Edward Leamer

University of California, Los Angeles | UCLA · Anderson School of Management

This paper proposes a method of forecasting US recessions beginning with data displays that contain the last 12 quarters of seven US expansions. These end‐of‐expansion displays allow observers to see for themselves what is different about the last year before recessions compared with the two earlier years. Using a statistical model that treats this...

The paper finds determinants for the end of U.S. economic expansions since 1960 using a binary variable approach. Different from previous studies, we specify a left‐hand side variable that is coded as one during the year prior to NBER dated recessions rather than during recessions. We thereby avoid confounding the occurrence of a recession with its...

Under current policies the deficit may get to 7% of GDP in 10 years. Our political process is not coming to grips with responsible fiscal policy. We have both parties agreeing a deficit is a great way of attracting votes. Future increases in spending are coming from entitlements. We need incentives in health care to do things more efficiently and e...

The theory of econometrics presumes a ‘specification’ that selects a sharp borderline between (a) assumptions that are maintained and (b) questions that the data are allowed to address. For example, one might treat the list of variables in a regression model as known with certainty but the ‘coefficients’ of these variables as uncertain. In practice...

This paper proposes a context-minimal range of alternative regression models that is used to generate a range of alternative estimates. A prior distribution is assumed with a zero mean but an ambiguous covariance matrix. The choice of the prior covariance matrix is facilitated by transformation to standardized variables which makes the prior expect...

This paper compares and contrasts Bayesian variable-exclusion methods proposed by Eduardo Ley and coauthors with methods proposed by Raftery and Sala-i-Martin et al. and with the s-values proposed by myself. A distinction is drawn between estimation uncertainty which is the focus of Ley's research and model ambiguity which arises in Ley's work and...

The downturn of 2008-09 has confirmed that: (i) housing is the single most critical part of the U.S. business cycle, (ii) the proper conduct of monetary policy needs to be cognizant that choices made at one point in time affect the options later, and (iii) the best time to intervene in the housing cycle is when the volume of building is above norma...

This paper combines the perspective of an international economist with that of an economic geographer to reflect on how and to what extent the Internet will affect the location of economic activity. Even after the very substantial transportation and communication improvements during the 20th Century, most exchanges of physical goods continue to tak...

This paper seeks to review how globalization might explain the recent trends in real and relative wages in the United States. We begin with an overview of what is new during the last 10-15 years in globalization, productivity, and patterns of U.S. earnings. To preview our results, we then work through four main findings: First, there is only mixed...

A review of the Heckscher–Ohlin framework prompts a noted economist to consider the methodology of economics. In this spirited and provocative book, Edward Leamer turns an examination of the Heckscher–Ohlin framework for global competition into an opportunity to consider the craft of economics: what economists do, what they should do, and what they...

No abstract available.

No abstract available.

This paper uses a Ceridian transaction-by-transaction data set on purchases of diesel fuel by over-the-road truckers to form a monthly diesel volume purchase index from 1999 to 2011, purged of weekday, holiday and calendar effects. These high-frequency data support a new and improved set of options to correct for (1) the variability in the weekday...

The large cross-country variation in income per capita and aggregate productivity is highly correlated with various measures of investor protection. To account for this pattern I propose a theory of aggregate productivity based on firm selection. According to this theory, improvements in investor protection reduce the cost of credit of young firms,...

We’re suffering an epidemic of deflation dread disorder, according to Edward Leamer of UCLA who takes on the New York Times and leading talking heads. Leamer's contention is that deflation is not so bad and maybe not coming.

My first reaction to "The Credibility Revolution in Empirical Economics," authored by Joshua D. Angrist and Jörn-Steffen Pischke, was: Wow! This paper makes a stunningly good case for relying on purposefully randomized or accidentally randomized experiments to relieve the doubts that afflict inferences from nonexperimental data. On further reflecti...

The analysis of economic data necessarily depends on assumptions that our weak data-sets do not allow us to test. We are forced to choose a limited number of variables in a multivariate analysis, to restrict the functional form, to limit the considered interdependence among observations to special forms, and to make special distributional assumptio...

This paper reports three sets of facts: 1) Declines in housing are very good predictors of oncoming recessions in the U.S.; 2) Housing and consumer durables are the most important components of GDP that are soft prior to the official beginnings of recessions, and these two contribute substantially to weakness during recessions; and 3) The cycles in...

Can More Information Make You Worse Off?? - Volume 9 Issue 1 - Ed Leamer

This book offers the wisdom and insight regarding the US economy from a well-known and distinguished econometrician who found himself first teaching macro economics to MBAs and then Directing the highly-regarded and widely-quoted UCLA/Anderson Forecast which provides quarterly forecasts for the US economy. Edward Leamer argues that "We are pattern-...

We need to start with some basic definitions. This first step may not be all that exciting. But, I remind you, if you expect the paint to last, you will need to spend a lot of time preparing the surface. I know you want to slap on the paint right away, but you will regret it if you do not show a little patience. Stick with me here. It will get bett...

After GDP, employment is the most important macro-economic variable. GDP measures what we are producing. Employment measures the number doing the work. Like GDP, employment moves up and down with the business cycle. Unlike GDP, the employment numbers help to predict where the economy is headed. There is a good reason for this. An employment contrac...

The subject of macro economics is intended to help us understand the movements of five variables: 1. GDP growth 2. Unemployment/employment 3. Inflation 4. Interest rates (short and long-term) 5. Exchange rate GDP and employment have been discussed in the immediately preceding chapters. We now turn to the inflation and the interest rates. We will do...

The right definition of a recession is a persistent and substantial increase in unwanted idleness. The three most important measures of idleness have been discussed in the previous chapter: the rate of unemployment, the intensity of work (hours per week in manufacturing), and excess capacity in manufacturing. Most other macro-economic variables als...

Not long ago, one could safely ignore the value of the US dollar and the external deficit (imports exceeding exports) when studying the US business cycle. Back in the 1950s and 1960s, the US exposure to international markets was pretty minimal. The ratio of imports to GDP was only 4% compared with 15% today. The external deficit as a fraction of GD...

We have already taken a close look on four key macro variables: GDP growth, inflation, interest rates and the unemployment rate. We studied the definitions of these variables, how they are measured, when they were high, and when they were low. For the purposes of understanding and especially for forecasting, we also need to know some of their “inte...

If you want to be an economist, or act like one, you have to be able to say quickly: C plus I plus G plus X minus M. That's another way we say GDP.

Up to this point, we have been looking a year or two ahead, trying to figure out when that next recession will arrive, and what the downturn is going to do to your pocketbook, if you are not prepared. Now we put on a different pair of glasses and look farther into the future, focusing on your retirement, and on the well-being of your children and y...

The message of the last chapter is that a persuasive causal inference from nonexper-imental data requires the following: (1) Statistically clear temporal orderings from historical data (first this, then that) (2) An unambiguous but-for hypothetical (an intervention, a change of the past) (3) A compelling story that turns observed correlations and t...

Recessions are the periods of weak sales, weak cash flows, and weak job markets. The worst way to enter a recession is with a heavy debt load premised on overly optimistic ideas about future growth of sales and earnings. It is doubly bad if that debt is collateralized with durable assets and inventories, whose prices tend to be very soft in recessi...

Our next item of business is to try to figure out what causes recessions. In chap. 12, we discovered that housing often declined before the recessions officially began. In chap. 13, we learned that an “inverted” yield curve and a drop in weekly hours in manufacturing often preceded recessions. Before discussing those important findings we issued th...

A recession is two quarters of negative GDP growth. NOT. Definition: A recession is a market failure, which causes a persistent and substan tial increase in unwanted idleness. Following a recession is a recovery during which idleness returns to normal levels.

Do you own a home? That may be your most valuable asset (other than your diploma and your spouse, not necessarily in that order). If you have a home, you probably have a mortgage as well. That's a liability. The difference between the market value of your home and the mortgage debt that is still outstanding is your home equity, which is part of you...

Several years ago, I was listening to NPR on my way to work and I heard a commen tator say “Human beings are pattern-seeking, story-telling animals.” Those simple words rang off loud celebratory bells in my head, since that was exactly the mes sage that I have been trying to get across in my courses, but I had never said it so clearly, and maybe ne...

Modern industrial economies suffer from a collective bipolar disease, swinging back and forth between manic activeness and depressive idleness, with epsiodes of normality in between. Why is that? Why doesn't the all-powerful market provide only happy outcomes, with each of us enjoying just the right mixture of leisure and work? Is there something t...

It is time now to start doing some detective work to figure out what causes recessions and then to figure out some suitable treatments and preventative measures. A sensible first place to look for the cycle drivers are the investment components of GDP: inventories, business spending on equipment and software, business spending on structures (office...

The previous chapter has four stories about unwanted idleness: “Broken relationships, soaking the rich when times are bad, making do with the old car, and a pyrrhic victory of hope over reason”. These help us to understand why unemployment is so persistent. This chapter has four stories about economic cycles. These stories help us to understand the...

When we write GDP = C + I + G + X − M, G refers to federal, state, and local government purchases of goods and services, meaning purchases of laser-guided bombs and salaries of economists in the Commerce Department, and even salaries of UCLA professors, who are employees of the State of California. These are the goods and services that are extracte...

In the previous chapter, we have examined the data as if the US economy experiences normal growth, punctuated by occasional downturns. We were not looking for a cycle. We looked closely at the data before, during, and after the recessions to try to discover the virus that caused them. We are now going to look at the very same data from a very diffe...

We have found some clues regarding the causes of recessions in the temporal or-derings of the components of GDP: homes, cars, equipment, and structures. That is the order of declines going into recessions and the order of the recovery as well; Usually, but not always. The recession of 1953 was different, and so was 2001. The components of GDP are n...

Richard Freeman contemplates the effects of world workforce doubling with the fall of the Soviet Union, China’s turn to the market and India’s liberalization. What effect has this globalization process had on wages worldwide? Though world wages were probably affected, Freeman emphasizes the fact that education and innovation are countervailing...

Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers Septemb...

Edward Leamer has questions about the Treasury's bailout plan, but the question is: does Secretary Paulson have answers? If not, then Leamer proposes a more direct way to spend $700 billion dollars that attacks the root of the problem--housing price declines: call it "trickle up" economics.

Extreme bounds analysis is a global sensitivity analysis that applies to the choice of variables in a linear regression. Rather than a discrete search over models that include or exclude subsets of the variables, this sensitivity analysis answers the question: how extreme can the estimates be if any linear homogenous restrictions on a selected subs...

Using 1947 US input–output tables and data on exports and imports, Leontief (1953) found, to the surprise of the profession, that the capital per worker of US exports was less than the capital per worker of US import substitutes. The response to this empirical ‘paradox’ was the formulation of theory that might explain why a capital abundant country...

The greatest problem for empirical analysis is how best to allow the context to affect the inferences. Econometric theory presupposes contextual “restrictions” that can be taken as given or assigned a probability distribution. These contextual inputs are rarely available. I illustrate this point with a review of the empirical work in international...

Econometrics is a field that uses economic theory and statistical methods to address empirical problems in economics. It is a tool for empirical discovery and policy analysis. The chapters in this volume embody this vision and either implement it directly or provide the tools for doing so. This vision is not shared by those who view econometrics as...

Geography, flat or not, creates special relationships between buyers and sellers who reside in the same neighborhoods, but Friedman turns this metaphor inside-out by using The World is Flat to warn us of the perils of a relationship-free world in which every economic transaction is contested globally. In his "flat" world, your wages are set in Shan...

Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession. Since World War II we have had eight recessions preceded by substantial problems in housing and consumer durables. Housing did not give an early warning of the Department of Defense Downturn after the Korean Armistice in 1953 or the...

Models based on leading indicators suggest that a recession is almost certainly imminent, but Edward Leamer, a prominent econometrician, distrusts the econometrics and argues that the housing slump will be confined to that sector.

The usual index of leading indicators has constant weights on its components and is therefore implicitly premised on the assumption that the dynamical properties of the economy remain the same over time and across phases of the business cycle. We explore the possibility that the business cycle has phases, for example, recessions, recoveries and nor...

Models are neither true nor false. Models are sometimes useful and sometimes misleading. The suggestion that “Size Matters” implicitly accepts the truthfulness goal and deploys a truthfulness metric for measuring the distance between the data and the model. With this way of thinking, we would be led decisively to “reject” a road map that has freewa...

Will the Internet redefine the "core" and the "periphery," creating a new geography, with neighborhoods connected not with streams and roads but with wires and microwave transmissions? An analogy to previous transportation and communications improvements is frequently made today: the transportation revolution of the 20 century permitted the deagglo...

this paper, we have assumed that the aggregate trade balance (FBAL) is fixed for each country, and that the exchange rate (EXR) varies to achieve external balance. Fixed investment and government-consumption shares in GDP (GOVGDP and INVGDP) are also fixed exogenously in equations 39 and 40. To satisfy the government budget constraint in equation 3...

this paper: How can the important dimensions of decentralization be described and quantified? To develop characterizations to enable analysis of the fiscal, institutional and political arrangements that determine how rural public services are delivered in developing countries requires a review of: (i) government institutions and the formal and info...

Graphs that allow side by side comparisons of the six longer US expansions since 1950 suggest that these expansions have four distinct phases: (1) a high growth recovery during which the rate of unemployment declines to its pre-recession level, (2) a modest growth plateau during which the rate of unemployment is constant, (3) a growth spurt that dr...

This paper combines the perspective of an international economist with that of an economic geographer to reflect on how and to what extent the Internet will affect the location of economic activity. Even after the very substantial transportation and communication improvements during the 20th Century, most exchanges of physical goods continue to tak...

Two round robin studies were conducted to determine the accuracy, repeatability, and reproducibility of extended GC analyses and dewscope hydrocarbon dewpoint (HCDP) measurements of lean natural gas mixtures. Extended GC analysis had great difficulty quantifying the concentrations of the C9 and heavier hydrocarbon components that have the greatest...

Why is income inequality higher in Latin America than in East Asia? Is this phenomenon related to the region's natural resource abundance? Is it a contributor to Latin America's slow and narrowly focused human capital accumulation? If so, can anything be done to reverse the Latin American trends, or should we think of the region's fate as unalterab...

This paper embeds variable effort into a traditional multi-sector model. Effort enters a production function like total-factor-productivity and on the assumption that effort doesn't affect capital depreciation, the capital-cost savings from high effort operations are passed on to workers. The labor market thus offers a set of contracts with higher...

Rigorous analysis of the previously centrally planned economies (PCPEs) is one of the most important but at the same time difficult tasks currently facing macroeconomists. We develop applied techniques appropriate to situations typically faced by Western analysts of PCPEs, as well as by development economists more generally, involving data which is...

Why is income inequality higher in Latin America than in East Asia? Is this phenomenon related to the region's natural resource abundance? Is it a contributor to Latin America's slow and narrowly focused human capital accumulation? If so, can anything be done to reverse the Latin American trends, or should we think of the region's fate as unalterab...

We provide evidence that US workers face a wage-effort offer curve with the high-wage high-effort jobs occurring in the capital intensive sectors. We find that real wage offers rose at every level of effort during the 1960's, a shift which is consistent with a decline in the rental cost of capital. During the 1970's, when relative prices of labor-i...

Arguments abound for the relatively poor economic performance of Latin America over the past 30 years. Many of these explanations attribute the region’s troubles, including low growth and high income inequality, to a particular set of political choices made by governmental leaders. In this paper we take a different tack, revisiting the structuralis...

This paper examines the structure and direction of developing Asia’s trade over the past two decades. The impacts on developing Asia of the economic slowdown in 2009–2010 in high-income countries of the Organization for Economic Cooperation and Development (OECD), which includes the European Union (EU), Japan, and United States (US) are projected t...

This re-analysis of Tobin's (l950)study makes three points: (1) graphs are a powerful device for discovery and for communication, and can reveal much of the information in the data; (2) squeezing out the more subtle multivariate messages requires some solution to the usual overparameterization problem. Data-mining is still the treatment of choice f...

A natural time and place to look for historical analogues to the dramatic liberalisation of Eastern Europe is post-war Europe. It is possible that Eastern Europe will now begin the process that Western Europe experienced after the second World War. As shown in Figure 1, the 1950s witnessed high growth rates of per capita GDPs in most of Western Eur...

Economic growth in Europe and Asia and Latin America could have contri- buted in many different ways to lower wages and increased income inequality that the United States has been experiencing. One plausible model that links external product markets to internal labor markets is the Heckscher-Ohlin- amuelson general equilibrium model. This model ope...

This paper begins with a review of the simple theory of wage determination that is a familiar part of the Heckscher-Ohlin model. It is shown how demand for local nontraded goods and services can support a high-wage equilibrium that is unthreatened by increased competition from low-wage foreigners. Next the shift in favour of services that has been...

In a new study of American opinion, Economic Nationalism and the Future of American Politics, Ruy Teixeira and Guy Molyneux argue that popular anxiety about American economic decline is feeding fears of foreign investment and low-wage imports and focusing Americans’ attention on the link between jobs and trade. According to Teixeira and Molyneux, 6...