Sunday, July 09, 2006

The New York Times teaches us a lesson, but misses much of the point itself

Here is a link to a NYT’s article by Edmund Andrews, “Surprising Jump in Tax Revenues is Curbing Deficit”.

One lesson illustrated by the story is the surprising amount of uncertainty in economic forecasts. Short term forecasts typically are very wrong. Long term forecasts typically are more uncertain than short term forecasts. Nobody knows much about what will happen long term. Would the stock market fluctuate so much as it does if economic variables could be forecasted accurately? The author fails to point this out.

Another lesson is that politicians and the media typically talk as if their favorite economic forecasts are accurate, despite that they are not. The author fails to point this out.

A third lesson is that politicians and the media get away with their spin because it is successful in influencing voters. Hence, voters' understanding of the issues is the problem, not the media and politicians. The author fails to point this out.

Here are some excerpts, with my comments.

An unexpectedly steep rise in tax revenues from corporations and the wealthy is driving down the projected budget deficit this year, even though spending has climbed sharply because of the war in Iraq and the cost of hurricane relief.

The unexpected is about all that can be really expected.

Congressional analysts say the surprise windfall could shrink the deficit this year to $300 billion, from $318 billion in 2005 and an all-time high of $412 billion in 2004.

"The fact is that revenues are way below what the administration said they would be a few years ago," said Thomas S. Kahn, staff director for Democrats on the House Budget Committee. "The long-term prognosis is still very, very bleak, and the administration doesn't have any kind of long-term plan."

This spin simply shows that Mr. Kahn is unable to address the real issues. Does he have a better forecasting methodology? Does he have a long-term plan?

The surge could also evaporate as quickly as it appeared. Over the past decade, tax revenues have become much more volatile, alternately soaring and plunging in the wake of swings in the stock market and repeatedly defying government projections.

Have tax revenues become more volatile? Where is the evidence? Should we take the NYT’s word?

Both supporters and critics of Mr. Bush cautioned against attributing much long-term significance to the recent fiscal improvement, in part because tax revenues have become more volatile.

Volatility is different from trend. If up volatility is not to be extrapolated, why should down volatility be extrapolated? If neither is to be extrapolated, what does that imply about all the media and political spin? Why does the author quote the spin without noting that it is rubbish?

Compared with the size of the economy, tax revenues are still below historical norms and far below what the administration predicted as recently as 2003.

More spin. Tax revenues also are far higher than others predicted as recently as 2003. This is not mentioned. Why?

Low tax revenues as a percent of the economy may be good. They may increase growth and increase the present value of tax revenues. This possibility is not mentioned. Why?

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