Posted on 10/31/2003 9:41:17 AM PST by Tumbleweed_Connection
Leading the way was John Mueller, a long-time supply-sider, with a 5.32 percent forecast for 2003. Our own Larry Kudlow, at 4.40 percent, was third. Brian Wesbury, of Griffin, Kubik, and Stephens in Chicago, ranked sixth, and the Bear Stearns team of David Malpass/John Ryding followed in seventh place.
(I don't participate in the WSJ forecast, but my own forecast was in line with the above supply-siders; in December of 2002 my La Jolla Economics called for better than 4 percent real GDP growth.)
Not only were the real GDP forecasts of the supply-siders among the top ten, when I looked at the third quarter I found that the group’s performance was just as impressive. Mueller retained first place, Wesbury came in third, Kudlow grabbed fourth, and the Malpass/Ryding combo dropped to twelfth.
The results of the forecasts make one wonder: Were these supply-siders lucky, or did they see something that other people did not see?
You might think that their good economic vision stems from the fact that they all use the same supply-side forecasting model. But this can easily be dismissed. The economists mentioned above, while they are advocates of supply-side polices, all use vastly different forecasting methodology. These include the global money concept, the futures markets, and the impact of money growth on real rates of return.
What they do have in common, however, is that they focus on the substitution (or incentive) effects of policy changes.
For example, rising interest rates lead to an acceleration of the purchases of consumer durables; pre-announced tax-rate cuts slow down the economy until the tax rates take effect; etc. It was this timing of the path of the economy, based on substitution effects, that gave the supply-siders their edge.
The moral of the story is that substitution effects are perilous to ignore. Those who do not incorporate substitution effects into their forecasts will suffer the fate of missing the turning points in the economy.
Good question. My economics professors taught me to be very wary of any economic models. The inaccuracy of economic modelling is the heart of Freidman's criticism of Keynesian fiscal policiy. As monetarists say, Keynesians have predicted 10 of the last 5 recessions. Well if the predictions are that bad, the policy prescriptions can be worse. If fiscal policy is used to manage the economy based on these predictions, instead of damping boom and bust cycles, it can actually amplify them.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.