How accurate are economic forecasts?

Make Me Smart April 19, 2023 Transcript

Note: Marketplace podcasts are meant to be heard, with emphasis, tone and audio elements a transcript can’t capture. Transcripts are generated using a combination of automated software and human transcribers, and may contain errors. Please check the corresponding audio before quoting it.

Kimberly Adams 

Hello and Happy Wednesday. I’m Kimberly Adams. Welcome back to make me smart where we make today make sense.

Kai Ryssdal 

I’m Kai Ryssdal it is what do you know… what do you know? No! What do you want to know Wednesday? The day we get to answer your questions. If you’ve got one for us that you’d like us to answer, the voicemails come to us at 508-U-B-SMART. Email comes to us at makemesmart@marketplace.org. I should say in here somewhere probably it’s Wednesday, April the 19th. People like us to say that.

Kimberly Adams 

Yes, they do. Alright, since we do know what date is now, let’s get to the first question, which is an email from Garrett in Virginia, which says “we hear a lot about economic forecasts from organizations like the IMF. And what I’m wondering is, what is their track record? How good are the IMF forecasts of global economic growth?” Mr. Ryssdal.

Kai Ryssdal 

Wow okay. So the TLDR is that the IMF is about as good as everybody else. And I will explain. Forecasting, first of all, is really, really hard. And in point of fact, if you listen to marketplace today, you heard Austan Goolsbee, the president of the Federal Reserve Bank of Chicago. And he said to me in a session we did about eight or 10 years ago, I don’t even know why people forecast anymore. The Federal Reserve shouldn’t forecast nobody should forecast, academicians don’t forecast because it’s really, really hard. So with that as the disclaimer here’s the deal. The IMF just came out with its most recent economic outlook, World Economic Outlook, and they say the global economy is gonna grow about 3% over the next five years. Okay, and just for a little more context, that’s about the weakest medium term forecasts we’ve had since 1990. Okay? Now, how good are they? How good is the IMF, which is chock full of economists? The answer is that they’re fine. In 2014, they did an analysis of their own forecasts and they said they’re, you know, about as good or about as bad as everybody else. Reporter at Quartz did in essence, the same thing. Looked at 1980 to 2021 IMF forecasts using World Bank data, and found that the IMF has been reasonably precise, right. And there are some some caveats in there, periods leading up to or coming out of recession when, right the business cycle kind of goes crazy. And it’s a little tough to predict what’s going to happen. They are less precise, right? Bloomberg did some analysis. Found wide variation in the direction of magnitude of errors. Forecasting is really hard. And you should take everything with a grain of salt, you should take CBO forecasts with a grain of salt, you should take congressional forecasts with a grain of salt, you should take everybody’s forecasts with a grain of salt. Read a lot of them, and you get the general directional sense. That’s that’s the answer. Right? Nobody’s going to be spot on.

Kimberly Adams 

How much do you think the desire for forecasts is tied into the market desire to make bets?

Kai Ryssdal 

Hmm. Really, really, really good question. I’d say they are closely correlated. I mean, look, that’s why you have analysts coming out on Wall Street and saying earnings are going to be x pennies per share or dollars per share, right? And then when they miss, there’s an opportunity to arbitrage that. Yeah, I It’s all one. All right, this is gonna be a little more pejorative than I mean to be but it’s kind of a little bit of a racket, right?

Kimberly Adams 

Yeah it’s like you make your money making predictions and you know, then you can make money whether those predictions are wrong or right right. I just never forget leading up to the financial crisis all of these ratings agencies that had graded all these mortgage backed securities so high, and yet we still we still rely on the same said ratings agencies to help us determine how solid an investment is. And they make their money either way.

Kai Ryssdal 

They do indeed. They do indeed. Totally true. Okay, Where am? I lost my place. All right, next next one. It’s it’s a voicemail. Here we go.

Tom 

Hello make me smart. Tom from Minnesota with a post office question. Your recent story about first class postage rate increases got me thinking again, why here in the fifth decade of the internet, we still have six day a week, residential mail delivery. Wouldn’t a Monday Wednesday, Friday delivery schedule, save us mail truck loads full of money, and save us all a bunch of trips to the recycle bin?

Kimberly Adams 

What you’re not getting lovingly handwritten note cards in your mailbox every day? Surely, that’s all that’s in there, not junk mail. Anyway, so I guess to answer this question, first, we need to know why we even have a six day mail delivery service. And it’s because the law says we do. It’s not exactly clear when this practice is start started. I have a friend who works for the post office, I’ll ask her again later. But according at least to the Congressional Research Service, it appears that the six day delivery was not legally required until fiscal year 1981, which is when Congress put language in requiring that USPS did a six day delivery and that was in the appropriations for their budget that year. There have been indeed proposals over the years to reduce the number of delivery days from six to five in order to save money. But when the experts sort of run the numbers on this, they figured out that yes, the move would save billions of dollars, but not enough billions of dollars to solve the USPS’s, USPS’s USPSss I think, yes, financial problems. Last year, President Biden signed a bill into law that further cemented the six day a week delivery. And Congress is the one that has the power to cut the number of days that the Postal Service would deliver the mail. But that probably wouldn’t go over well with constituents because we do love our post office. According to a 2023 Pew Research Center poll 77% of Americans report having a favorable opinion of the Postal Service. And given all the other things that members of Congress have to do that constituents don’t like, that’s just sort of like picking an unnecessary fight. Also, if you think about the Postal Service union, the letter carriers unions, they will definitely put up a big fight if the days were going to be cut back. And if we think watching, you know, people are on strike in France and in Europe is bad, imagine if every single letter carrier in America got mad. Just think about that. Right? Okay, our next question comes to us from Liz, who writes, “the Federal Reserve reports it is it is operating at a loss for the first time since 1915. Can you make me smart about the economic implications of this?” This has you written all over it Kai.

Kai Ryssdal 

So this is actually a super, super, super complicated question. So I’m gonna I’m gonna simplify as best I can. The Federal Reserve is a an independent agency of the federal government, it is also self funding. And it funds itself through its open market operations by its buying and selling of bonds and securities. And what has been happening for a very, very long time with interest rates as low as they have been, is that the Federal Reserve, which takes deposits from member banks, right? It takes and holds money on deposit for banks, it has not had to pay a lot of interest on those deposits, right. It’s just like, when you go to your bank, and you give them $100, and they pay you you know, a 10th of a percent interest or whatever it is, and you get back $100.01, at the end of at the end of your period of deposit. Federal Reserve does the same thing. And for a very, very, very long time. The amount of interest it was paying on the deposits it held for banks was less than the interest it was getting on the securities it owns. Remember, we’ve talked many times about the Federal Reserve actually buying bonds in the open market to try to control interest rates, specifically long term interest rates, right. And for a very long time, it was paying less than, in interest, than it was earning an interest. And so it funded its own operations and remitted the remainder, which was in the billions of dollars every year to the Treasury. Okay? Now, with the Fed having raised rates, if you remember, Silicon Valley Bank, the challenge for Silicon Valley Bank was that they didn’t manage their interest rate risk, right? They took their depositor’s money, they went out and bought really long dated US Treasury bonds that yielded at the time 1%. Right. But then, as the Federal Reserve started raising interest rates, you could buy long dated federal bonds that were yielding 5%. And those bonds are much more valuable. The Federal Reserve has a version of the same thing happening to it. Now, it because it has raised interest rates, it has to pay more interest on the on the deposits it has from banks, but all of those bonds that it bought during quantitative easing, the $9 trillion in mortgage backed securities and federal debt that it bought, yield really low rates. And so it’s now on the other end of its equation. Okay? So while the Fed is not making billions of dollars, the accounting trick of the Fed, not being able to remit that money to the Treasury Department is a little complicated. Because the Fed is the Fed, Jay Powell, using the secret chairman of the Fed keyboard that he keeps in his office can create money at any time. Right. So what they do with the Fed for accounting purposes is they basically make a little checkmark next to the deficit that they have in any given year that they’re not making money. And they say, Okay, we’re gonna owe it to you. And it’s called a deferred asset. Because at some point, the interest rate spread is going to change, and the Fed’s gonna start making money again, and they’re gonna start sending money to the Treasury again. Right. So the net actual effect is nothing. Truly.

Kimberly Adams 

Even though we are currently surpassed the debt limit, and Treasury is going through extraordinary measures, does it matter that the Fed is not sending that money to Treasury at this particular moment in time?

Kai Ryssdal 

The short answer is no. The longer answer is that there is money… there is debt listed on the federal balance sheet that does not count toward the debt limit. And this is in that pile. Okay. I was just thinking that the Treasury might be really thankful about getting those checks right about now. it’s a really good, interesting curious question. Oh they shouldn’t be… look, Janet Yellen I’m sure it would be like, Hey, Jay, give me the money. But but it doesn’t count. Anyway. So that’s what happens. It’s really interesting, though. I mean, the Fed has gotten just as an institution, the Fed is kind of interesting the way it works.

Kimberly Adams 

Yeah. It’s so fascinating. And that was actually really clear. Thanks.

Kai Ryssdal 

Thank you. I appreciate that. If you’re interested in the Fed, by the way, Jeanna Smialek’s new book, it’s called. What’s it called? What’s it called? Limitless. Limitless that’s what it’s called. It’s really good. It talks a lot about the Fed in history. Doesn’t talk about the Fed’s, you know, operations. But anyway. Okay, last question today. It’s an email, Pam. She wants to know this. “Has anybody” Oh, this is interesting. “Has anybody calculated the carbon footprint of the space economy? I have loved space since the first Russian dog went into space.” Pam, you’re dating yourself, “but I find it less and less defensible as the climate crisis progresses? Can you make me smart about what climate impact these programs are having here and now?” Great question.

Kimberly Adams 

Why did you even have to go there man?

Kai Ryssdal 

Come on. Come on!

Kimberly Adams 

Okay. Relative to it cuz I mean, sure… It definitely has emissions. It definitely is like a big rocket burning stuff every time there’s a launch. So yes, it matters. However, relative to the aviation industry, the carbon footprint of space travel is actually pretty small. It totals about 1% of the amount of fossil fuels burned by planes each year. But the environmental impact is of course, growing as interest in space fairing and space exploration and space tourism increases. So for the past two decades, you know, scientists didn’t really worry much about studying the emissions of spaceflight, because there just weren’t that many rockets going into space. You know, during the space race, when you know, the US and Russia are trying to like outdo each other with the rockets and everything. rocket launch attempts peaked at 139 in 1967. But then that number went down as the Cold War relaxed. And so between about 2000 and 2010, the average number of launches stagnated at around 70 launches per year. But last year, a record breaking 180 successful rocket launchers went into orbit, and I think we can totally expect that number to keep going up. One space science expert predicted that the number of annual launches, and therefore emissions, is going to grow 10 times higher in the next decade or two. So given that, you do it, it is it is time to start thinking about the emissions of these things. So, in general, a rocket launch emits about 200 to 300 tons of carbon dioxide. But the scientists who look at this, say it’s a lot less about how much C02 is emitted, and more about how and sometimes where it’s being released in the atmosphere. So spacecrafts send emissions straight into the upper parts of the atmosphere, where they can actually have even more significant impact on global warming and linger for long periods of time, because you don’t necessarily, you know, like have the wind dispersing things up there. Plus a rocket launchers environmental impact also depends on the type of fuel being used. So the most common propellants are indeed carbon based. But several space travel space travel companies are experimenting with low carbon fuels. So for example, when Jeff Bezos traveled to space in a Blue Origin spacecraft, it actually didn’t release any carbon dioxide, which is because it ran on a fuel made of liquid hydrogen and liquid oxygen, not exactly water, even though that may be where your brain jumped. But anyway, the Blue Origin launch released a huge amount of water vapor afterwards which can damage the ozone layer and impact parts of the atmosphere that are closest to space. So yeah, this is it’s a valid question. So right now, it’s minuscule compared to the C02 emissions of, you know, your average plane travel for the world. But you know, as it picks up, it’s gonna be meaningful. So hopefully, we get this fuel situation sorted out soonish.

Kai Ryssdal 

There’s got to be some smart startup founder who’s thinking about this right? Gotta be.

Kimberly Adams 

I’m sure I’m sure. I was trying to find, oh, here it is. There was a NASA news release I got today that says that NASA is creating an in-space servicing assembly and Manufacturing Consortium, which is going to be a group that’s going to, you know, be focused on making in space capabilities for maintaining architectures and mission lifecycles and extend the life of spacecrafts in space, which is something that’s going to need to happen and kind of relates to the convo we were having yesterday about all the infrastructure that has to be put in place before we do all of the big moonshot slash Mars shot stuff.

Kai Ryssdal 

Exactly. Which is coming.

Kimberly Adams 

Yeah for sure. But before we go, one more gratuitous ask about the Webby Awards. Because I have no shame. We only have one day left to vote for the Webby Awards. And so in case you missed it make me smart has been nominated in the business category. And the Webby Awards are sort of like the People’s Choice Awards for the best of the internet. We’re in second place right now just barely. And we could really use your help to win. So if you haven’t yet, we’d really appreciate it if you could log on to the Webby website and vote for us. Million Bazillion is also up in its category and you can vote for us by going to marketplace.org/votemms and again the voting ends tomorrow April 20. And we would appreciate your support

Kai Ryssdal 

Make Me Smart is produced by Courtney Bergsieker. Ellen Rolfes writes our newsletter. Our intern is Antonio Barreras. Today’s program was engineered by Juan Carlos Torrado.

Kimberly Adams 

Ben Tolliday and Daniel Ramirez composed our theme music. Our senior producer is Marissa Cabrera. Bridget Bodnar is the director of podcasts. Francesca Levy  is the executive director of Digital and On Demand

Kai Ryssdal 

Bam, perfect timing.

Kimberly Adams 

Bam