Comments on Michael Stutchbury “IMF sees problems here even after global crisis passes”, 10/08/2009, http://www.theaustralian.news.com.au/story/0,25197,25906807-5017771,00.html
While the IMF has got its forecast wrong many times as any other economic forecasters did in the past, its assessment of this time seems more reasonable than the Treasury's used in the may budget. The destruction to the Australia's capacity may not be very big, but to the main OECD countries are very large indeed. This is one reason why the media term growth cannot be as those in previous recoveries from recession.
Another main reason is the inevitable adjustment to rebalance internationally, especially in the US and China in particular to their economic structures and savings and consumptions. That adjustment process of the main international economies on top of the damage to productive capacities by the great recession will see a slower world growth. That in turn will mean a slower growth for the Australian economy, both in the recovery phase and thereafter.
The Treasury needs to have another very careful examination of its assumptions used in its economic forecast. The structural parameters have changed and one cannot simply extrapolate the past experience without taking into account the new international situation.
Showing posts with label Lucas critique. Show all posts
Showing posts with label Lucas critique. Show all posts
2009-06-24
Changed external environment and Treasury forecast again
Comments on report “Treasury defends eco growth estimates, puzzled by IMF forecasts”, 3/06/2009, http://www.businessspectator.com.au/bs.nsf/Article/Treasury-defends-eco-growth-estimates-puzzled-by-I-pd20090603-SN2K3?OpenDocument
Henry was again defending the indefensible of the Treasury forecast, although he had few other choices.
It was reported that Dr Henry said "When economies are experiencing weak periods of growth, it is usually the case that those weak periods of growth are followed by strong periods of growth".
But the important question is: is this a usual case? The answer is more likely to be no.
There is a synchronised global recession, or a great recession, following a severe financial crisis that almost brought the world banking system down and nearly plunge the world into depression. This is unusual rather than usual. The recession in some of the advanced economies, such as the US, UK, is a so called balance sheet recession. The Japanese experience of a lost decade in growth in the 1990s was a balance sheet recession. That may provide some food for thought for the current one in world largest economy now.
We also have another unusual situation, that is, of significant imbalance between savings and consumption in the US at least. This had not been taken seriously before the economic crisis and is taken much more seriously now and for the next few years if not the decade. There will be some adjustment of savings and consumption in the US that means likely slower than usual growth for a period due to falling share of consumption in GDP.
So by important measures, this is not a usual time or case or situation or circumstance. Treasury should have realised that. But apparent it did not, whatever its reasons. It should and in my view will be a lesson for Treasury and its top brass in economic forecast. They should heed to Lucas critique and should analyse the broad environment much more carefully. The business as usual approach does not always work.
Henry was again defending the indefensible of the Treasury forecast, although he had few other choices.
It was reported that Dr Henry said "When economies are experiencing weak periods of growth, it is usually the case that those weak periods of growth are followed by strong periods of growth".
But the important question is: is this a usual case? The answer is more likely to be no.
There is a synchronised global recession, or a great recession, following a severe financial crisis that almost brought the world banking system down and nearly plunge the world into depression. This is unusual rather than usual. The recession in some of the advanced economies, such as the US, UK, is a so called balance sheet recession. The Japanese experience of a lost decade in growth in the 1990s was a balance sheet recession. That may provide some food for thought for the current one in world largest economy now.
We also have another unusual situation, that is, of significant imbalance between savings and consumption in the US at least. This had not been taken seriously before the economic crisis and is taken much more seriously now and for the next few years if not the decade. There will be some adjustment of savings and consumption in the US that means likely slower than usual growth for a period due to falling share of consumption in GDP.
So by important measures, this is not a usual time or case or situation or circumstance. Treasury should have realised that. But apparent it did not, whatever its reasons. It should and in my view will be a lesson for Treasury and its top brass in economic forecast. They should heed to Lucas critique and should analyse the broad environment much more carefully. The business as usual approach does not always work.
2009-05-23
Treasury as top economic policy agent and Rudd/Swan political spins
Comments on Paul Kelly “Spun out”, 23/05/2009, http://www.theaustralian.news.com.au/story/0,25197,25523687-12250,00.html
Yes, everything can change and it is possible that Rudd/Swan government may be forced into fiscal discipline that will required any government for the next decade to return the budget into surplus and control the government debt into the supposed low levels in the end. However, most Australians will probably have to wonder whether the current government under Rudd/Swan stewardship will be capable of achieving that. So their records have not given the public any confidence.
The public’s memory will not be very short in terms of their too big cash handouts in the face of recession and ballooning federal government budget deficits. It is also yet to see the economic and budgetary wisdoms of their proposed national broadband network at the currently costs to the tune of $43 billion, a number confirmed by the Finance minister was picked up from the air. It is noted that this is at the time of the government turning a projected budget surplus to huge deficits and an optimistically projected government net debt of $188 billion. They may think they are being heroic and with a vision to build the grandiose infrastructure for Australia and may be puzzled why the public do not see that way. For that they will forever be bewildered.
Treasury may have done its best in sketch a path to surplus. Most people understand its difficulties in doing so. And it should be commended for forcing the government make a commitment to budget restraints, although the public doubt the Rudd/Swan Labour can achieve it based its recent records. However, it appears that Treasury has been in great pain to show the public that its best is good enough.
If the Rudd/Swan government’s cash handouts were problematic in terms of their effectiveness in achieving their policy objective, then one has to wonder what role Treasury has played in those two episodes of fiscal policy dramas, given that Treasury is the government’s top economic advisor, especially on fiscal policies and affairs. Was it also so naïve as Rudd/Swan in believing the effectiveness of the cash handouts? Or was it advised against them? What would have been Treasury’s best alternatives in those times? Remember, it was not just once, it was twice in a row and the second was done after it should have been known that the first was ineffective.
In terms of the often criticised medium term optimistic economic forecast, the Treasury could have done better than that. It should have stick with its traditional forecast methodology and used trend growth rate to underlie the budget trajectory and forced Rudd/Swan to make a commitment of more stringent budget constraints, something like only 1 per cent real growth. That would have been more credible and caused the politicians to think and work harder in future budget considerations. That will force them to act more responsibly in spending taxpayers money and make less policy blunders.
To be a little more academic in questioning Treasury’s macroeconomic modelling for this budget, one has to ask whether and how Treasury had considered Lucas’ famous critique of macroeconomic modelling. To put it simply, the Lucas critique was made more than 30 years ago, and called many macroeconomic modelling back then into question. The critique pointed out that most of the key parameters used or estimated in macroeconomic modelling were variable but not structural, as a result, forecast assuming those parameters as structural was not reliable.
Treasury secretary Henry’s public elaboration of the Treasury modelling during his defence this week did not improve public confidence in the Treasury’s recent forecast modelling. He simply fell into the fallacy that Lucas criticised about more than three decades ago. Given the current global great recession and damages that causes, given the long period of de-leveraging process of financial institutions as evidenced by the Japanese case in the wasted 1990s following the burst its asset market bubbles, given the rising government debts in most industrialised countries and the inevitable trim of government spending in the medium term following the recovery, given the imminent international adjustments surrounding US savings and consumptions, there is every possibility that the world will experience a period of slow growth. That is much more likely than the probable Treasury optimistic forecast. Given all those, why was that reasonable to assume above trend growth for so many years for Australia by simply using the same past parameters to underpin that forecast? Where was the consideration regarding Lucas critique of macroeconomic modelling? Why can the public with any intelligence believe that forecast to make the budget position trajectory look better than otherwise?
The change to more optimistic, or more practical as the government or Treasury call it, forecast for future may or may not have been Treasury’s preferred initiative. But it obvious agreed to and braced it. That does not increase Treasury’s credibility of competence, and possibly independence, given the fact that Treasury, as most public servant agencies, has to serve the government of the day.
The public is not questioning just the integrity of Treasury, but more importantly also its competency following these so obvious fiscal policy blunders. The public is entitled for that. After all it is the public/taxpayers money that pays for the politicians and top public servants to look after their welfares.
Yes, everything can change and it is possible that Rudd/Swan government may be forced into fiscal discipline that will required any government for the next decade to return the budget into surplus and control the government debt into the supposed low levels in the end. However, most Australians will probably have to wonder whether the current government under Rudd/Swan stewardship will be capable of achieving that. So their records have not given the public any confidence.
The public’s memory will not be very short in terms of their too big cash handouts in the face of recession and ballooning federal government budget deficits. It is also yet to see the economic and budgetary wisdoms of their proposed national broadband network at the currently costs to the tune of $43 billion, a number confirmed by the Finance minister was picked up from the air. It is noted that this is at the time of the government turning a projected budget surplus to huge deficits and an optimistically projected government net debt of $188 billion. They may think they are being heroic and with a vision to build the grandiose infrastructure for Australia and may be puzzled why the public do not see that way. For that they will forever be bewildered.
Treasury may have done its best in sketch a path to surplus. Most people understand its difficulties in doing so. And it should be commended for forcing the government make a commitment to budget restraints, although the public doubt the Rudd/Swan Labour can achieve it based its recent records. However, it appears that Treasury has been in great pain to show the public that its best is good enough.
If the Rudd/Swan government’s cash handouts were problematic in terms of their effectiveness in achieving their policy objective, then one has to wonder what role Treasury has played in those two episodes of fiscal policy dramas, given that Treasury is the government’s top economic advisor, especially on fiscal policies and affairs. Was it also so naïve as Rudd/Swan in believing the effectiveness of the cash handouts? Or was it advised against them? What would have been Treasury’s best alternatives in those times? Remember, it was not just once, it was twice in a row and the second was done after it should have been known that the first was ineffective.
In terms of the often criticised medium term optimistic economic forecast, the Treasury could have done better than that. It should have stick with its traditional forecast methodology and used trend growth rate to underlie the budget trajectory and forced Rudd/Swan to make a commitment of more stringent budget constraints, something like only 1 per cent real growth. That would have been more credible and caused the politicians to think and work harder in future budget considerations. That will force them to act more responsibly in spending taxpayers money and make less policy blunders.
To be a little more academic in questioning Treasury’s macroeconomic modelling for this budget, one has to ask whether and how Treasury had considered Lucas’ famous critique of macroeconomic modelling. To put it simply, the Lucas critique was made more than 30 years ago, and called many macroeconomic modelling back then into question. The critique pointed out that most of the key parameters used or estimated in macroeconomic modelling were variable but not structural, as a result, forecast assuming those parameters as structural was not reliable.
Treasury secretary Henry’s public elaboration of the Treasury modelling during his defence this week did not improve public confidence in the Treasury’s recent forecast modelling. He simply fell into the fallacy that Lucas criticised about more than three decades ago. Given the current global great recession and damages that causes, given the long period of de-leveraging process of financial institutions as evidenced by the Japanese case in the wasted 1990s following the burst its asset market bubbles, given the rising government debts in most industrialised countries and the inevitable trim of government spending in the medium term following the recovery, given the imminent international adjustments surrounding US savings and consumptions, there is every possibility that the world will experience a period of slow growth. That is much more likely than the probable Treasury optimistic forecast. Given all those, why was that reasonable to assume above trend growth for so many years for Australia by simply using the same past parameters to underpin that forecast? Where was the consideration regarding Lucas critique of macroeconomic modelling? Why can the public with any intelligence believe that forecast to make the budget position trajectory look better than otherwise?
The change to more optimistic, or more practical as the government or Treasury call it, forecast for future may or may not have been Treasury’s preferred initiative. But it obvious agreed to and braced it. That does not increase Treasury’s credibility of competence, and possibly independence, given the fact that Treasury, as most public servant agencies, has to serve the government of the day.
The public is not questioning just the integrity of Treasury, but more importantly also its competency following these so obvious fiscal policy blunders. The public is entitled for that. After all it is the public/taxpayers money that pays for the politicians and top public servants to look after their welfares.
2009-05-20
Kohler's spurt and settle and the Lucas critique
Comments on Alan Kohler “Rough trade”, 20/05/2009, http://www.businessspectator.com.au/bs.nsf/Article/terms-of-trade-pd20090520-S7T7P?OpenDocument&src=rab
Alan, I like your words of spurt and settle.
Further, I like the comments on many budget and business models – including government's, that they are based on spurt not on settle. Neither is always correct and those based on spurt are wrong in settle times. This is particularly pertinent now in the wake of Federal budget and the Treasury economic forecast underpinning the budget position trajectory. Many economists have commented that the forecast of economic growth at well above the trend rate for continuous six years or more were too optimistic. But the government, the PM and his Treasurer have been saying just the opposite - they are conservative estimates has been what they have said. What an interesting confusion and amusement! It has been an exciting time, isn't it?
This just reminds me about the Lucas critique on macroeconomic modelling a few decades ago before the rational expectations revolution. All modellers should heed what Lucas said and always keep that in mind when approaching economic and business modelling.
Elsewhere I have commented on the Treasury/government's economic forecast for the next 10 years or so, including comments on Treasury Secretary Ken Henry's defence of that forecast. You and your readers might find those of some interest. They appear to have got their model key parameters incorrect, similar to using spurt when it should be something different. See http://mrlincolns.blogspot.com/2009/05/paradox-of-treasury-economic-forecast.html, http://mrlincolns.blogspot.com/2009/05/underatndably-henry-denfends.html, http://mrlincolns.blogspot.com/2009/05/critique-of-treasury-economic-forecast.html and http://mrlincolns.blogspot.com/2009/05/swan-budget09-my-first-response.html.
Alan, I like your words of spurt and settle.
Further, I like the comments on many budget and business models – including government's, that they are based on spurt not on settle. Neither is always correct and those based on spurt are wrong in settle times. This is particularly pertinent now in the wake of Federal budget and the Treasury economic forecast underpinning the budget position trajectory. Many economists have commented that the forecast of economic growth at well above the trend rate for continuous six years or more were too optimistic. But the government, the PM and his Treasurer have been saying just the opposite - they are conservative estimates has been what they have said. What an interesting confusion and amusement! It has been an exciting time, isn't it?
This just reminds me about the Lucas critique on macroeconomic modelling a few decades ago before the rational expectations revolution. All modellers should heed what Lucas said and always keep that in mind when approaching economic and business modelling.
Elsewhere I have commented on the Treasury/government's economic forecast for the next 10 years or so, including comments on Treasury Secretary Ken Henry's defence of that forecast. You and your readers might find those of some interest. They appear to have got their model key parameters incorrect, similar to using spurt when it should be something different. See http://mrlincolns.blogspot.com/2009/05/paradox-of-treasury-economic-forecast.html, http://mrlincolns.blogspot.com/2009/05/underatndably-henry-denfends.html, http://mrlincolns.blogspot.com/2009/05/critique-of-treasury-economic-forecast.html and http://mrlincolns.blogspot.com/2009/05/swan-budget09-my-first-response.html.
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