30 Jan 2009

Casey Mulligan: "Wow, I Was Only Wrong By 72 to 575%"

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UPDATE below

Folks, I understand that I am highly critical of other economists, and I probably need to work on that. But I am sorry, Casey Mulligan’s handling of today’s GDP numbers (for 4Q 2008) just sent me over the edge. Let me be clear, I think Mulligan is a really good economist; earlier I trumpeted his awesome arguments against mortgage writedowns being tied to income. But I cannot remain silent in the face of today’s events.

Let’s set the context: Mulligan has been a maverick on many issues lately, saying that the credit crunch is bogus (having an entire “WMD week” to show that Paulson’s warnings were baseless), that the talk about helping homeowners is completely messed up, etc. But another of his “these guys are so stupid” theme was that everybody was freaking out about a depression, when per capita GDP was going to set records and such. Let me quote his post from January 19, entitled “My Q4 GDP Forecast Details”:

The pundits (eg., Goldman Sachs or the White House) say that real GDP will fall about 5 percent (seasonally adjusted at annual rates) Q3-Q4.

I have used three different methods to make my own forecast, and each of them says that the pundits are wrong. Here is what I find for seasonally adjusted real GDP growth Q3-Q4 at annual percentage rates (and thus in the same units as the -5 cited above):

* Productivity based: -2.2%
* Income based: +0.4%
* Spending based: +0.8%

Everybody got that? Mulligan’s big thing was that yes, nominal GDP was going to drop, but price deflation was going to mitigate or even completely offset it (yielding positive growth).

Well, here is how CNBC described the numbers that came out today:

The economy shrank at a 3.8 percent pace at the end of 2008, the worst showing in a quarter-century, as the deepening recession forced consumers and businesses to throttle back spending.

Although the initial result was better than economists expected, the figure is likely to be revised even lower in the months ahead and some believe the economy is contracting in the current quarter at a pace of around 5 percent.

Now, Mulligan does not need to concede defeat here; I would have been perfectly happy if he posted on this release and said, “Well, it doesn’t look good for me at the moment, but let’s all realize that we don’t have new information here. I always conceded that nominal GDP was going to drop, and I just thought deflation would be a lot more than the BEA is admitting. But unless they bring that number down in future revisions, I was wrong.”

Nah, Mulligan didn’t say that, or at least, you would have to really comb through his (many) posts on the new release to realize that is what happened. In fact, the casual reader might be led to think that Mulligan’s predictions had been vindicated. After all, Mulligan has a post today titled, “Wow I was close on nominal GDP,” which opens with:

Wow, in dollar terms, I was close on each of the spending categories (see below)!

I expected the GDP deflator to fall a lot more, and the experts thought it would rise. I wonder how much GDP deflator revision is possible.

Does everyone see what he did there? He’s making it sound as if he was basically right–certainly better than those ignorant “experts” popping off dire -5 percent contraction estimates–when Mulligan was totally wrong, at least regarding the numbers the BEA just put out. Two of his estimates actually had positive growth, when we just got the worst contraction in 25 years.

Hey, that last phrase reminded me of something. Wow I’m good.

UPDATE: I just now saw that Mulligan in this post tries to defuse wise guys like me (I think he wrote this before my post, and I just didn’t catch it):

I had previously predicted that real GDP “might” go up, although I still said that slightly down was the more likely. I was very precise about that: I said that it was 1/3 likely to go up and 2/3 likely to go down.

There are no rules in the blogosphere, but it is factually incorrect to quote me as predicting that real GDP WILL go up. “WILL” and “MIGHT” are different in plain English (not to mention that I also put it terms of probabilities).

Let me be clear: As I continue to read Mulligan talk about his GDP predictions, my opinion of his handling of this MIGHT go up…

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