and would only borrow to fund mutual fund operations. What ever happened to depository institutions?

The CBO announces its panel of economic advisors.

Tea parties, retail sales, and more on the macro ranting.

Bruce Barlett, a former Regean official, points out some of the problems with the logic behind recent tea parties. I somehow think any such attempt to use logic will fall on deaf ears, but the tea parties seem rather silly to me. (part one)

Economix is still on the case of retail sales. We've seen a bigger decline than in the past. I'm going to predict that the trend line will stay below 100, as people try to save more, rely on credit less, and spend less. Dave Altig at the Atlanta Fed doesn't think there's anything so historically odd, though.

Menzie Chinn provides another excellent post, this time on the role of financial systems in macroeconomic models. Kling isn't convinced that macroeconomists have good models, and he's at least partially right, since all models require some degree of simplification. I think it's a field that will continue to get a lot of attention. In a not-totally-unrelated light, Dani Rodrik provides an interesting comment on the field of economics. Still on forecasting, Simon Johnsons provides his forecast of forecats. Nicholas Bloom at Stanford says that the response to the financial crisis was effective in avoiding a severe recession, and that growth will resume at the end of this year. I wonder how much of an effect the "response to the financial crisis" really had.

Macroeconomic questions

Tim Harford is yet another to consider the problems of macroeconomics. He says that the field hasn't answered or even asked the right questions. I wonder, what questions should be asked? Has anyone asked them? It seems like that's an important step to take. There should at least be a dialogue on the issue about it.

A lot of models look at output, or consumption, interest rates, or exchange rates... those seem to be the answers people want to know. When are we going to get out of this recession? What will the level of unemployment be a year from now? How much money will people lose? Those are questions that we can roughly provide models for, and questions people want answers to.

I think, other questions are much more detailed--and maybe would push the field toward finance. Note that we can try to answer these questions, but not rigorously. There's something to be said for a model, I think, in a world where people look to forecasters, and firms, industries, central bankers, and governments use models. People at least want to see numbers as rough estimates.

I find intro economics courses interesting, because there are a number of things taught that aren't ever covered again in higher-level courses. They seem much more basic. The three functions of money. The flow of money. We make lists and draw diagrams, but to what degree are these things deeply studied? As financial crisis turned into recession, these are issues that could be studied more. How is a crisis in the financial industry different from a crisis in the book industry? To what extent should we care? What models do we have to illustrate this? How often are the circular flows of the economy even discussed? The first cycle that comes to an economist's mind is probably the business cycle. Are we ignoring the money cycle? I learned a more complicated version than I see in Mankiw's book*.

We can use microeconomics to model firms, and even multiple firms, but without regard to a larger effect on the economy. We can model a generalized economy. There's an important disjoint there, particularly when a firm becomes "too big to fail." What happens when a single firm or industry gains price control over the economy? What happens when firms or industries affect each other? You can try to model firms and industries as small open economies or large open economies, but does that take you far enough? What are the effects when one of these diminishes in size by a significant amount? What are important differences between firms, industries, and economies, and how can this be modelled?

I think that rather than refine our current models, macroeconomists of the future will use a bunch of different models. There will be a number of models predicting different things (much like weather forecasting), and we'll report a range of possible outcomes with likelihoods--not unlikely today's forecasters, I suppose, but with more models. We won't have as much, "I use this model, not that model..."

*no offense to Mankiw, or an otherwise good textbook--this is purely a commentary on macroeconomics

Foreclosures, wallpaper, last month's news, and the OECD.

Wow. In some cases, banks are just walking away from foreclosures. The costs of dealing with foreclosed properties just isn't worth it.

I think this is pretty funny. Money as wallpaper in Zimbabwe.

Calculated Risk provides March economic news in 20 graphs. That's data released in March, which is February data.

Speaking of data, Menzie Chinn reports on OECD's forecasts for the next year or so.

The G-20 summit is going on, so people are anxiously waiting to see how it'll turn out.