Greg Mankiw Rises to the Challenge
This is great… I’ve always thought Greg Mankiw’s blog was pretty useless, since he basically links to other things with one-liners. But lately he’s come out of his shell to foil the dark forces of the Obama economic team.
In this post I want to clarify exactly what Mankiw is saying regarding recessions and future economic growth. Predictably, Mankiw’s criticism of Team Obama’s economic forecast led Paul Krugman to use the term “evil” (though in fairness Krugman was trying to come up with a clever title) and, yet again, Brad DeLong is getting weary dealing with all these ignoramuses. (Also be sure to check out the comments at DeLong’s post; a good illustration of the tolerant liberals and their love of intellectual inquiry.)
Anyway, Mankiw’s original post was literally the coolest one I have ever read at his site. It is great stuff; I love it when a thinker does something like this. “Ah, you notice this correlation and think it supports your theory, but what I’m saying is blah blah blah, and notice that it too fits the data. So your smug confidence is a bit misplaced, old chum.” (Note that I am heavily paraphrasing, and for some reason I ended up talking like Adam West’s Batman.)
OK so let me first explain the original Team Obama claim and Mankiw’s nuanced critique…
The Claim From Team Obama (and Supported By Krugman and DeLong)
Right now we are in a recession; growth has been below average. This in large part is driven by higher than average unemployment. Hence, we can expect higher than average growth rates in GDP in a few years, and that’s why the forecasts of future deficits are so rosy.
Mankiw’s Literal Response:
In the [Council of Economic Advisors] 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.
Mankiw’s Response Translated By Bob Murphy
Mankiw is agreeing that if the current recession ends in late 2009 or 2010, then there will be higher than average GDP growth in 2011 and 2012. But what if the recession lingers on?! After all, aren’t Krugman & Friends telling us everyday that we are going to repeat the Japanese Lost Decade because we are foolishly ignoring his brilliant recommendations?
Incidentally, I am not necessarily endorsing Mankiw’s formal argument in the paper he co-authored with Campbell. What I am saying, though, is that Krugman and DeLong aren’t even addressing what Mankiw is saying (verbally) in his blog post. Perhaps that’s Mankiw’s fault for bringing up the obscure “unit root versus trend stationary” econometric dispute.
Let me clarify that last point a bit: I believe the academic dispute is like this: What is your forecast for actual GDP (not GDP growth, mind you, but the actual nominal dollar amount of GDP) in, say, the year 2020? OK great. Now we’re chugging along, and we hit a recession in the year 2013. What does that event do to your forecast? I believe the trend stationary people say it shouldn’t matter, whereas the unit root people say the loss in output during the recession years is gone forever.
So against that, Krugman and DeLong are miffed (and perhaps rightly so). They want to say that the level of GDP eventually catches back up to its long-run expected level by higher than average growth after the recession in 2013.
However–and this is Mankiw’s blogging point–if we hit a recession in 2013, and then you ask me for my GDP forecast for 2015 (not 2020), then it’s not nearly as obvious that this value will be unaffected.
