"the Sanders campaign is simply pulling numbers out of the air."

[Jefferson23]

144. James Galbraith Describes Major Forecast Failure in Model Used by Romers to Attack Friedman on Sande

Posted on February 27, 2016 by Yves Smith

Yves here. Now the big artillery is coming out. The Gang of Four, as Bill Black called them, that attacked Gerald Friedman for publishing a model that showed that Bernie Sanders’ economic plan could work, delivered what they though was a roundhouse punch on Thursday, in the form of a short paper by Christine Romer and David Romer. Their conclusions, which were taken up quickly by the mainstream media, such as the New York Times, would seem to be fatal:

The demand impacts forecasted are too large

The Friedman model assumes the output gap is larger than it is

The plan is likely to do little to increase productive capacity

The latter claim is bizarre since quite a few economists around the world are now pushing for infrastructure spending, precisely because it has spillover effects on productivity. For instance, Larry Summers pointed out in the Wasshington Post in 2014 that the IMF estimated that every dollar of infrastructure spending increased GDP by nearly $3 and the Sanders plan calls for significant infrastructure expenditures. By contrast, Friedman used very conventional fiscal multiplies of 1.2 in the early years falling to .8

So why do the Romers say so confidently that Friedman is off base? They are using a different model. And as Galbraith explains long-form, it’s one with a pretty crappy track record in post-crisis America. And Galbraith gives an important warning:

In the real world, forecasts are a very weak guide to policy; when attempting to make major changes the right strategy is to proceed and to take up the challenge of obstacles or changing circumstances as they arise. That is, after all, what Roosevelt did in the New Deal and what Lyndon Johnson did in the 1960s. Neither one could have proceeded if today’s economists had been around at that time.

By James Galbraith, professor of Government/Business Relations at the Lyndon B. Johnson School of Public Affairs, the University of Texas at Austin. His most recent book, Inequality and Instability was published in March, 2012 by Oxford University Press. The next will be The End of Normal, from Free Press in 2014. Originally published at the Institute for New Economic Thinking website

The Romer/Romer letter to Professor Gerald Friedman marks a turning point. It concedes that there are indeed important issues at stake when evaluating the proposed economic policies of Presidential Candidate Bernie Sanders. These issues go beyond the political debate and should be discussed seriously between and among professional economists.

All forecasting models embody theoretical views. All involve making assumptions about the shape of the world, and about those features, which can, and cannot, safely be neglected. This is true of the models the Romers favor, as well as of Professor Friedman’s, as it would be true of mine. So each model deserves to be scrutinized.

In the case of the models favored by the Romers, we have the experience of forecasting from the outset of the Great Financial Crisis, which was marked by a famous exercise in early 2009 known as the Romer-Bernstein forecast. According to this forecast (a) the economy would have recovered on its own, in full and with no assistance from government, by 2014, (b) the only effect of the entire stimulus package would be to accelerate the date of full recovery by about six months, and (c) by 2016, the economy would actually be performing worse than if there had been no stimulus at all, since the greater “burden” of the government debt would push up interest rates and depress business investment relative to the full employment level.

It’s fair to say that this forecast was not borne out: the economy did not fully recover even with the ARRA, and there is no sign of “crowding out,” even now. The idea that the economy is now worse off than it would have been without any Obama program is, to most people, I imagine, quite strange. These facts should prompt a careful look at the modeling strategy that the Romers espouse.

I attach here the manuscript version of Chapter 10 from my 2014 book, The End of Normal, “Broken Baselines and Failed Forecasts,” which discusses these issues in (I hope) accessible detail.

It should be noted that these issues, while important, do not bear on whether economists should try to discourage American voters from supporting the Sanders program. In the real world, forecasts are a very weak guide to policy; when attempting to make major changes the right strategy is to proceed and to take up the challenge of obstacles or changing circumstances as they arise. That is, after all, what Roosevelt did in the New Deal and what Lyndon Johnson did in the 1960s. Neither one could have proceeded if today’s economists had been around at that time.

in full: http://www.nakedcapitalism.com/2016/02/james-galbraith-describes-major-forecast-failure-in-model-used-by-romers-to-attack-friedman-on-sanders-plan.html