Friday, December 03, 2010

Chart of the day

Via Dan Mitchell
While this is an obvious blow to Keynesianism, it also illustrates the absurdity that a cabal of economists can predict the impact of a macro-scale policy move with any kind of precision. More damning, of course, is that they couldn't even get the trend right, much less the exact numbers -- but I guess that's what happens when one's faith is placed in increased government spending as an economic elixir.


Ben said...

I don't really understand how you can at once impugn the predictive ability of economist and then use their incorrect prediction to demonstrate the inadequacies of Keynesian economics. That seems incoherent to me.

Colin said...

The impugnment of Keynesianism is that unemployment remains stubbornly high despite the usage of Keynesian policy tools as a response. One can argue, of course, that absent such a policy response that unemployment would be worse, but it seems difficult to make that case when one compares the current recovery to past recessions:

The picture only darkens when one considers that with the pool of unemployed workers so high that their re-entry into the labor force is actually likely to push the unemployment rate even higher (as seems to have occured in November). Thus, a continued high plateau seems more likely than any kind of imminent decline.

Jason said...

Course the Keynesian will tell you the administration did not proportionally respond to the magnitude of the crisis, blunting the effect of the stimulus.

I think the graph shows that the President and his economic team were overly optimistic, and while counter-factuals are nearly impossible to prove there is a consensus to the notion that at the very list stimulus did no harm, and in all likelihood prevented things from becoming much worse.

Of course the difficulty of counter-factuals also makes it hard for one to argue that a different policy would have led to a dramatically different outcome.

Finally, Colin, your last comment is why staring at the unemployment rate is often times not the best use of time. Instead we should be looking at non-farm payroll numbers.

Colin said...

Jason, I agree that unemployment as traditionally defined is not the most useful number. The U-6 unemployment rate is probably better.