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Monday, July 30, 2012

Dr. Doom Roubini on the Future For the U.S. Economy

      Nouriel Roubini-aka Dr. Doom-earns his keep again. No one can accuse him of lack of truth in advertising based on his latest prognostications.

     However, Jonathon Portes doesn't get Dr. Doom. First Portes explains who we-layman, commentators, policymakers-should listen to for maroeconomic analysis.

     "This question was prompted by a recent exchange I had with Ed Vaizey and Simon Hughes on the BBC's Daily Politics: I pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite".

     "This is a fair question. My answer to it is that policymakers and the public should listen to economists who fulfill two critera: first, they have made empirically testable predictions (conditional or unconditional - see Krugman here) that have proved, by and large, to be broadly consistent with the data; and second, they base those predictions on an analytic framework (not necessarily a formal model) that is persuasive. In other words, getting it right alone is not enough; it should be possible to show your workings - to explain why you got it right. Otherwise, your predictions may be interesting, but they tell you little about how to formulate policy."

     http://notthetreasuryview.blogspot.co.uk/2012/07/which-macro-economists-are-worth.html

     Evidently, Portes places Roubini in this category of  'interesting but with little clue of how to formulate policy.' It has been questioned how much predictive success is worth in Macro analysis. Of course, those who believe in efficient markets completely dismiss accurate predictions as little more than luck or a fluke. They presume that no one can beat the market in the long run.

     "It is worth mentioning two economists who I respect, admire and find interesting but do not in my view qualify for inclusion on my shortlist. They are Nouriel Roubini and Ken Rogoff. In both cases, I - and maybe this is partly my fault - don't understand what, if any, analytic framework they are using, so I find it difficult to impossible to evaluate their advice. Nouriel's predictions, while often accurate, seem to be based largely on instinct and a sense of which data matters and which doesn't. That's fine - and having an instinct for the data is invaluable - but I just don't know how to evaluate the plausibility of articles like this."

    Well let's take a look at "this." Here's Roubini's analysis for the U.S. economy:

     "Even this year, the consensus got it wrong, expecting a recovery to above-trend annual GDP growth – faster than 3%. But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013."

      http://www.economonitor.com/nouriel/2012/07/20/american-pie-in-the-sky/

      Again, we can debate the importance, or lack thereof, of predictive success. However, it is impressive how on target Roubini so often is.

      "Even this year, the consensus got it wrong, expecting a recovery to above-trend annual GDP growth – faster than 3%. But the first-half growth rate looks set to come in closer to 1.5% at best, even below 2011’s dismal 1.7%. And now, after getting the first half of 2012 wrong, many are repeating the fairy tale that a combination of lower oil prices, rising auto sales, recovering house prices, and a resurgence of US manufacturing will boost growth in the second half of the year and fuel above-potential growth by 2013."

      "The reality is the opposite: for several reasons, growth will slow further in the second half of 2012 and be even lower in 2013 – close to stall speed. First, growth in the second quarter has decelerated from a mediocre 1.8% in January-March, as job creation – averaging 70,000 a month – fell sharply."

       He also thinks we will lose something from the "fiscal cliff" though not the full 4.5% of GDP we supposedly will if none of the tax cuts are extended and all the spending cuts go into effect.

       "Third, the fiscal cliff would amount to a 4.5%-of-GDP drag on growth in 2013 if all tax cuts and transfer payments were allowed to expire and draconian spending cuts were triggered. Of course, the drag will be much smaller, as tax increases and spending cuts will be much milder. But, even if the fiscal cliff turns out to be a mild growth bump – a mere 0.5% of GDP – and annual growth at the end of the year is just 1.5%, as seems likely, the fiscal drag will suffice to slow the economy to stall speed: a growth rate of barely 1%."

       He also points out the drop in consumption patterns:

       "Fourth, private consumption growth in the last few quarters does not reflect growth in real wages (which are actually falling). Rather, growth in disposable income (and thus in consumption) has been sustained since last year by another $1.4 trillion in tax cuts and extended transfer payments, implying another $1.4 trillion of public debt. Unlike the eurozone and the United Kingdom, where a double-dip recession is already under way, owing to front-loaded fiscal austerity, the US has prevented some household deleveraging through even more public-sector releveraging – that is, by stealing some growth from the future."

       "Fifth, four external forces will further impede US growth: a worsening eurozone crisis; an increasingly hard landing for China; a generalized slowdown of emerging-market economies, owing to cyclical factors (weak advanced-country growth) and structural causes (a state-capitalist model that reduces potential growth); and the risk of higher oil prices in 2013 as negotiations and sanctions fail to convince Iran to abandon its nuclear program."

       I'm never sure about the whole fiscal cliff thing, if this hasn't been overdone. He seems to think that while the full cliff fall won't happen that it will be enough to shave off some. He's certainly right about the external forces being a threat. The big worry is that Europe takes us with them:

       "Similarly, the gravity of weaker growth will most likely overcome the levitational effect on equity prices from more quantitative easing, particularly given that equity valuations today are not as depressed as they were in 2009 or 2010. Indeed, growth in earnings and profits is now running out of steam, as the effect of weak demand on top-line revenues takes a toll on bottom-line margins and profitability."


       "A significant equity-price correction could, in fact, be the force that in 2013 tips the US economy into outright contraction. And if the US (still the world’s largest economy) starts to sneeze again, the rest of the world – its immunity already weakened by Europe’s malaise and emerging countries’ slowdown – will catch pneumonia."

       Much as I want to believe the "fariy tale" it's hard to argue with his record.

4 comments:

  1. The trouble with Portes' criteria is that he presumes determining which analytic framework is more persuasive. Steve Keen's record in forecasting has been better than Krugman, but similar at times, yet they use very different frameworks. Economists can't collectively determine which is a better model, so how can we expect politicians to reach an accurate conclusion (if one even exists)?

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  2. Yes Woj. Look I'm just an intetrested layman. So I don't know which is the best model purely on it's own terms.

    You do have to be impressed with Roubini's results, however he derives them.

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    1. Mike,
      Sorry if that comment came off wrong...wasn't trying to imply you should know or shouldn't have commented on Portes' view. My intention was merely to point out that the criteria still relied heavily on subjective views. I completely agree with you that Roubini's results are impressive and he remains on my list of economists' whose forecasts I take into consideration.

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  3. No Woj, your comment was fine. Maybe my answer seemed like I was bent out of shape when I said "look, I'm must an interested layman..."

    But I wasn't talking you there-it wasn't you needs to "look." I agree with your point about the subjective criteria for models.

    The "look" was more rhetorically directed at those Macro guys who hide behind credentialsim-a point that Krugman himself criticized yesterday. So we're in agreement on this.

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