The past week has been notable for the victory laps taken by central banks currently residing under the thumb of Professor Moriarty Woodford. In last week's speech to the Economic Club of New York, Janet Yellen noted that forecasts for unemployment were largely proven correct- but only with a healthy dose of QE to grease the wheels. Latterly, Martin Weale at the Bank of England has performed an exhaustive study suggesting that QE worked even better than originally thought.
All of this is well and good, and the Weale paper is full of Bayesian vector autoregressive fun, if you're into that sort of thing. The problem with these sentiments, of course, is that they are based in one way or another on the very types of econometric models that have failed so spectacularly over the past seven years. The counterfactual ("what would have happened if there were no QE over the last few years?") is easily dismissed, because it is unprovable.
Perhaps Macro Man is the only one irritated by this casual dismissal of the counterfactual. After all, irritation is not a particularly remunerative emotion, and what's done is done. Nevertheless, it is perhaps worth pointing out a few holes in the logic.
In Yellen's speech, she noted that the unemployment came in just about where it had been forecast, but only with the aid of QE. Observe how she was careful to use private sector forecasts rather than the Fed's own estimates. Macro Man ran a little study, comparing the unemployment rate from 2012 onwards with where the Fed itself had forecast it 12 months earlier. As it turns out, unsurprisingly, the unemployment rate has been consistently lower than the Fed had forecast 12 months earlier- by an average margin of 0.4%.
So in point of fact, if QE had an impact, perhaps the Fed didn't need to do it after all, as their unemployment rate forecasts might have been more accurate!
Of course, the real question for Ms. Yellen is "if QE was so great at keeping the unemployment rate below your forecast, why was it so lousy at keeping economic growth at your forecast, let alone above it?"
Were one to actually pose such a question to the Fed, the response would no doubt be full of phrases like "fiscal drag" and "participation rate" and "part time employment" and stuff like that. (It would be churlish to ask why the econometric models did not forecast this stuff, too.)
Of course, with fiscal policy, there is another unprovable counterfactual that is blithely waved away. The Fed's attitude towards the government has been one of an overindulgent parent towards a squalling infant or squabbling toddlers, the type that always seem to sit in close proximity to your author on airplanes. Rather than using the stick of "shape up or else", the parent/Fed adopted the carrot strategy of "here's a little sweetie to keep you quiet for five minutes." Of course, the lesson learned by the naughty children is that having a fit brings a reward....so it encourages more fits. (The same holds true for the infants in the airplane example.) For all his many faults, it's hard to imagine that Alan Greenspan in his pomp wouldn't have let off a few rockets in his Congressional testimonies to put an end to some of the nonsense.
Just once, it would be nice to see a headline that differs from the usual
*CENTRAL BANK CONCLUDES THAT THE ACTIONS IT TOOK WERE REALLY QUITE MARVELOUS
Instead, it would be great to see something like
*CENTRAL BANK ADMITS IT REALLY SCREWED THE POOCH WITH THAT ONE
Sadly, that's one for the alternative universe newswire (or maybe a couple of the regional Fed presidents.) It's too bad, really....that's a counterfactual that Macro Man could really get behind.
All of this is well and good, and the Weale paper is full of Bayesian vector autoregressive fun, if you're into that sort of thing. The problem with these sentiments, of course, is that they are based in one way or another on the very types of econometric models that have failed so spectacularly over the past seven years. The counterfactual ("what would have happened if there were no QE over the last few years?") is easily dismissed, because it is unprovable.
Perhaps Macro Man is the only one irritated by this casual dismissal of the counterfactual. After all, irritation is not a particularly remunerative emotion, and what's done is done. Nevertheless, it is perhaps worth pointing out a few holes in the logic.
In Yellen's speech, she noted that the unemployment came in just about where it had been forecast, but only with the aid of QE. Observe how she was careful to use private sector forecasts rather than the Fed's own estimates. Macro Man ran a little study, comparing the unemployment rate from 2012 onwards with where the Fed itself had forecast it 12 months earlier. As it turns out, unsurprisingly, the unemployment rate has been consistently lower than the Fed had forecast 12 months earlier- by an average margin of 0.4%.
So in point of fact, if QE had an impact, perhaps the Fed didn't need to do it after all, as their unemployment rate forecasts might have been more accurate!
Of course, the real question for Ms. Yellen is "if QE was so great at keeping the unemployment rate below your forecast, why was it so lousy at keeping economic growth at your forecast, let alone above it?"
Were one to actually pose such a question to the Fed, the response would no doubt be full of phrases like "fiscal drag" and "participation rate" and "part time employment" and stuff like that. (It would be churlish to ask why the econometric models did not forecast this stuff, too.)
Of course, with fiscal policy, there is another unprovable counterfactual that is blithely waved away. The Fed's attitude towards the government has been one of an overindulgent parent towards a squalling infant or squabbling toddlers, the type that always seem to sit in close proximity to your author on airplanes. Rather than using the stick of "shape up or else", the parent/Fed adopted the carrot strategy of "here's a little sweetie to keep you quiet for five minutes." Of course, the lesson learned by the naughty children is that having a fit brings a reward....so it encourages more fits. (The same holds true for the infants in the airplane example.) For all his many faults, it's hard to imagine that Alan Greenspan in his pomp wouldn't have let off a few rockets in his Congressional testimonies to put an end to some of the nonsense.
Just once, it would be nice to see a headline that differs from the usual
*CENTRAL BANK CONCLUDES THAT THE ACTIONS IT TOOK WERE REALLY QUITE MARVELOUS
Instead, it would be great to see something like
*CENTRAL BANK ADMITS IT REALLY SCREWED THE POOCH WITH THAT ONE
Sadly, that's one for the alternative universe newswire (or maybe a couple of the regional Fed presidents.) It's too bad, really....that's a counterfactual that Macro Man could really get behind.
9 comments
Click here for commentsOne possible quibble -- my recollection is that the Bernanke repeatedly exhorted the Congress to do something on the fiscal front -- build some bridges, pave some streets with cashmere, etc. He was completely ignored, because freedom.
ReplyWhammer
Good points. In the UK, the counterfactual is now the go-to excuse wheeled out by 'Professor' Blanchflower for every loony-tune forecast he gets 100% wrong.
ReplyC Says,
ReplyIndeed ,given that we know even the most successful in our world get it right only some of the time we must conclude that central bankers getting it right all of the time are not of this world. They must be overdue for a rise. Would that be in pay ,or aboard a rocket you can decide.
In favour of the former though we should note that they have never failed to rescue a bust that they helped to create.
There is at least one counterfactual CBs will not deny: "If we had not stepped in courageously when we did, the world would have gone down the tube." To which some might add, "...and by now come out the other end much better off."
ReplyRossmorguy
The big guy over @ his blog recently deconstructed the topic of Counterfactuals.
ReplyIt's just too depressing for me, much rather think in terms going forward.
Fowardfactuals, what do you do when you've exhausted close to all the variables of counter-counterfactuals?
Makes sense?
@Whammer Yes, in his testimonies Bernanke did mention that a credible fiscal path would be useful...but always qualified with the sentiment "it's not my job to tell you what to do." Sort of like the parent on the airplane who pleads with their braying offspring to be quiet rather than reading them the riot act.
ReplyWell at least the fed has inspired the Japanese. We shall see what helicopter Ben's theories impact in the real world very soon.
ReplyAs well they have also set the standard for the next crisis. Emergency rate cuts, blah, keep selling Mortimer. I'm waiting for asset purchases to bail me out.
"Not a single note from any civil servant or politician present on the night of the infamous bank guarantee meeting in Government Buildings exists in the Department of An Taoiseach."
Reply"This was the startling admission from the Government last night as detailed accounts from the four senior bankers who arrived at the building on the night of September 29 have emerged."
"The bankers – former AIB chief executive Eugene Sheehy, his chairman Dermot Gleeson and their Bank of Ireland counterparts Brian Goggins and Richie Burrows – provided detailed accounts in 2010 about the roles they played in the meeting."
http://www.independent.ie/irish-news/politics/fresh-insight-into-the-night-that-haunts-us-30201565.html
Welcome to the anti-scientific world of modern economics, where demagogues clothe their ideological preconceptions in stupefying mathematical complexity (Woodford, Eggertson, pretty much everyone regarded positively by the academy) or an overwhelming quantity of meaninglessly poor quality data (Pilketty, Reinhart & Rogoff, etc.). The modern academy pushes an idiotic orthodoxy which bends first-rate minds to insipid, destructively illogical conclusions which simultaneously attempt to emulate real sciences while managing to banish any semblance of empirical inquiry from their research. It's too bad they either regard historical empirical evidence as being irrelevant anecdotes or, if consulted at all, as a field for cherry picking one's favored conclusions (i.e. every paper Bernanke ever wrote on the depression).
ReplyThere is probably nothing sadder than seeing intellectualism reduced from the open-minded search for truth into a path-dependent quest to maintain orthodox incoherence, even as its failings continue to be ever more obvious. My only hope is that the next crisis is so stupefyingly catastrophic that we can finally be rid of 'macro prudential' regulation and aggressive central banking.