Saturday, January 10, 2009

Predicting the Recovery

The Job Impact of the American Recovery and Reinvestment Plan The 14-page report The Job Impact of the American Recovery and Reinvestment Plan just released by the incoming Obama administration includes this caveat (among others):

Our estimates of economic relationships and rules of thumb are derived from historical experience and so will not apply exactly in any given episode. Furthermore, the uncertainty is surely higher than normal now because the current recession is unusual both in its fundamental causes and its severity.

And as we're constantly reminded by financial vendors, "past performance does not predict future returns."

So how predictive is economics? The irony seems to be that the more you need a good prediction (e.g., in today's unusual and severe crisis) the less likely you are to get one from economic models.

It would be interesting to plot the actual unemployment numbers against the report's projections (both with and without the proposed stimulus):


However, since there will surely be some stimulus it will be impossible to know what the "without recovery plan" numbers would have been. And since the plan that finally comes out of Congress will surely not be the one proposed by the Obama camp, the "with recovery plan" projection will be invalidated too.

I hope they update this report or issue a similar one once Congress passes their stimulus package.