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The intellectual bankruptcy of macroeconomics (by Russ Roberts)

Posted By Russ Roberts On September 3, 2013 @ 1:41 pm In Debt and Deficits,Scientism,State of Macro | Comments Disabled

Gregg Easterbrook in an excellent essay on the NFL’s legal problems and lots of other stuff, digresses on the sequester:

Last week’s word that the GDP grew at 2.5 percent in the second quarter [1] is strong economic news; the jobs report due Friday may signal if the recent mild decline in unemployment will accelerate.

The good news about the second quarter applies to the period the sequester went into effect. Widely predicted to cause awful economic distress, instead across-the-board spending cuts have been accompanied by economic improvement. When the sequester began, unemployment was 7.9 percent and the most recent quarter had shown only 0.4 percent GDP growth. Now unemployment is down to 7.4 percent while growth has climbed to 2.5 percent. Perhaps these improvements would have happened anyway; perhaps trends would be even better without the sequester. All that can be known is that politicians and pundits said the sequester would be terrible for the economy, and instead so far it’s been a positive.

Let’s review some predictions:

“Sequester Will Sock A Vulnerable Economy” — Washington Post banner headline on the midwinter day the sequester started. “The sequester is already hurting our economy,” President Barack Obama said a few days later. Since these statements, the GDP is up about 3 percent, the stock market is up about 5 percent, unemployment is down half a percent and the housing market has become so strong there is talk of a new bubble. Three months into the sequester, American household net worth hit an all-time high [2].

Unnamed “experts” predicted that the sequester “will cost 700,000 jobs [3]. Instead about 1 million new jobs have been added [4].

Early in the sequester, the New York Times’ lead editorial declared that Ohio “could lose 30,000 jobs” while approving of a claim that federal spending restrictions could bring the University of Cincinnati’s medical school “to its knees.” Three months later, the Bureau of Labor Statistics reported, “The largest over-the-month increases in employment occurred in Ohio.” The latest figures show Ohio having 37,000 more jobs than in the same month of the previous year [5]. Rather than kneel, the University of Cincinnati’s medical school announced a $100 million expansion.

Of course it might be that the economy would have done even better if the sequester hadn’t happened. That’s why Easterbrook writes:

Perhaps these improvements would have happened anyway; perhaps trends would be even better without the sequester. All that can be known is that politicians and pundits said the sequester would be terrible for the economy, and instead so far it’s been a positive.

The New York Times didn’t mention the source of the 700,000 job loss. Was there more than one? I don’t know but Macroeconomic Advisers, a well-know consulting firm was one source. [6] Krugman cited [7]their analysis approvingly. So were they wrong? I assume Macroeconomic Advisers and Krugman would say that they meant that there would be 700,000 more jobs now if there hadn’t been a sequester. But then it wasn’t a prediction. It was a seance. Or a mood. Or a hope. Or a fear. Or something. But when your prediction can’t be falsified, it’s not a prediction.

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URLs in this post:

[1] 2.5 percent in the second quarter: http://www.bea.gov/newsreleases/glance.htm

[2] American household net worth hit an all-time high: http://www.businessinsider.com/fed-flow-of-funds-q1-2013-6

[3] “will cost 700,000 jobs: http://www.nytimes.com/2013/03/04/business/economy/corporate-profits-soar-as-worker-income-limps.html?hp&_r=0

[4] 1 million new jobs have been added: http://www.bls.gov/news.release/empsit.t01.htm

[5] 37,000 more jobs than in the same month of the previous year: http://www.bls.gov/news.release/laus.t05.htm

[6] was one source.: http://macroadvisers.blogspot.com/2013/02/mas-alternative-scenario-march-1_19.html

[7] Krugman cited : http://www.nytimes.com/2013/02/22/opinion/krugman-sequester-of-fools.html

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