Predict Now, Revise Tomorrow
12:00 AM, Jan 4, 2014 • By IRWIN M. STELZER
Even more important is the outlook for the jobs market. The Fed now expects the unemployment rate to decline from 7.0 percent to somewhere between 6.3 percent and 6.6 percent, reflecting its “confidence that the job-market gains will continue.” The consensus among economists is that the economy, its manufacturing sector now operating at pre-recession levels, will add close to 200,000 jobs per month, bringing total employment to pre-recession levels before July. Still, when that milestone is reached, six million fewer Americans will be at work than would have been employed had the downturn not occurred. Whether continued growth will begin to lure workers who have dropped out of the labor force back into the market is as yet unknown. Liberals say recent increases in the minimum wage will make work more attractive, conservatives that those raises will destroy jobs. Liberals say that unless the emergency unemployment benefits are restored aggregate demand will shrink, conservatives that restoration of benefits would reduce the force of this new prod to get off the couch and participate in the labor force. Good economists can found who support each of these arguments.
Harvard’s Larry Summers, Obama’s preference to fill Bernanke’s seat but shot down by leftish senate Democrats, worries that even with some improvement we will not achieve “escape velocity” and return to full employment any time soon. Instead, he muses, we may have entered an era of “secular stagnation” in which the economy persistently underperforms and unemployment remains high. Unless, of course, a dose of Keynesian medicine is administered soon, spiked perhaps with a bit of income redistribution so that a larger portion of national income goes to those most likely to spend it.
Even if Summers is wrong—and he very often is right—forecasters, the majority of whom say 2014 will be a rather good year, have reason to be nervous. On a theoretical level, they have to worry that the models that failed to predict the recent recession, undoubtedly improved by some tinkering, are still not up to the job of predicting the course of the economy with reasonable accuracy. Emanuel Derman, a former Goldman Sachs modeler and managing director turned Columbia academic, writes in his Models Behaving Badly, “Models necessarily simplify things … squeeze the blooming buzzing confusion into a miniature Joseph Cornell box, and then, if it more or less fits, assume that the box is the world itself.”
On a more practical level, forecasters have to face the fact that the real world abounds in what former Defense Secretary Donald Rumsfeld called “known unknowns.” We cannot know how the wave of regulations the administration has in store for American industries will affect growth and hiring. These rules range from those aimed at closing the coal mining industry to rules “incorporating personal fall protection systems into the existing general industry rule for Walking and Working surfaces.” We cannot know if the reforms imposed on the financial sector will so curtail banks’ ability to take on risk as to reverse recent increases in bank lending to small businesses. Then, there is Obamacare, with its bevy of new taxes on “the rich” and its higher costs for many businesses, its effects unknowable at this early stage in its troubled introduction. All likely to affect growth rates, but in unknowable amounts.
Throw in the turbulent world out there, beyond our shores. A soon-to-be nuclear-armed Iran might further destabilize the Middle East, pushing up oil prices and putting paid to the notion that we are now independent of the volatility of world oil markets. We might see the great fall of China as its leaders attempt to rein in excessive credit and reduce excess manufacturing capacity by closing down state-owned enterprises. Capital flight might drive emerging nations into recession. Some eurozone banks might finally collapse under the weight of their bad loans. There’s more, but you get the idea. The world is very much with us.
These are only some of Rumsfeld’s “known unknowns.” Lurking in the wings to make life for forecasters a series of mea culpas and revisions are the “unknown unknowns.”
Have a wonderful, exciting New Year.
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