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

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…

Martin Feldstein Opposes This Stimulus

This article by Feldstein–who calls himself a conservative economist–is breathtaking. I am not kidding, I don’t see how someone could have written an op ed opposing the current stimulus bill, that would have annoyed me more. I truly think by the end of it, my jaw had dropped. (HT2MR) Here’s the part where he shows we’re all Keynesians now; but you must read the whole thing to see just how awful it is. (“Awful” if you aren’t a fan of the government, I should clarify.)

Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.
…
Instead, the tax changes should focus on providing incentives to households and businesses to increase current spending. Why not a temporary refundable tax credit to households that purchase cars or other major consumer durables, analogous to the investment tax credit for businesses? Or a temporary tax credit for home improvements? In that way, the same total tax reduction could produce much more spending and employment.

"Pattern Is Playing Out Again"

So argue fellow PRI author Jason Clemens and I. (Incidentally, he was just the president-elect when we wrote the piece. I understand that he has been sworn in.)

UPDATE: Hey kids, can you spot the mistake in the article? (And no, I don’t mean a mistake in our analysis.)

"A Night of Clarity"

I apologize for not giving more notice, but if any of you are within driving distance–please don’t charter a jet in this economic downturn–of Nashville, you might consider checking out the event described below. I will be selling autographed copies of the Best Economics Book Ever, though I have a cold so I can’t kiss babies.

Krugman Expands the Ranks of the Cultish

A typical objection to Austrian economics is that it is a cult. We worship Mises, we excommunicate heretics, etc. (The second point is true but c’mon, just look at this stuff.)

Anyway, I’m glad to note that Paul Krugman has now expanded the ranks to anyone who is a non-New Keynesian:

What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.

This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.

It’s a sad story.

Incidentally, if some of you regulars can help me remember, I want to come back to this Ricardian equivalence stuff. Krugman links to this post which allegedly proves that Wikipedia is wrong to assert that Ricardian equivalence implies that deficit spending can’t boost aggregate demand. (In other words, Krugman and Econospeak say that even with Ricardian equivalence, the government can boost aggregate demand.) Econospeak thinks his numerical demonstration is a counterexample, but it’s not; it just begs the question. Here’s what he says:

Suppose we decide to have an additional $100 billion in public investment in 2009. In Ricardo’s example, permanent taxes will increase by $5 billion per year which would have a very modest offsetting reduction in consumption. So if government purchases rise by $100 billion and consumption falls by $5 billion, then isn’t the direct impact on aggregate demand closer to $95 billion for the year rather than zero?

So to repeat, Econospeak is simply begging the question here. A proponent of Ricardian equivalence could use the same numerical example to make his point. He’d say, “On the surface this might look like you’d get a boost in aggregate demand, but no you wouldn’t. The households would realize they now had a perpetually higher annual tax payment of $5 billion. So to budget for that, they’d have to put aside an extra $100 billion today, such that at 5% interest they would be able to pay those future taxes without cutting back consumption. Thus, no change in aggregate demand.”

Now I admit that sounds weird; why take the hit to consumption all in year one? But if the government is spending that $100 billion on present consumption, then it makes perfect sense. Or rather, it makes just as much sense as the standard Ricardian equivalence example, where the government gives a deficit-financed tax cut and households just save it all.

At this point, Krugman is right–you need to use formal models to keep all of your assumptions straight, and to think through the full general equilibrium implications. Sometime in February, after the book is turned in and I’ve caught up with my “real job,” I will dig up some of the stripped-down New Keynesian models and see if Krugman really is surrounded by friggin’ idiots. (Note that I agreed with DeLong about Fama, so it’s possible that Krugman is right vis-a-vis the right-wing critics who rely on purely mainstream economics.)

Murphy Debut "Daily Reckoning" Article

Today my debut article at the Daily Reckoning ran. (They saw my sarcastic doom and gloom at mises.org and thought, “This is our kind of guy!”) The plan right now is that I will contribute columns every month or so. (BTW there are some missing hyperlinks because they just switched to a new format and there were some posting snafus.) In today’s article I make a lot of the same arguments about Bernanke having no options, but I spell some of the issues out more carefully, especially “open market operations.” The conclusion:

The Federal Reserve under Ben Bernanke’s leadership has painted itself into a very tight corner. He has cleverly managed to stave off utter disaster so far, but he is running out of options. Ironically, the effects of his incredible injections of new reserves have been masked simply because the financial sector is still paralyzed. If and when the economy begins to improve, Bernanke will have to decide whether to allow double-digit price inflation or instead contain prices by strangling the incipient recovery.

"With All Due Respect, Mr. President, That Is Not True"

A Cato petition (pdf) signed by a ton of ethics-free Republican hacks (not my term, new readers!). I was pleased to see Alberto Bisin, one of my professors at NYU who would at least visit the Austrian colloquium, on the list. Apparently this is a full-page ad in a few major outlets. (HT2 Steve Horwitz)

When Money Was Literally Backed By Gold

Ah, wouldn’t you feel more comfortable investing in a country that issued these? (HT2 MoneyGirl)