Saturday, May 13, 2017

Maybe macroeconomic forecasts aren't so bad

Macroeconomists... are asked to routinely produce forecasts to guide fiscal and monetary policy, and are perhaps too eager to comply. ...

...the supposedly most embarrassing forecast errors come with regards to large crises. Yet, these crises are rare events that happen once every many decades. Since typical economic time series only extend over a little more than one hundred years, statistically forecasting the eruption of a crisis will always come with large imprecision.

Compare how economics does relative to the medical sciences. ...

Imagine going to your doctor and asking her to forecast whether you will be alive 2 years from now. That would sound like a preposterous request to the physician, but perhaps having some actuarial mortality tables in her head, she would tell you the probability of death for someone of your age. For all but the older readers of this article, this will be well below 50%. Yet, one year later, you have a heart attack and die. Should there be outrage at the state of medicine for missing the forecast, with such deadly consequences?

One defense by the medical profession would be to say that their job is not to predict time of death. They are driven to understand what causes diseases, how to prevent them, how to treat them, and altogether how to lower the chances of mortality while trading this off against life quality and satisfaction. ... This argument applies, word for word, to economics once the word disease is replaced by the words financial crisis. ...

A more sophisticated defense would note that medical sciences are about making conditional forecasts: if you make some lifestyle choices, then your odds of dying change by this or that much. These forecasts are at best probabilistic. ...

Economics is not so different, even in 2007-08. Within days or weeks of the failure of Bear Sterns or Lehman Brothers, economists provided diagnoses of the crisis, and central banks and finance ministries implemented aggressive measures to minimize the damage, all of which were heavily influenced by economic theory. ... The economy did not die, and a Great Depression was avoided, in no small part due to the advances on economics over many decades.

Too many people all over the world are today being unexpectedly diagnosed with cancer, undergo enormously painful treatment, and recover to live for many more years. This is rightly hailed as a triumph of modern oncology, even if so much more remains to be done. After suffering the worst shock in many decades, the global economy’s problems were diagnosed by economists, who designed policies to respond to them, and in the end we had a painful recession but no melt down. Some, somehow, conclude that economics is at fault. ...

Macroeconomists are... asked to predict what will happen to the changes in the CPI or GDP over the next 1-5 years. The comparison of forecast quality must be made for the same time horizon and for a similar level of aggregation. The fairer comparison would be to ask doctors to predict what will be the percentage change in the annual number of patients that eventually die after being admitted to an emergency room due to a stroke. For these similar units, my guess is that medical forecasts will look almost as bad as macroeconomic forecasts.
--Ricardo Reis on comparing apples to apples

Why do dads tell dad jokes?

But now I know why dads tell dad jokes. You have this captive audience that laughs at 100% of your jokes for eight straight years, so your jokes just get worse and worse. And then one day, the laughter stops.
--MEL on the fate of the monopolist

Why do your sports teams suck? Taxes

Between 1989, when the team entered the N.B.A., and this season, the [Minnesota] Timberwolves have the worst record in the league. ...

In a state synonymous with hockey, neither the Wild nor the Stars (while in Minnesota) has won the Stanley Cup. Same for the Vikings and the Super Bowl. The Twins did win the World Series, but that’s the exception to the losing rule. ...

Minnesota has one of the highest top marginal income tax rates for any state at 9.85 percent. ...

It’s unclear how much professional athletes value these public goods, but the Timberwolves still have to pay extra to offset those taxes. And given the competition under a salary cap, it means Minnesota teams spend almost 10 percent less than teams from Florida or Texas, which have no income tax. This could be enough money to upgrade from an average player to an All-Star.

To test my theory, I gathered data on the outcomes of every professional sports game over the past 40 years as well as data on state and local tax rates each team member faces. I then computed how much taxes predict winning for each league in every year while controlling for other factors such as population, income, franchise age and local amenities (i.e., weather).

Results of the analysis show that higher taxes consistently predict worse performance in every league — not just the N.B.A. but also Major League Baseball, the N.H.L., and the N.F.L. over the past 20 years. ...

Several other factors connect the income tax effect to my theory. Comparing player salary to player value measures provides evidence that higher-taxed teams in baseball and basketball pay more for players of similar quality, suggesting tax compensation is real. The income tax effect also relies on the assumption that players and teams are responding to income tax rates when negotiating contracts. This explains why the effect arises only in the wake of collective bargaining agreements in the late 1980s and early 1990s that allowed players to become unrestricted free agents and have teams compete to sign them.

The income tax effect could also be explained if people in low-tax states such as Texas and Florida just enjoy sports more and support their teams more and this translates to more winning. But I found that in college football and basketball, where athletes are not paid and should not care about income tax rates, teams from lower-tax states do not perform better than teams in higher-tax states.
--Erik Hembre, NYT, on the tax elasticity of labor supply