Paul Krugman suggests that my skepticism about the administration’s growth forecast over the next few years is somehow “evil.” Well, Paul, if you are so confident in this forecast, would you like to place a wager on it and take advantage of my wickedness?
Team Obama says that real GDP in 2013 will be 15.6 percent above real GDP in 2008. (That number comes from compounding their predicted growth rates for these five years.) So, Paul, are you willing to wager that the economy will meet or exceed this benchmark? I am not much of a gambler, but that is a bet I would be happy to take the other side of (even as I hope to lose, for the sake of the economy).
Krugman wisely decided to avoid this bet, which suggests he’s smarter than he appears when he is at his most political. In any case, the actual 5 year RGDP growth just came in at slightly under 6.3%. That’s not even close. Mankiw won by a landslide.
A few quick observations. This data point does nothing to support the market monetarist model. Indeed some would argue that it contradicts any demand-side models. Ed Prescott might consider it a “proven scientific fact” that refutes all demand-side nonsense. Of course Mankiw shares our belief that demand shocks matter, and I’m convinced by Bennett McCallum’s argument that the unit root problem mostly reflects the fact that GDP is hit by both supply and demand shocks, and that supply (or productivity) shocks tend to be very persistent. The fall in the unemployment rate during a period of slow growth has helped to convince me that there’s something to Tyler Cowen’s Great Stagnation argument.
FWIW, I have argued that Keynesians underrate the importance of supply-side problems such as European-style labor market distortions. I’ve argued that the British “output gap” is actually about 3/4th supply side. So while I would have preferred a faster recovery from what I view as a strong demand shock, it’s at least a bit less embarrassing for us conservative demand-siders than for the Keynesians who focus obsessively on demand shocks. I can’t speak for Greg Mankiw, but I wouldn’t be surprised if he had similar views.
For a guy who is right about everything Krugman sure seems to have been wrong about an awful lot of recent events. Over at Econlog I’m about to do an important post documenting Krugman’s consistent attempts to shift position in order to avoid seeming to have been wrong about fiscal stimulus. Of course on monetary policy nothing can prove him wrong. If it works, great, he’s a fan. If not, well he was skeptical all along.
[Here’s the Econlog post.]
BTW, Mankiw was replying to this Krugman post.
As Brad DeLong says, sigh. Greg Mankiw challenges the administration’s prediction of relatively fast growth a few years from now on the basis that real GDP may have a unit root — that is, there’s no tendency for bad years to be offset by good years later.
I always thought the unit root thing involved a bit of deliberate obtuseness — it involved pretending that you didn’t know the difference between, say, low GDP growth due to a productivity slowdown like the one that happened from 1973 to 1995, on one side, and low GDP growth due to a severe recession. For one thing is very clear: variables that measure the use of resources, like unemployment or capacity utilization, do NOT have unit roots: when unemployment is high, it tends to fall. And together with Okun’s law, this says that yes, it is right to expect high growth in future if the economy is depressed now.
But to invoke the unit root thing to disparage growth forecasts now involves more than a bit of deliberate obtuseness.
One point where I do agree with Krugman is the labor market, which does show clear trend reversion. That’s one reason I remain a demand-sider despite the unit root problem. Unemployment doesn’t rise and then stick, as in many European countries. For those who don’t know, a unit root in a time series like RGDP implies that even after a change in RGDP, the optimal forecast of future RGDP is roughly the trend rate of growth. No “bounceback” can be expected. Mankiw was pointing out that since RGDP fell sharply in 2009, if the optimal forecast of future growth after 2009 was near trend then the optimal forecast of future growth after 2008 was well below trend.
PS. If Krugman regards Mankiw as evil, what possible adjective could he use to describe Ed Prescott?
PPS. My comment about Krugman avoiding the bet was a joke. I actually don’t think academics are required to bet their beliefs. Public humiliation is more effective in any case.
Update. I forget to mention that Krugman is covered either way. If the economy bounces back it proves it’s a demand problem. If not, well didn’t Keynes mention secular stagnation?