While I'll stand by what I said, that the data to me are a bit premature for calling a recession in Minnesota, I think I might also take a minute to sympathize with our state economist, particularly after he took a bit of a rebuke from elected officials.

"Tom Stinson tends to be a bit on the pessimistic side of things, to put it charitably," Gov. Pawlenty says.

Pawlenty says governors around the country have shared their concerns about the economic challenges facing Americans. But he says it's important to guard against too much pessimism.

"The economy is deeply challenged, nationally and in Minnesota. But I don't think it's helpful - unless it's clearly justified by the data - for people to get overly pessimistic or overly scare people, either," says Gov. Pawlenty.

With all due respect to Governor Pawlenty, what is a state economist's job? As we've noted, there is not anyone else in a position to speak about the state of the state economy; nobody is going to come along and verify state business cycle peaks and troughs. (I wanted to use the word "officially", but does that word apply to the status of the NBER in dating national cycle peaks and troughs?) I will at some point use the Owyang, Piger and Wall method to date the state cycle (and St. Cloud's) but nobody will say anything about it because, well, it's just me, some economist at Somewhere State. Not A State Economist.

When we published the previous (Fall) report on the state of the economy and reported that our first signal of recession from our new model had flashed, most of the reaction was positive. (There are a few local people who, because they are promoters of St. Cloud business, will not agree with us. We agree to be friendly in our disagreement.) People appreciated someone putting together the case for why the economy may do well or not. And I think that's the reaction we have to this recession call. Glad to hear him say it because he deserves our respect, but I wish I had more background.

Stinson's "pessimism" is largely confined to tamping down revenue expectations so that not too much money is spent by government. (If they do overspend because the revenues didn't pan out, who do you think gets blamed?) Whenever the state budget shows surplus there is a temptation for legislators and governors to spend it on those things that help assure re-election; I think it may fall to someone like a state economist to point out the possibility that the forecast will be in error. You may in fact lean on the scales just a bit. But he has no such incentive that I can see with the recession call. I have to assume it's an honest assessment of the data -- and again, you have to assume he has access to more than we do. I'm trying to reslice the data available to see if I can figure out what he is seeing. So far, I haven't found the right slice, or the right data.

Labels: economics, forecasting, Minnesota

I said something on the air Saturday that, based on a couple of phone calls after the show, appears to require some explanation. What I said was that there are two entirely different types of forecasting one is discussing in this budget inflation debate.

One type of forecasting is forecasting of an event. The revenues generated by the tax code are the result of an event -- what happens in the economy -- multiplied by a vector of tax rates that collect revenue based on a matrix of flows of income and stocks of wealth or assets in the hands of economic agents. The tax rates are constant; the movement in tax bases comes from the Global Insights forecast (as I mentioned earlier). Insert the numbers from that economic forecast in the matrix, plug and chug, and there you are, a revenue forecast.

What I said on the air was that you can't forecast decisions. That's not right exactly; there's a very good example of decision-forecasting in the Taylor Rule, which is a forecast of the Federal Funds rate target set by the Federal Reserve as the basis of its monetary policy. It is a description of how monetary policy was being set under the leadership of Chairman Greenspan. (Does it describe Chairman Bernanke? Look at the graph and decide for yourself. The Taylor Rule, properly understood, is not a mechanism that predicts an economic event but a heuristic used to try to understand how the FOMC is deciding policy at that point in time. The rule is not independent of the committee whose behavior it is forecasting.

Legislatures and executives do not automatically adjust spending to inflation. The budget forecast provided, as noted by the House Fiscal Analysis Department, is the budget's structural balance, i.e., "how much more is being collected than spent before any tax or spending decisions are made." (Emphasis added.) They may do so as an element of policy; the budget forecast provides information on what additional spending would occur if all non-indexed items were to be raised by inflation as measured by CPI. But is it appropriate for an arm of the executive branch to forecast a policy decision of the legislative branch? I think it is not.

There is, by the way, a very simple solution. The Federal government has both an Office of Management and Budget (reporting to the executive branch) and a Congressional Budget Office. If the DFL wants a forecasting arm that reports budget figures the way they would like to read them, have the Senate and House Fiscal Analysis Department provide you that information. What the DFL is doing instead is censoring the information the Finance Department can provide, but not allowing it to report spending without inflation. This is a bad policy.

Labels: economics, Final Word, forecasting, inflation, legislature, Minnesota