
Economists’ projections of interest rates and unemployment have proved too high - prostoalex
https://www.wsj.com/articles/economists-got-the-decade-all-wrong-theyre-trying-to-figure-out-why-11576346400
======
aazaa
> Economists have been casting around for the answer, a theory to explain
> their inability to peer accurately in the months ahead, let alone the years.
> ...

No mention of "quantitative easing" anywhere.

QE ran in various forms from 2008-2013. Short term rates were held at _zero_
in the US from 2008-2015. Several industrialized areas now have _negative_
nominal rates. The Fed has started QE back up again to prop up the failing
repo market, insisting that what's happening isn't another round of QE. None
of these unusual activities were considered worth discussing by most
economists prior to 2008. No wonder why their predictions are so off the mark.

Can ultra-loose monetary policy lead to marketplace distortions? Can it lead
to malinvestments like we see in the tech sector? Can it lead companies into a
false sense of security, delaying and scaling back layoffs, because the usual
economic signals have been swept under the rug by government policies?

Of course. The only surprise here is that the WSJ chooses to completely ignore
these completely obvious distortions.

~~~
ambernightcruse
There's no mention about QE because QE is only about lowering the cost for the
private sector to borrow money. The main threat to QE is inflation, which is
hovering around 2% and stubbornly low, so QE is in the clear. The repo
purchases are operating as intended, with new liquidity requirements for banks
from Basel 3 reforms.

Also you complain about negative nominal rates, which make banks less likely
to lend; then you speculate on malinvestments and market distortions. So which
way do you want it, is money too tight or too loose?

~~~
roenxi
> The main threat to QE is inflation, which is hovering around 2%

If I lent money at 6% interest from 2007 to today, I would have performed
about the same as the capital gains from owning an equivalent amount of
everyone's Favourite Shiny Rock, gold. Not including the recent price jump
from QE4.

Owning a rock should not be generating a real return. In reality, it probably
isn't. Real inflation is likely different from consumer price inflation.

It isn't perfect evidence, but gold is basically as pure an asset as we can
get and it lines up with what should be happening if the government is
printing money with its ears pinned back. No practical uses, easy to store,
rare enough to be valuable. Anyone who is interested in saving for their
retirement would be unwise to treat CPI as inflation in their calculations.

~~~
esoterica
Gold is fairly volatile and you are cherry picking dates. The spot price of
gold fell 45% from 2010 to 2015, do you think consumer prices fell 45% over
the same period?

~~~
roenxi
No, I specifically said the gold price change suggested the consumer price
inflation rate wasn't measuring real inflation; so obviously I don't think
changes in the gold price are having an immediate reflection in consumer
prices. And I think in the timeframe you indicate they stopped QE and people
noticed the gold price had risen much faster than new money had been created
so scaled back.

Picking 2010-2015 is cherry picking the date substantially more than
2007-early 2019 when we're talking about QE spurred inflation. If I were
cherry picking I'd go 2000 to late 2019 and get 19%. I'm just going a little
pre-QE and then the lowest rate of return post-QE so people can't accuse me of
cherry picking in favour of my argument. If you pick practically any pre-
financial crisis to basically any post-crisis date it looks like a real rate
of return.

4-5% real inflation lines up pretty well with what we'd expect inflation to be
if we assumed doubling the money supply halved the value for money. So if
asset inflation is a little high and consumer price inflation is a little low
the theory seems reasonable.

~~~
esoterica
What exactly is your definition of “real inflation”? If you’re including the
prices of financial assets then you are using a nonstandard definition of
inflation.

~~~
roenxi
Persistent decline in the purchasing power of money. I forget the technical
definition of a 'good', but I count assets as part of 'goods and services'
that people want to purchase.

Anyway, if the technical definition of inflation is only _consumer_ goods,
that shouldn't be the focus when talking about QE. If we are creating money we
should focus on what that money is being used to purchase. If inflation is
only going to be consumer goods then the main threat of QE obviously isn't
inflation because it isn't being used to buy consumer goods. The risk is
nobody being able to afford non-consumer goods like houses and other financial
assets needed for retirement.

My motivation is knowing how much my salary is worth in assets, because I
don't spend most of what I earn and I think the political situation would be a
lot more stable if everyone got to retire into their own home without having
to spend years paying for a banks endorsement that they are worthy to own a
home.

I dunno, what do you want to call the steady erosion of purchasing power? We
have to adjust asset prices by something to account for expected change caused
by creation of new money. My understanding is people use CPI, which is not a
good choice for reasons under discussion - the CPI isn't capturing the effects
of QE.

~~~
esoterica
The cost of housing is included in the inflation number via rent, not house
prices. Rent is the true cost of housing; when you purchase a house you are
not only purchasing shelter but also a speculative investment that you expect
to appreciate. Only the former is relevant to cost of living.

> The risk is nobody being able to afford non-consumer goods like houses and
> other financial assets needed for retirement.

You need to buy financial assets for retirement only so they can be later
exchanged for non-financial goods like good and gas. Only the latter prices
are relevant to you. It makes a difference whether you pay $1 or $10 for gas,
but there is zero difference between buying stock at $100 and selling it later
at a X% return, and buying stock at $1000 and selling it later at an X%
return.

The future rate of return might be relevant for your retirement, but that is
both outside the scope of inflation and not proxied by the current asset price
increases (which is what you are claiming inflation is supposed to also
measure).

------
hash872
It's fascinating to me that even august publications like the Wall Street
Journal continue to use 'unemployment rate' as any kind of reliable metric,
and says stuff like 'the unemployment rate is at a 50 year low now'.
Unemployment just measures those who are actively looking for full-time
employment but are unable to find it (and yes there is a separate
underemployment metric, which seems a little more accurate).

The reason we have 'slack' in the labor market is because the adult prime-age
participation rate in the economy was quite low for a long time after 2008,
and even now is only getting back to early 2000s numbers. This just seems like
a much better metric to understand the health of the labor market & perceived
slack. Disability has exploded over the last 20-30 years, and someone
collecting a disability check- especially if they are simply milking the
system- doesn't show up as 'unemployed' because they're not actively looking
for work. It's actually pretty concerning for the US how low the adult
participation rate has fallen. There's pretty good evidence that this decade
of low interest rates has started to slowly bring in people off the sidelines
who weren't looking for work, had given up, were in the informal sector and
weren't counted, etc. That's a massively good thing for society.

I don't think you can understand labor market slack or the point at which
wages will start to rise until you ditch the somewhat gimmicky 'unemployment
rate' and start looking at adult participation in the economy period

~~~
rayiner
Labor market participation rate is not a great measure. Look at the breakdown
of changes in labor market participation by age:
[https://www.bls.gov/emp/tables/civilian-labor-force-
particip...](https://www.bls.gov/emp/tables/civilian-labor-force-
participation-rate.htm)

From 1998 to 2018 participation dropped just 2 points for those age 25-54.
That is projected to stay stable through 2028. It went up for those 55+. The
only place it dropped significantly was 16-24. I.e. our society is richer and
we can afford to have more young adults spend their early 20s binge drinking
instead of working.

As to disability—it’s hard to tell whether increasing numbers of people on
disability is good or bad. If the government has simply gotten more generous
and allowing more people with real problems to draw disability, that’s not a
bad thing.

~~~
hash872
FRED seems to have some different results
[https://fred.stlouisfed.org/series/CIVPART](https://fred.stlouisfed.org/series/CIVPART).
These are huge numbers in a country the size of the US. Anyways, 'projected'
is meaningless.

It's pretty widely acknowledged that disability is abused, it seems to be a
mix of people with real problems and those without. The very high disability
rates in a few counties I think shows that it's not always legitimate usage

~~~
rayiner
The FRED data is identical and probably the same source. It shows labor force
participation rate dropping from 67% in 1998 to 63%, same as the BLS data I
posted. But the chart you linked to doesn’t break things down by age group.
When you do, you can see that the drop is almost entirely due to the 16-24 age
group. Participation for people 25+ is stable since 1998.

~~~
hash872
>drop is almost entirely due to the 16-24 age group. Participation for people
25+ is stable since 1998

This is simply not true at all. FRED specifically tracks prime-age labor
participation rate. Gallons of ink/pixels have been written by academics about
how the prime-age rate is lower since the early 2000s, it's a well-understood
phenomena:

[https://fred.stlouisfed.org/series/LNS11300060](https://fred.stlouisfed.org/series/LNS11300060)

Here's a few academic pieces on the issue, including 3 by regional Fed
branches:

[https://www.piie.com/system/files/documents/wp19-1.pdf](https://www.piie.com/system/files/documents/wp19-1.pdf)

[https://www.frbsf.org/economic-
research/publications/economi...](https://www.frbsf.org/economic-
research/publications/economic-letter/2018/september/prime-age-workforce-and-
labor-market-polarization/)

[https://www.kansascityfed.org/en/publications/research/er/ar...](https://www.kansascityfed.org/en/publications/research/er/articles/2019/3q19tuzementhao-
uneven-recovery-prime-age-labor-force-participation)

[https://www.dallasfed.org/research/economics/2019/0219](https://www.dallasfed.org/research/economics/2019/0219)

And here's a piece by the Brookings Institute on it too

[https://www.brookings.edu/blog/up-front/2018/08/02/the-
recen...](https://www.brookings.edu/blog/up-front/2018/08/02/the-recent-
rebound-in-prime-age-labor-force-participation/)

~~~
rayiner
The chart you linked to was for total labor force participation rate, not
prime age. The articles you linked confirm the same thing I said:

> US labor force participation of prime-aged workers (aged 25–54) fell by 1.8
> percentage points between 1995 and 2017,

Falling from 84 to 82 percent is “stable.”

------
duxup
Is it because say unemployment has proven to be a strange concept these days
with "underemployment" being a larger concern?

Perhaps they were simply predicting the wrong thing / things that don't seem
as relevant.

~~~
AmericanChopper
Underemployment is an entirely subjective concept though. Having skills that
that you can’t sell due to insufficient demand doesn’t necessarily say
anything about the market at all.

~~~
Can_Not
One person not being able to sell their skills is a personal problem, a
significant number of people who can't find work with their skillset and a
significant number of employers unable to find people with skills is a market
failure. We're at a market failure and there is economic loss as a result.

~~~
AmericanChopper
Yeah not really. It depends on a lot more context than just number of skilled
people unable to find employment. If I became the best person in the world at
playing Pac-Man, but couldn’t find a job as a professional Pac-Man player, it
would be ridiculous to say I was underemployed.

The only situation I would find it reasonable to describe underemployment as a
problem is when people who’s skills were marketable at the time they acquired
them, are no longer marketable. But even then, it takes more context to
describe that as a market failure. If I decided to never learn another skill
at work, then my skills would eventually become obsolete. In that situation,
the market hasn’t failed me, I have failed me.

Then you have people who’s skills were known to be completely unmarketable at
the time they acquired them. This isn’t a market failure in any way. The most
common context where this occurs could be described as a governance failure
though. The fact that you can get huge amounts of credit to pursue an
education that doesn’t have any market value at all isn’t a market failure.
It’s a failure of government for financially guaranteeing something that
doesn’t have any value. When people who made bad decisions fail, that is a
market success.

~~~
Can_Not
> If I became the best person in the world at playing Pac-Man, but couldn’t
> find a job as a professional Pac-Man player, it would be ridiculous to say I
> was underemployed.

It would be ridiculous, because we're not talking about one person with a
fringe occupation as a strawman, we're talking about large groups of normal
people facing systemic problems.

~~~
AmericanChopper
Putting aside the fact that this assessment is really just your opinion, what
was your reasons for claiming this is a market failure? I believe you never
got around to mentioning that.

------
neonate
[http://archive.md/nUmz5](http://archive.md/nUmz5)

~~~
frandroid
Thank you for your service

------
imglorp
Someone please correct my impression here, but why aren't both macro- and
micro-econ viewed as a largely academic ideal that completely ignores many
realities of human civiliation?

I'm thinking specifically of malice and manipulation, at all levels of all
systems: if there is a way to enrich (ie steal), motivation is towards it
happening and towards weakening rules and oversight. For example, who wants to
quibble over peanuts like $1T federal deficits or $10T NASDAQ total caps when
there are $370T tied to the LIBOR, which has a big fat steering wheel on it?
Your econ textbook doesn't have a nice chart for that.

[https://www.bloomberg.com/news/articles/2018-05-06/libor-
ref...](https://www.bloomberg.com/news/articles/2018-05-06/libor-refuses-to-
die-setting-up-battle-for-benchmark-supremacy)

~~~
ur-whale
> why aren't both macro- and micro-econ viewed as a largely academic idea

Because it's easier to get funding when you claim to be a science.

The fact that the discipline has exactly zero predictive power is rarely
brought up by practitioners (of course), nor particularly noticed from the
people who consume the by-product of said discipline.

~~~
baja_blast
Economists are the Wizards/Shamans of today, both pretend to have special
insight and knowledge of how future outcomes will unfold only difference is
instead of cutting off the head of a chicken and seeing where it lands, they
have "models".

------
acd
But that there are economic expansion without inflation depends on
globalization. We are importing goods from low wage countries. In other words
we are importing low inflation until trade barriers stop that.

Ie central banks try to operate like they control wage inflation. But wage
inflation is a global market nowadays.

------
DubiousPusher
I'm not a subscriber so I can't read the article but I have a personal
hypothesis about this. Developed economies have begun to enter a post scarcity
state. Daily goods like food and household items are not responding to
inflation because they are no longer scarce. The combination of economies of
scale, automation and cheap foreign labor have brought many goods to this
point.

Meanwhile, things which are still governed by scarcity, medicine, property,
education are skyrocketing in price. In part because those are more opaque
markets with some bad incentives but also in some part ecause people can
devote much greater percentage of their income to these things.

What it really looks like to me is these economies are straddling a the line
between acarcity and non-scaecity. I'm no economist though.

~~~
harryh
Inflation has nothing to do with the scarcity of goods. It has to do with the
scarcity of money.

~~~
ambernightcruse
The first sentence is incorrect, inflation is about too many dollars for the
amount of goods available for purchase. You're thinking of deflation, which is
the relatively small amount dollars for real goods in the economy.

------
qubex
Paywalled, couldn’t read.

As an economist, strongly allergic to this kind of title. The theory of
endogenous money (as opposed to non monetary and/or fractional reserve banking
theories) accounts for what is described in the title fairly effectively:
money needs to be viewed as a medium of exchange, and it needs to be plentiful
so that information never gets bottlenecked: this will surprise no software
developer if they compare it to, for example, storage space and/or network
bandwidth. Economic theories that either ignore money as irrelevant or ascribe
inherent value to it (as does neoclassical economics, and as do crypto-
currency enthusiasts who effectively seek to recreate artificial sources of
scarcity just as the gold or more accurately bimetallic standard did) fail to
account for the economic expansion that accompanied the expansion of monetary
supply; endogenous money models, though less widespread, do not make such
disproven predictions, and thus should be allowed to stand whereas the others
should be held to be manifestly disproven.

Now, could we please sit down and figure out not what the next currency shall
be, but what an ‘antibank’ is going to be?

~~~
Rerarom
There's something I don't get about endogenous money vs. fractional reserve.
Namely, the factual claims.

So fractional reserve says that money is created by loans between banks as
restricted by the money multiplier and endogenous money says that banks can
create unlimited money. [1]

My question is not which of these is true but rather how can this be under
dispute? Aren't the workings of banks established by laws and regulations?
Can't one just ask the relevant people what are they actually doing?

[1] [https://www.amazon.com/Where-Does-Money-Come-Ryan-Collins-
eb...](https://www.amazon.com/Where-Does-Money-Come-Ryan-Collins-
ebook/dp/B00FFAKEQU)

~~~
raxxorrax
As a non-economist: Is there really any practical difference by now?

~~~
qubex
As an economist: yes.

~~~
raxxorrax
How so if money is created by commercial banks today with a fictional
multiplier for bonds (did I get that right?)? I believe money to be an
intermediary, but it works because we all believe that it does have an
inherent value. At least as long as it is relatively stable for the time frame
between earning and spending.

If I cannot use it for any form of saving, we had a primitive market of
natural produce for any form of security. It don't think that financial assets
are a widespread reality for most market participants.

If there is at least the factor to theoretically restrict the creation of
money, what mechanism would replace it? Trust in banks or the currency itself?

Wouldn't that be practically the same? Or asked otherwise: What are the
greatest problems with the current banking system?

~~~
ambernightcruse
Commercial banks don't create money, they create loans. And when loans are
zeroed out they no longer exist. There's interest that is earned as revenue
and eventual profit, but only the Treasury creates money.

Money doesn't work on faith. Money is debt. The currency issuer takes on
debt(the US government.) The debt is coined/minted/printed to fulfill some
government budget. These dollars go to people to build/work/service the
programs. The government coerces people into working by raising a tax. If the
government runs a deficit, then the private sector has a net positive gain. If
the government runs a surplus, then the private sector has a net loss(e.g.,
austerity.)

You don't want to restrict the creation of money if the economy is expanding.
You want the money supply to grow or else you will have deflation.

------
gonational
If you can find me economists that have predicted economic activities/results
with any level of accuracy (e.g., greater than 50% even), then I will find you
~10 times as many prominent economists who have predicted the opposite.
Economists probably predict things accurately at a rate lower than throwing a
20 sided die into the air and guessing which number will be facing up when it
lands.

Does that matter? Well, if they can’t predict things with any degree of
accuracy based on the data given, this must mean that they don’t understand
the ends that are achieved by the means that generated the data, doesn’t it?

If economists don’t understand the outcomes that result from the inputs, then
they shouldn’t be trusted to advise on the inputs?

TBH, why do we even care what “economists” think at all, given the above?
Economists are no better, from an objective value perspective, then tarot
readers. Economics, as a study / practice, has been corrupted by the followers
of Keynes, and by the worship of monetarism, and, as a result, fails to
provide any value to the economy, let alone to society as a whole.

Business leaders. Business leaders provide value to the economy by staking
their own success on being able providing enough value to turn a profit.
Business leaders make predictions, and when they fail they don’t make money
(they probably lose a lot of money). If their predictions come true, they
become rich. Economists just sit on the sidelines, watching and squawking like
railbirds, and postcasting things to boost their ego, staking nothing but the
time it takes to type out 280 characters of their precious wisdom.

~~~
dv_dt
Businesses only become profitable in a almost completely artificial human made
financial landscape. There is really no reason to believe much more than a
successful businessman is someone who was smart, sure, but also lucky at some
very particular niche. And as bad as economists are, they're the few which are
studying how that landscape's construction affects how businesses and people
grow within them. That isn't to say we should blindly follow their advice, but
to throw out all economists in favor or successful businessmen is looking to
implement cargo cult surviorship biases.

~~~
AnimalMuppet
> Businesses only become profitable in a almost completely artificial human
> made financial landscape.

Baloney. _Some_ may; many good ones are profitable anyway.

------
martindale
Satoshi got it right; "Chancellor on Brink of Second Bailout for Banks" — 10
years and running strong. Seems the Austrians are winning back a century of
lost ground!

~~~
qubex
Satoshi got it extremely wrong, to the point that if he had any economic
background at all I’d suspect the first wave of crypto currencies to be a sick
joke: artificial scarcity (and more generally, inflexible money supply) of the
kind engendered by bitcoin and its ilk are the exact embodiment of what money
must not be if one is to not artificially crimp the economy’s growth. There’s
a very good reason why we came off the so-called Gold Standard (bimetallic
standard, actually), and why coming off it heralded the greatest period of
economic growth in Western history.

~~~
drcode
Satoshi used his/her economic theories to create a 100 billion market cap
asset from literally zero... what would they have to do to convince you folks
that they were on to something with their ideas? Also cure cancer?

~~~
doublement
Bitcoin isn't used for anything except to transfer dollars from regular buyers
to miners and/or large early adopters.

~~~
drcode
Nobody is forced to buy Bitcoin.

~~~
doublement
Yet they do it anyway.

------
Excel_Wizard
a savings glut is the thing that Krugman has suggested, and is the thing which
makes sense to me.

Which stinks because I hate Krugman.

~~~
nathan_compton
Can you elaborate? Intuitively, no one I know has a "savings glut." If
anything, people in my generation are saddled with debt.

~~~
Excel_Wizard
There is more money saved up than there are good productive investments
available for it, in comparison to the past.

This correlates with a few things: \- Inflation of the value of investment
assets (high P/E ratios) \- Low interest rates on bonds \- Secular stagnation

~~~
nathan_compton
That I can believe, but it seems a bit double-speaky to call it a savings
glut, right? My untutored intuition tells me that its a glut of savings in a
small number of people's hands.

People who don't have a glut of savings, or even significant debt, which is _a
lot_ of people, can probably think of a lot of good uses for that money.

Assuming this sketch is accurate, the problem is too much money in the hands
of too few. Not a savings glut. To call it such seems like a nakedly political
way of avoiding the real issue.

~~~
twic
The thing that's glutted is the savings themselves - the number of dollar
bills that have been scanned in and put in spreadsheets. That the spreadsheets
are in the name of a small fraction of the population doesn't change the fact
that there is a glut of the dollars.

~~~
nathan_compton
Pretty sure it does - if you split that "glut" up evenly across the population
of, say, earth, I'm pretty sure they would find more than "marginal returns"
on its expenditure - perhaps not in the form of literal investments in
monetary instruments, though. When its concentrated in the hands of a few, its
marginal value is very small. The very wealthy aren't looking to spend that
money on like actually useful things like health care or paying off their
student debts or housing or education. They want to get returns.

The world would be a better place if that money was in the hands of more
people.

If you ask non-wealthy humans, there is plenty of stuff to spend money on. It
only looks like a glut if you're a rich person.

~~~
throwaway34241
A lot of the things you are talking about are spending. I think the savings
glut theory is specifically about the demand for saving and loaning money for
investments vs spending and borrowing money to invest, and there being a
relatively high demand in dollars for the former. If you’re proposing
decreasing saving via tax policy (on people with a high propensity to save)
and increasing spending via fiscal policy, I think that fits right in.

Aside from wealth inequality increasing net saving (since wealthy people save
a higher percent of their income), the trade deficit may also be a factor,
since it means overall foreign countries are saving dollars (if they were
spending the dollars we pay them on US goods there would be no trade deficit).

Low interest rates are a traditional way to discourage saving and encourage
borrowing but interest rates are already quite low (real negative rates are a
possibility with some inflation, but it’s questionable if investments that
only make sense under negative rates are actually good investments).

------
jokoon
Politically I will always be against policies that attempt to reduce
unemployment. It's counter productive. Jobs is not a good metric.

There are way too many subsidies to sustain wage slavery. I'm not against
capitalism, but fighting unemployment has not reduced inequality. The UBI,
even at a low amount, would enable a much more virtuous labor economy.

------
tuberelay
The official US inflation measure is garbage.

It doesn't include enough of the big 3 costs in people's lives : housing,
education and healthcare.

It includes whacky stuff like "oh your cellphone is faster now than 5 years
ago, we're going to say that you're getting 10x the phone for roughly the same
price and use that to disprove inflation".

It ignores asset inflation (stocks, real estate, venture capital, everything
else) driven by QE. The average person never saw the QE because it went
straight to banks and inflated asset prices. Rich people with assets made 4x
their money. Wage slaves saw none of it. None of this is counted in inflation
measures.

~~~
aishvar
That's just flat false.

Look at the latest CPI report:

[https://www.bls.gov/news.release/pdf/cpi.pdf](https://www.bls.gov/news.release/pdf/cpi.pdf)

It includes the list of items, weightings, and price changes.

All 3 of those (shelter, medical care, and education) are on there.

~~~
bpt3
The parent poster didn't say they weren't there, but that they are under-
weighted, and I'd agree with that assessment personally.

------
whydoyoucare
There is a reason why Economists aren't billionaires! :-)

~~~
Mikeb85
Two of the richest investors I can think of off the top of my head (Warren
Buffett and Steven Cohen) have an education in economics. In fact, lots of
fund managers do. Also, economists as a group are quite varied, and dare I say
the more successful ones are making millions trading and working for banks,
not making public predictions.

------
joshuaellinger
Except for the MMT people. They mostly got it right but they don't count as
'real' economists to the WSJ.

~~~
virmundi
MMT is not enough to google for. Who are they and what do they think/teach?

~~~
lbotos
[https://en.wikipedia.org/wiki/Modern_Monetary_Theory](https://en.wikipedia.org/wiki/Modern_Monetary_Theory)

