Alpha Pundits: Larry Summers has a good start in the New Year … but what did Paul Krugman just predict?

Posted on Posted in Pundit Challenge

by Warren Hatch

Credit where credit is due. On October 7, 2015, Former Treasury Secretary Larry Summers published an important essay in the Washington Post on global secular stagnation. In particular, Mr Summers focused on the weakening trends in China that, as he put it, raise “the specter of a global vicious cycle in which slow growth in industrial countries hurts emerging markets, thereby slowing Western growth further.” While Mr Summers didn’t include specific probability estimates, the tumultuous last few week in China’s markets is making that forecast look more prescient, at least for now.

For his part, Larry Summers sees more trouble ahead, as he wrote in his latest Washington Post piece on January 10, 2016: “While it certainly could be the case that the Chinese developments reflect a combination of market psychology and clumsy policy responses, and that the strong response of world markets is an example of transient contagion, I doubt it.” Alas, it is difficult to translate “I doubt it” into a specific probability estimate like the Superforecasters provide. But it is possible.

While Larry Summers doesn’t (yet) provide numerical probabilities, in his October essay he included a series of embedded forecasts, such as this prediction about inflation and central bank policies: “The risks tilt heavily toward inflation rates below official targets.” It is a catchy verbal salvo, but exactly what it means is open to interpretation. So we asked an informal panel of Superforecasters to convert the vague verbiage into a probability range. In this example, our panel assigned a range of 70%–99% to that forecast, centering on 85%. When asked that same question, the Superforecasters gave an unofficial probability of 72%, at the lower end of the range. Right now, some of the recent data is supporting Mr Summers.

Pundits_Summers_160110

This method of extracting good-faith inferences from vague verbiage is something we would like to do systematically. We invite the alpha pundits to offer corrections where necessary or, better still, offer their own probability estimates alongside their forecasts. Then we can all keep score and see who is more accurate, which is what Good Judgment is all about.

By the by, so far the Superforecasters part ways with Larry Summers when he writes in his latest piece, “the global risk to domestic economic performance in the United States, Europe and many emerging markets is as great as any time I can remember.” The Superforecasters currently attach odds of 8% that there will be two consecutive quarters of negative GDP growth in the US during 2016 – a rough proxy for a recession – about the same odds they had a month ago. We’ll see how events unfold. And it would be terrific to hear what odds Mr Summers attaches to that prospect.

Meanwhile, Nobel Prize laureate Paul Krugman just published his own take on recent events in The New York Times, which includes this forecast: “Now, my best guess is still that things won’t be that bad — nasty in China, but just a bit of turbulence elsewhere. And I really, really hope that guess is right, because we don’t seem to have a plan B anywhere in sight.” Perplexed? Same here. We invite you to parse that forecast and offer what you think Mr Krugman is predicting, along with your own probability estimates HERE or in the comments section below.

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One thought on “Alpha Pundits: Larry Summers has a good start in the New Year … but what did Paul Krugman just predict?

  1. Ha – that’s kind of fun.
    Going just off the snippet above:
    “things won’t be that bad” —> things will be a little bad
    “just a bit of turbulence elsewhere” —> volatility outside of China
    “nasty in China” —> Tricky to say what is meant by “nasty” here. My assumption is that Mr. Krugman is restricting his forecast to the financial arena and means that China’s stock market will continue to stumble, companies will continue to have to rely on the central government bailing them out, and central banking moves will have unintended effects within China. I doubt he expects outright recession.

    As far as what his statement forecasts regarding the US economy, I’m not sure. Maybe he is saying that there will be high volatility but he doesn’t expect a recession.

    Reading the linked column, it is clear that he is uncertain of the outcome and his forecast. So he probably wouldn’t assign a probability too far off 50%, but to what? From the column as a whole, my guess is that he’s forecasting in the region of 40-45% that China’s economic woes result in a US slowdown. Not sure if he is thinking about recession or missing inflation targets.

    For my own estimate…I have no idea. I don’t expect a recession in the US (8% sounds nice, I might say 10%) but transportation costs look like they will be low (inflation rates remain <2%: 75% or so). But of course, there's an anchoring effect from the given #'s here…

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