Until University of Oregon economist Mark Thoma is sure that the economy is on firmer footing, and that employment prospects have improved substantially, he says he will continue to push back against the optimistic economic forecasts that are all the rage these days.
By Mark Thoma
I don’t like to make economic forecasts. Though I do it on occasion, I generally leave that to Tim Duy — he’s much more of a data grubber than I am so he’s better at it anyway. I do try to comment on what data says when it’s released, mostly at MoneyWatch, but I don’t generally consider those to be formal forecasts of where the economy is headed.
There’s a good reason why I try to avoid forecasts. In the past, whenever I’ve tried to predict the path the economy would take, I’ve found myself reading subsequent data releases in a way that supports the forecast. I think that once you make a forecast, it affects your objectivity, and I think that applies generally, not just to me.
Perhaps that’s why I’m feeling more and more alone in talking about the current state of the economy. Though the worries began long before this, in June of 2008 I did a MarketPlace segment where I predicted that the recovery of unemployment would lag output, and I said that policy should begin addressing the problem immediately due to the long lags between the time when policy begins is first considered and the time it actually has an impact on the economy. Ever since, I’ve found myself watching to see if that forecast was correct (which is another reason why I don’t like to make forecasts — you hope you are correct, but being correct in this case means people will struggle to find jobs, so it brings on an internal contradiction — how can you hope people will struggle?).
As I said above, I don’t think I’m alone in reading data in a way that supports previous forecasts, and others are much more bullish about the latest data releases than I have been. Part of my point has been that the data can be read another way. When people say, for example, that there’s nothing in the latest employment report to change the relatively optimistic forecasts they’ve made recently, I try to say that there’s nothing in the data to reject the alternative forecast either, i.e. that we are still headed for a very slow recovery of employment. Whatever your null hypothesis or prior beliefs were, the latest data did little to change that outlook.
My reason for noting that the data can be read another way goes beyond trying to show that I was right and others were wrong about how long it would take for employment to recover. I am very worried that we are, for all intents and purposes, about to abandon the millions who are still unemployed. Once we conclude that a robust recovery is underway, we will turn our attention to other things. All of the social services that we need to provide for the unemployed, simple and important things like making it possible for their kids to get dental care to name just one example, will be ignored. We devote little if any effort to job creation. We will simply turn our backs and move on.
I fully understand the desire to have a perfect landing, to get policy just right. But just right when the costs of unemployment are so much higher than the costs of inflation means that we should bias policy toward the unemployment problem. If we are going to make a mistake, it should be too much employment, and the inflation that comes with it, rather than too little. However, with the inflation hawks writing almost daily in the WSJ and elsewhere that we need to raise interest rates immediately to avoid inflation, and with all of the pressure to address the budget deficit, if anything the bias in policy seems to be in the other direction. Thus, while I acknowledge the fact that I am probably reading the data in a way that is favorable to previous statements, there was a good reason to worry back in 2008 that this would be a problem, and I believe there’s still good reason for worrying about it today. If I have read the data more pessimistically than others, the reason for it is simple — to push against the chance that we will forget about all the households that continue to struggle. If Ben Bernanke’s right, even with current policy we are looking at years until employment gets back to normal and we must do all that we can to help people find jobs or, failing that, provide the social services they need to get by until the employment picture improves.
Until I am sure that the economy is on firmer footing than it’s on now, and that employment prospects have improved substantially, I will continue to be the one who pushes back against optimistic reading of the data. And I will make no apologies for it beyond what I’ve said here.