11 Sep 2013

Which Economists Predicted the Sluggishness of the Economic Recovery?

Krugman 16 Comments

Earlier this week Paul Krugman was patting himself on the back for predicting years ago that the economy would not bounce back quickly from our slump. After quoting himself from 2008 talking about how this slump was different from the V-shaped ones of the past, Krugman (writing two days ago) says:

That’s from early 2008, before we had any idea just how bad it was going to be, but it was already obvious to me then that V-shaped recovery was not in the cards, precisely because prolonged jobless recoveries had already, pre-2008, become the new normal. I was still too optimistic about the length of the slump, but remember, this was seven months before Lehman fell.

So I didn’t mean to imply that 2008 was completely sui generis; on the contrary, it simply represented a stronger form of a pattern that was already apparent from 2001 and before that in 1990-91.

Why, then, did the White House predict V-shaped recovery? I don’t know. I will say, however, that a lot of business economists were still thinking that a deep recession means a fast recovery, essentially because they weren’t thinking about the changing nature of slumps. And maybe that view infiltrated Treasury, in particular.

Not bad, Dr. Krugman. I seem to recall another guy at the time who was skeptical of the White House’s view of the recovery from the slump. Here’s what he wrote in March 2009:

[W]hen I read the [Council of Economic Advisers'] CEA’s forecast analysis, this sentence jumped out at me:

“a key fact is that recessions are followed by rebounds. Indeed, if periods of lower-than-normal growth were not followed by periods of higher-than-normal growth, the unemployment rate would never return to normal.”

That is, according to the CEA, because we are now experiencing below-average growth, we should raise our growth forecast in the future to put the economy back on trend in the long run. In the language of time-series econometrics, the CEA is premising its forecast on the economy being trend stationary.

In the CEA document, Table 2 shows growth rates immediately after recessions end. It demonstrates that growth is higher than normal in most of the recoveries. Is this evidence against the hypothesis that Campbell and I advanced?

I don’t think so. The problem is that those numbers start at the end of the recessions, and we do not know when the recession will end. In other words, if God came down and told us the exact date the current recession was going to end, my forecast subsequent to that date would be for higher than normal growth. But absent that divine intervention, there is always some chance the recession will linger (remember the Great Depression), and an optimal forecast has to give some positive probability weight to that scenario as well. The forecast should be an unconditional expectation, not an expectation conditional on a particular end date for the recession.

Right now, we are facing a particularly high-variance economy. (Just look at the VIX index.) That means, under the conjecture I just described, that when recovery comes, it will probably be a robust one. But this logic is not necessarily a reason to raise the unconditional expectation of economic growth, because we don’t know when that recovery will begin.

That economist was Greg Mankiw. At the time, when he doubted the Administration’s forecast of a quick rebound from the slump, Krugman replied immediately:

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. How can you fail to acknowledge that there’s huge slack capacity in the economy right now? And yes, we can expect fast growth if and when that capacity comes back into use.

I quoted the whole thing because it is simply amazing. It is awful for two separate reasons:

(1) Mankiw wasn’t denying that “we can expect fast growth if and when that capacity comes back into use.” Mankiw was saying that he doubted the Administration’s forecast that capacity would come back into use within a few years.

(2) KRUGMAN HIMSELF in that timeframe was denying that “low GDP growth due to a severe recession” would lead to a sharp rebound; that’s why he’s now patting himself on the back, after all.

I am trying to come up with an analogy for what Krugman did here, but there’s too many levels. It is simply impressive, is all I’ll say.

16 Responses to “Which Economists Predicted the Sluggishness of the Economic Recovery?”

  1. Bharat says:

    Clearly, the empirical evidence is on Krugman and Mankiw’s side.

    • Major_Freedom says:

      I said that the economy would slump because of increased government intervention, not because of insufficient intervention, and guess what? I was right.

      This is not to say that my theory is therefore proven, just that Krugman can’t claim to be right about theory, because my mutually exclusive theory has been just as “empirically confirmed” as his.

      What makes my theory superior is its internal analytics. Krugman’s theory presupposes the notion that initiating violence against people helps them. I don’t think it takes many brain cells to know that’s a bunch of bologna.

      • Minor_Freedom says:

        Atta boy Major_Freedom.

  2. Innocent says:

    I voted for it before I voted against it?

    How is that for an analogy?

    Second did the economy not bounce back quickly from the slump because he saw that it was ‘different’ or could it be that the reason it did not bounce back from the slump be because of the choices used to ‘fix it’.

    Is not one just as valid as the other. I could argue that because the Federal Reserve and Congress has refused to allow the market to enter equilibrium that they have caused a sustained ‘soft landing’ in which people and institutions have attempted to ‘guess’ what would happen next rather than see clear indications of growth from the ‘market’. How is my scenario any worse off then saying, ‘If we had but DOUBLED or TRIPLED the stimulus all would be well.”

    Krugman simple cannot be wrong, and since he plays both sides he can always point to a place where he ‘knew it’ Back in 2001 I refused to purchase a home because the market rate of housing was rising too quickly to make sense in comparison to wages and land prices. My wife was furious with me. I THOUGHT the market would explode in 2005… I was wrong, I began to doubt myself, until in 2007 it blew up in a spectacular way that even I could not have seen. I then bought a house with the money I had been saving.

    So… Who was the better economist? I noticed a trendline that was out of place 7 years before it finally blew up ( though I thought it would be before then… Timing is the issue there. ) When was it Krugman noticed something might be out of place with housing?

    So was not Krugman wrong about the economy up until he realized there might be a problem? Should he not have been sounding the warning horn the entire time? “Housing CANNOT sustainably go up 10% per year forever!” Honestly… Now he ‘KNEW’ the economy would take a while to recover, while at the same time he claimed that what the administration did would lead to robust growth?

  3. Capt. J Parker says:

    Thanks for calling Krugman out on this. But Krugman doesn’t deserve any claim to being right about the probable slow speed of the recovery from the great recession where the CEA was wrong. In his 2008 blog that Krugman is now quoting, he predicted a “slow” recovery where our problems would be over in 2010. That would look pretty V shaped given how big the slump in GDP was. No one, Krugman included knew what we were in for in early 2008. But, in March 2009 when he and DeLong were sighing in exasperation at Mankiw’s now prophetic doubts, CEA was predicting a return to GDP trend in 2013. So, does that amount to a V recovery or a great moderation style slow recovery? Keynesian non-falsifiability strikes again.

    The other thing that’s so weird is Krugman was called out on this whole issue before.

    http://econjwatch.org/articles/paul-krugman-denies-having-concurred-with-an-administration-forecast-a-note

  4. Tel says:

    Remember how Krugman was always comparing Ireland and Iceland? Well in 2013 both of them faced slumping GDP of almost the same amount… go figure. Remember Krugman was getting all tough-guy over Estonia… well they also had slumping GDP in 2013 of not quite as much, but similar. Almost like it doesn’t matter if you are a Krugman darling or a Krugman bad guy.

    Did anyone predict all three would slump simultaneously?

    http://krugman.blogs.nytimes.com/2013/08/28/the-asian-crisis-versus-the-euro-crisis/

    Strange though, here is Krugman preaching that short term stress (via devaluation) would go Greece a lot of good. Gotta be cruel to be kind huh Kruggers? Needless to say, if people are suffering hardship because of “austerity” (where this word has been given a newspeak meaning such that it only applies to government spending for some reason) then that’s terrible… but if people are suffering hardship due to devaluation (meaning that the government has taken their money) that’s the path to recovery.

    Every day another excuse for government power.

  5. Martin says:

    Link from Mankiw: http://gregmankiw.blogspot.nl/2013/09/who-predicted-sluggish-economy.html. Wonder when Krugman will reply.

  6. JD Foster says:

    In quantum mechanics, until it is observed a particle can be in two states at once. I believe it’s called quantum superposition. Krugman takes this one step better in that once he is observed (via his own words) he can then return to being in either state until observed again.

    This also leads to something called entanglement whereby a pair of photons can be emitted in opposite directions with indeterminate spins and then sometime later when the spin is actually observed to be a right spin, for example, it forces the particle going in the opposite direction to take on a left spin. This is, of course, bizarre, which no physicist would dispute. I suspect the explanation for Krugman’s inconsistencies can only be found within such impressively bizarre realms as quantum mechanics.

  7. Hunter Pritchett says:

    Yeah but that wasn’t the part that DeLong and Krugman were upset about. They were upset about the part wear he says “The data suggest that an unexpected change in real GNP of 1 percent should change one’s forecast by over 1 percent over a long horizon.” They didn’t say anything bad about his argument that a recovery may not come soon, but rather another suggestion he made, that rescessions should change LONG-TERM growth projections. I don’t really see 5 years as long term, so I don’t think Mankiw has necessarily been proven wrong.

  8. Gregory Pakela says:

    Professor Krugman is constantly substituting ad hominem attack for sound reasoning. On the basis of casual observation he concludes that the V-shaped recovery was not in the cards because the previous two recessions featured jobless recoveries, even though both recessions were comparatively shallow. So he offers no theory as to why this recession would be similar. Then, as you point out, he contradicts himself in defending the administration’s forecast because deep recessions can be expected to produce rapid growth as capacity comes back into use.

    Instead of contemplating your models, think of why this recession and recovery is different than each of the past three recessions – for thirty years consumers have increased their use of credit to the point where they have saturated their ability to take on yet more debt. First it was credit cards, then home equity loans and the “wealth effect.” So, unlike the past, the consumer is not there to bail the economy out. Moreover, the demographics are different. Baby boomers were coming of age and spending money on household formation and for their general amusement. Now they are in the process of retiring, trying to make up for their lack of savings or the hit that they’ve taken in the stock market over the past decade.

    Now it may have been the case that the Keynesian explosion of spending and debt, along with the most aggressive monetary accomodation in our recent history would have created a V-shaped recovery. But it didn’t.

  9. ryan Kane says:

    I am just a regular person in society who works, consumes, utilizes, and teaches the Principles classes. And I knew when this recession first started that it was different and that we were not going to recover for a very long time. And when we do, our economy will not look the same.

  10. the economy guru says:

    CLEARLY YOU PEOPLE DON’T KNOW THE FIRST THING ABOUT ECONOMICS. SUPPLY AND DEMAND!!!! CALCULUS AND GEOMETRY. know what im saying?

    • the (real) economy guru says:

      AT THE SAME TIME YOU PEOPLE ALSO DON’T KNOW THE SECOND THING ABOUT ECONOMICS. OPPORTUNITY COST!!!! FRENCH AND SPANISH. can you dig it?

      • the economy guru says:

        It is quite evident that you are nothing more than an ignorant prick. FACE!

    • guest says:

      “Yes, I believe I know what you are saying.” – Butters, from South Park

  11. Dan H. says:

    Paul Krugman was being totally consistent. See, the prediction of a V-shaped recovery in early 2008 had to be wrong, because it was made by a Republican administration. The prediction of a V-shaped recovery in 2009 had to be right, because it suited the policy plans of a Democratic administration.

    And the best part is that by arguing both sides at different times, Krugman can always claim he was correct. Win-win-win from his perpective.

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