Why MMT Will Fail Part XVIII – No One Does Predict Recessions Or Booms

The basic underlying conceit of modern monetary theory is that it’s possible for the really clever people – you know, those who would run an MMT system – to know what macroeconomic conditions are going to be in the immediate future. They they can print the right amount of money, spend the right amount, to smooth out recessions, tax the correct amount to deflate booms without recession or inflation. This requires that we can in fact forecast macroeconomic conditions accurately enough to be able to manage those fluctuations.

We have absolutely no evidence that we can do that:

We describe the evolution of forecasts in the run-up to recessions. The GDP forecasts cover 63 countries for the years 1992 to 2014. The main finding is that, while forecasters are generally aware that recession years will be different from other years, they miss the magnitude of the recession by a wide margin until the year is almost over. Forecasts during non-recession years are revised slowly; in recession years, the pace of revision picks up but not sufficiently to avoid large forecast errors. Our second finding is that forecasts of the private sector and the official sector are virtually identical; thus, both are equally good at missing recessions. Strong booms are also missed, providing suggestive evidence for Nordhaus’ (1987) view that behavioral factors—the reluctance to absorb either good or bad news—play a role in the evolution of forecasts.

Or as it is described:

In February, Andrew Bridgen, chief economist at London-based Fathom Consulting, worked out that of 469 downturns since 1988, the International Monetary Fund had predicted only four by the spring of the preceding year. By the spring of the year in which the downturn occurred, the IMF was projecting 111 slumps, fewer than a quarter of those that actually happened. In a post on his firm’s website, Bridgen wrote that while IMF economists monitoring Equatorial Guinea, Papua New Guinea, and Nauru can walk tall for their recession calls, the rest pretty much flopped. “Since 1988 the IMF has never forecast a developed economy recession with a lead of anything more than a few months,” he says.

IMF economists point out that they’re not alone in missing downturns. A recent working paper by Zidong An, Joao Tovar Jalles, and Prakash Loungani discovered that of 153 recessions in 63 countries from 1992 to 2014, only five were predicted by a consensus of private-sector economists in April of the preceding year. And the economists tended to underestimate the magnitude of the slump until the year was almost over.

Or if you’d like the pithy version:

“Why Are Economists So Bad at Forecasting Recessions?” Easy: macro is hard.

Or, as we might put it, we’ve still got that socialist calculation problem. We don’t know enough to be able to predict the economy, therefore we cannot manage it. Thus theories claiming that this is how we should manage the economy if we had enough information to manage the economy are going to fail, aren’t they?

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Climan
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Climan

I always thought that MMT stood for Magic Money Tree, which got me wondering about the taxation system, the net effect of which is to reduce the money of individuals and companies, and increase the money (haha that should be reduce the debt) of the govt. Why not dispense with the complex and expensive taxation system and simply print the total tax take directly, based on the total amount of money transferred within the banking system? Yes, there would be a one-off devaluation of the currency, but so what, we’d all have more of it to compensate for that.

Andrew Carey
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Andrew Carey

That’s already been tried. The excellent Adam Fergusson book ‘When money dies’ gives examples of where government printed more than 90% of expenditure. For practical purposes that complex taxation system had been dispensed with although tax collection still existed. If your argument is that things would miraculously work out differently if the cost of the taxation system was reduced all the way from sub-10% to zero % of national economic activity then you have all your work ahead of you, I’m afraid.

Climan
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Climan

Is it really necessary to do forecasts for MMT to work? If one only knows what happened a few years after the event the subsequent numbers can be corrected so that the long-term average (up to a few years ago) comes out right, whatever right is.