In a series of blog posts, John Cochrane presents two graphs showing how both the Fed and CBO have continued to make significant mistakes in forecasting large Keynesian rebounds, and have slowly revised their forecasts downward. The downward forecasting is consistent with a point I made on March 3rd, after the CBO’s Budget and Economic Outlook was published. If Keynesian economics properly modeled the current circumstances, it would make accurate near-term forecasts of the recovery. Because the slow recovery stems from permanent structural problems and not a temporary lull in demand, Keynesian models have grossly overestimated the speed of recovery. The gross inaccuracy of Keynesian forecasts, is evidence the theory is wrong, at least under the current circumstances.
Cochrane ends his first post by asking, “…the question of the day really should be why we have this slump — which, let us be honest, no serious forecaster expected.” I take exception here [“here” hyperlinked to second post]. My book, Unintended Consequences, accurately predicted the slow recovery and lays out my rational.
