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The Economists Are Not Alright
Some big names made some big mistakes when forecasting the impact of pandemic relief
By Veronique de Rugy and Jack Salmon
This year hasn’t exactly been great for expert predictions and modeling projections. The countless polls that predicted a double-digit victory for Joe Biden and the forecasts that gave the Democrats a 4-in-5 chance of winning the Senate simply didn’t pan out. Earlier in the year, pandemic models that informed significant policy decisions ended up overestimating the number of fatalities by a multiple of 10.
What then of the credibility of economists in 2020? With the onset of the downturn in March, economists seemed to forget completely the lessons from government responses to the last economic crisis and the decade of economic literature that followed. With COVID-19 cases soaring once again, a new relief package in the works, and some of the extra unemployment benefits set to expire at the end of the month, economists are again making predictions. So let’s look at how they fared when they analyzed the impact of the earlier relief spending and, in particular, the expansion and extension of unemployment insurance.
Going into this downturn, we knew that extending unemployment benefits leads people to delay job-hunting until the checks stop arriving. One 2010 study found that extending payments raised the U.S. unemployment rate by 2.7 percentage points. Other studies come to similar conclusions, while it has also been noted that enhanced unemployment insurance leads families to reduce other sources of income and to save less. Nevertheless, the CARES Act in March extended jobless benefits by 13 weeks, and later nearly all states offered another 20 weeks.
Missing the Mark
Since many economists failed to remember the lessons of the past, they continually made bad predictions this year. One of the biggest culprits was Nobel Prize winner and New York Times columnist Paul Krugman, who in August claimed that the expiration of the $600 a week in extra unemployment compensation in late July would drive down consumer spending and result in a 4% to 5% contraction in gross domestic product. Since then, personal consumption has, in fact, continued rising, recovering 91% from its April lows, while the third-quarter GDP expanded 7.4% from the second quarter.
Back in July, economists from Jared Bernstein, tapped by President-elect Biden to serve on the Council of Economic Advisers, to Ernie Tedeschi, a former senior adviser at the U.S. Treasury, forecast that by the end of the year the economy will have contracted by 2% and the unemployment rate would probably be greater than 11%. Similarly, economists at the Economic Policy Institute proclaimed that the end of the extra jobless benefits would lead to the loss of more than 5 million jobs, while Mark Zandi of Moody’s Investors Service warned of large job losses and double-digit unemployment rates “well after the pandemic is over.”
In reality, the economy has continued to expand, employers have added more than 6 million people to their payrolls since July, and the unemployment rate fell to 6.7% last month.
As for the impact of ending other COVID-19 relief spending, the wrong-headed analysis ranged from academic economists such as Darrick Hamilton and Joseph Vavra, who saw a vast loss of income that would trigger an eviction crisis, to a majority of the economists in a survey in July who saw an explosion of bankruptcy filings in the second half of the year. What all of these scary predictions have in common is that none of them were even vaguely accurate.
Mixing Economics and Politics
What is it that leads many mainstream economists to make such flawed economic predictions so confidently? Perhaps it’s their pious belief in Keynesian stimulus theory, or maybe these often-progressive economists have a broader political motive to paint a bleak picture of the economy in order to promote lavish government spending programs.
Consumers quickly changing their behavior in reaction to the pandemic were responsible for a large part of the severe contraction in the second quarter. But the primary driver was the mandated business closures and stay-at-home orders. As states began lifting these restrictions, the economy began a robust recovery, even as the pandemic continued. However, with states such as California once again issuing stay-at-home orders and forcing businesses to shut, the recovery faces a serious risk of stalling. A recovery that runs out of steam will only encourage more dire predictions from the same folks who have misled us time and time again.
These experts may claim that their projections missed the mark because after the $600 in weekly supplemental payments ended in July, President Trump authorized the Lost Wages Assistance program to help unemployed workers. But this claim is problematic because the program provided only $300 a week in extra payments in most cases. State governments largely didn’t begin disbursing the money until mid-September and, in some cases, not until late October. Only a maximum of six weeks could be claimed compared with roughly four months, and the program had stricter eligibility requirements that left out many part-time and low-wage workers.
Logically, many economists should have lost all credibility for their capacity to forecast the effects of government support measures. But even after this federal relief package is approved, we will, no doubt, continue to see economists warning us of the impending unemployment crisis, eviction disaster and economic contraction that awaits us if we fail to pass hundreds of billions of dollars in additional relief in the new year. Indeed, many are now sounding the alarm, arguing that the labor market recovery has gone into reverse, that we are entering a national eviction crisis and that massively expanded stimulus spending is the only solution to our economic woes.
It is certainly possible that some of the dire economic predictions will come true this time around if state governments adopt the economically destructive policies of California and some other states. But it is important for policymakers and economists to acknowledge that any negative economic trends are likely to result from government action, such as the stay-at-home orders and business closures we had in March, and not from government inaction, such as the expiration of unemployment benefits and the lack of a federal bailout for states that we saw after July.