Friday, 21 December 2012

Marking myself to market: my predictions for 2012, revisited

Brad Delong calls for economists to "mark their beliefs to market" - that is, reassess their position when the facts suggest that they might have been wrong - and commendably shows us the way here.  He is also very hard on economists who fail to do so; I only wish the UK media would be equally critical of those whose analysis has proved wanting (I could suggest a few names..).

But I was talking about me, of course.  I have just despatched my reply to the usual end-of-year email from Chris Giles at the FT asking for my economic predictions for 2013. You'll have to wait until very early next year to read them and those of others; but I thought it was worth looking back at what I said in December 2011 (to the FT and separately to the New Statesman), which I reproduced here at the time.

Broadly, I think they read pretty well in retrospect - judge for yourself - although arguably I was slightly too optimistic in some respects. For example, I expected the eurozone to "muddle through". Well, it's still muddling, but by no means through. On the UK economy, I said: 
"One is tempted to say - to paraphrase an old Soviet joke - that 2011 was an average year for the British economy. Not as good as 2010, but better than 2012..
More seriously,  under our baseline scenario - that the eurozone muddles through - quite similar to this year, so not great, but not disastrous. Premature fiscal austerity will continue to weigh on the economy, leading to lower growth and unemployment than necessary - and high youth unemployment will do permanent social and economic damage. This will be compounded by eurozone weakness.  But as in the US, very aggressive monetary policy will limit the damage, and exports to the rest of the world will help. Moreover, with inflation falling, real incomes will stop shrinking so fast, so consumer confidence may pick up a bit." 
Unfortunately, while the serious prediction wasn't bad - certainly more accurate than that of the government, OBR, Bank of England, or any of the international organisations - the joke was spot on.  

On fiscal policy and the bond markets, it's probably worth repeating this: 
"It remains NIESR's view that in the short term fiscal policy is too tight, and a temporary loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility.  It is worth noting - particularly given George Osborne's assertions that those of this view, which include Martin Wolf and Paul Krugman, are "on the outer fringes of the international debate" - that Olivier Blanchard, the Chief Economist of the IMF, agrees with us... 
As for "retain the bond market's faith" it is unclear what this means.  The UK will not default, no-one with a brain seriously thinks it will, and the opinion of the rating agencies is irrelevant.  We have nothing to worry about on that score. But our current historically very low level of interest rates is - just as in Japan - a sign of economic failure, not success." 
Nothing much has changed, except that the consensus view among serious economists and the international organisations has continued to shift towards that of NIESR.  


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  2. Mark to market? Without numbers? Interesting. On the unemployment you were wrong, as with GDP numbers- not your fault, all economists have underestimated EU impact but then economists aren't in business, they just talk about it. The jury is still out on the UK's mild austerity.
    As for being unsure what it means to retain bond markets faith, well, how to say politely... many economists don't understand how bond investors operate.
    Finally, after the second world war, Japan was one of the poorest countries in the world, now it's population enjoys a high standard of living. It's rates have been relatively low compared to ours ALL this time...ooops!

  3. "But our current historically very low level of interest rates is - just as in Japan - a sign of economic failure, not success."
    Robert is right that Japan's rates have been relatively lower than ours, but they have been much higher in the past than presently (though still a little lower than ours. The important word is "Current", rather than rates over the longer term since WW2, with J Portes referring to Japan's economy since the 1990s to the present - the 'lost' decades of poor economic performance. Hence the "sign of economic failure" comment.
    See graphs for both countries: