Standard errors of sub-standard theory

Apparently, Trump has almost entirely overlooked economists for any of the major posts which has led to this article: Economists Contemplate Life on the Outs. The President-Elect does not seem to value economists very highly, which the following reaction might help you understand why.

“Donald Trump doesn’t matter,” Yale’s Robert Shiller, the outgoing president of the American Economic Association and a winner of the 2013 Nobel Memorial Prize in Economic Sciences, said during a discussion of the long-run prospects for the economy. “He’ll only be here for four years and he’s gone.” Shiller later admitted that could be wishful thinking: “I’m a natural optimist, so I don’t want to speculate on how bad things could get.”

But the response that truly made me laugh is this where, to translate, economists are said to be perfectly aware how bad things might go but focus on the most likely outcomes even though improbable seriously bad events often occur instead. Here it is in their own words:

In their academic research, the more [economists] know about something, the more they emphasize their standard errors. The closer you get to the op-ed page or policy advising, the standard errors shrink down to nothing. You look at the predictions that economists made about what would happen with Brexit, what would happen with the election of Trump, what would happen with the downgrade of U.S. debt, etc., and a lot of those were appallingly wrong. I think we need to do a better job conveying some of our uncertainty, some of the standard errors around what we do.

The real story is that they don’t have a clue since they have been following standard macro with its emphasis on aggregate demand for eighty years. Shunting these people to the side is one more example of Trump’s good judgment. If he really does cut spending and cut regulations and only spends public money on what genuinely adds value, he will be doing pretty well most of what needs to be done. But having said that, I do note that the adjustment process may – may – lead through a relatively steep valley before things finally begin to improve. And now that I have covered all possibilities, we can sit back and see what actually happens.

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