Riding the Real-Raters

Padinha takes aim at a die-hard malcontent.
Publish date:

For Real?

JACKSON HOLE, Wyo. -- One of the two most annoying economists you will ever come across works for a New York-based shop; the other works in Chicago. The former has earned a number of critical mentions in this column. Today we focus on the latter.

More than two years ago, when the real (inflation-adjusted)

federal funds rate

began to hit levels it hadn't seen since the late 1980s, this particular economist started screaming that such a "restrictive" real funds rate was bound to produce smartly slower economic activity. Then, during the course of the next 20-plus months, he cited every blip in claims, every pause in housing starts, every decrease in the manufacturing purchasing indices, every subtrend increase in payrolls, every deceleration in inventory building, every weak retail sales number, every drop in weekly money-supply measures and every burp in share prices as evidence that his forecast was bearing out.

Last year, early in May, he cautioned that money growth was on the verge of decelerating (it would end up accelerating by almost two full percentage points come December), and later that month he warned that the odds of a recession in 1998 had risen to a whopping 40% (the economy grew at a massive 4.7% rate during the second half of the year).

All because of an "overly restrictive" funds rate.

The table below shows the level of the real funds rate back to the 1950s. (Note that the real funds rate equals the

nominal funds rate less the

inflation rate.)

During 1997-1998, the real funds rate posted its highest two-year level since 1988-1989. But it hardly kept the economy from growing.

Gross domestic product

boomed to the tune of 3.9% in 1997. Then it went on to explode another 3.9% last year.

A real-rater could have saved himself lots of embarrassment by just thinking back to the

Coke Decade

. The real funds rate clocked in at 5.29% in 1983; GDP grew 4.0% that year. Then, in 1984, the real funds rate went on to average a whopping 6.33%; GDP vaulted 7.0%.

It's clear that real-raters aren't

reading Michael Prell, the director of the


Division of Research and Statistics. As (admirably) humble as this guy is, he still plays a kind of



Greenspan's Mozart

. This is what he recently had to say about the notion that real rates are high and a drag on demand:

The proof of the pudding is in the eating, and to date the frequent assertion by Fed critics that monetary policy was too tight has been consistently contradicted by subsequent strength in domestic demand. I'll let you judge whether that was a reflection of my bosses' greater insight or just good fortune.

And yet in today's newspaper, there's said Chicago forecaster still bitching and moaning that real rates are too high, that they're overly restrictive and that the funds rate ought to be lowered accordingly.

The point here is not to single out piss-poor forecasts just for the sake of poking fun at them. Economic forecasting is a tough business -- period. Everyone in the field makes plenty of terrible calls (and you should always keep in mind that your narrator lost an obscene amount of money

last autumn).

The point, rather, is that speciousness pervades many economic forecasts. These forecasts often fly in the face of very obvious facts and sometimes -- especially after two-plus years -- they deserve to be ignored altogether.

As do the people who refuse to quit producing them.

Side Dish

To Nic in Sydney: Airlines. And can you pass along a different email address? The pond thing isn't working.

The two best (and most popular) write-ins yesterday were

Marvin Gaye


Billie Holiday


Okay. Here's something for the mathematics-statistics types.

(a) A woman has two children. She is standing in front of you with one of them -- her ten-year-old daughter.

What is the probability that her other child is a boy?

(b) A woman has two children. She is standing in front of you with one of them -- her ten-year-old daughter. You say to her, "I know you have two children." She responds, truthfully, "I do. My husband took our baby to the zoo."

What is the probability that her other child is a boy?

And the question is this: Is there a difference between the two answers?

Ground rules: There are absolutely no tricks here; I won't respond to any requests for clarification or more information. When you write in with your answer, don't put anything save the two probabilities in the subject line of your note. In the body of the note, explain why you think your answers are correct. The person who submits the clearest (and most clever?) correct explanation will win ... well, something really good. Please note that I will read every email, but that I will respond only to correct -- in terms of probabilities


explanations -- ones.