During the Great Recession, I used to argue that when it comes to monetary policy, there is no “wait and see”. Within minutes of a Fed announcement, the financial markets give us almost all the information on the likely impact of a new policy that we will ever have. The actual future course of the economy depends not just on the new policy, but also on many other extraneous factors.
The same is true of the world of sports, where the betting line for a game is a rough estimate of the market prediction as to the outcome. The prediction is relatively efficient, although the actual outcome of the game is highly random and often differs one way or another from the predicted outcome.
This recent story caught my eye:
The Packers were 1-point favorites on Tuesday.
Then on Wednesday, Aaron Rodgers was ruled out for Sunday’s game at Kansas City due to a reported positive test for COVID-19. And we got a clear idea how much the Packers quarterback matters to the point spread.
When BetMGM opened the line after the news, the Chiefs were 7.5-point favorites. Not many players ever can cause an 8.5-point difference in the spread. . . .
Rodgers is one of the league’s best players. We saw it yet again last week when he helped a shorthanded Packers team to a win over the then-undefeated Arizona Cardinals. It’s arguable he means even more than 8.5 points to the spread.
We’ll find out on Sunday what Rodgers’ absence means for the 2021 Packers.
I’m not sure it’s “arguable” that he means more than 8.5 points to the spread, at least for this game. Perhaps the reporter means that it’s arguable that the change in the spread underestimates how much he actually means to the Packers. In any case, we probably won’t find the answer to that question on Sunday–as football outcomes depend on all sorts of unpredictable factors. We might know a bit more after Sunday, but not because we’ll know more about Rodgers, rather we’ll learn a bit more about his replacement.
READER COMMENTS
Matthias
Nov 6 2021 at 7:11pm
Your argument would work even better, if we had not just prediction markets for eg inflation (via the TIPS spread) but also for eg ngdp.
rsm
Nov 6 2021 at 7:49pm
Why can’t you make an index fund that tracks NGDP, like SPY tracks the S&P 500? Is it because NGDP is a magic number that doesn’t really represent anything, so it’s essentially unobservable, conjured out of the incantations of government statisticians?
Do economists take it on faith that NGDP represents General Welfare? Can we expose this fetish with GDP or NGDP or whatever you want to call some invented number, and stop even considering it when making public policy, please?
Thomas Lee Hutcheson
Nov 7 2021 at 5:58am
I’ve never run across an economist that thinks even real GDP is the same a “General Welfare” though it is correlated with some things that surely contribute to general welfare.
In what ways do you think that the use of real or nominal GDP leads to policy errors?
rsm
Nov 9 2021 at 1:42am
Is GDP also correlated with rising suicides and overdoses?
Does GDP lead to policy errors because it assumes prices are efficient, but we all know from personal experience that prices are an artifact of power relations?
Would we be better off scrapping GDP goals and inflation targeting, having acknowledged prices are arbitrary?
Scott Sumner
Nov 7 2021 at 12:33pm
“Do economists take it on faith that NGDP represents General Welfare?”
If it does, then Zimbabwe must be the happiest place in the universe!!
Thomas Lee Hutcheson
Nov 7 2021 at 5:52am
We need TIPS markets in 1 and 2 year inflation.
What is the history of how we got something so rational as a TIPS? I doubt that it was that the Treasury felt it “needed” an additional instrument for raising cash.
Is the Fed’s process of choosing PCE v CPI for it’s price target known? Is PCE being less well known a feature or a bog or neither?
The logic of a non-zero target is clear enough (making relative prices more flexible in the face of nominal rigidities v making them less predictable in the long run), but it would be interesting to understand how the Fed hit on 2%.
An NGDP security or a bond that paid one trillionth of GDP would put a lot more pressure on Commerce in the preliminary and revised process.
Spencer Bradley Hall
Nov 7 2021 at 9:33am
As Marie Antoinette said: “There is nothing new except what has been forgotten.”
As American Yale Economic Professor Irving Fisher stated:
“In my opinion, the branch of economics which treats of these five regulators of purchasing power ought to be recognized and ultimately will be recognized as an EXACT SCIENCE, capable of precise formulation, demonstration, and statistical verification.”
Spencer Bradley Hall
Nov 7 2021 at 9:37am
As I said: “At present, short-term money flows, proxy for R-gDp, falls by 5 percentage points from July to September.”
Jun 28, 2021. 12:12 PMLink
So, R-gDp fell from 6.7 % to 2.0 %.
TMC
Nov 7 2021 at 9:49am
“Within minutes of a Fed announcement, the financial markets give us almost all the information on the likely impact of a new policy that we will ever have.”
I’d add ‘vs. expectations.’ Expectations of new policy are already built into the market at the time of an announcement. It’s how much the actual announcement varies that drive the reaction. I tried to explain this to my son who took the tapering as good news because the market did. No, it was just better than they expected.
Maybe similar to your valuing Rodgers vs his replacement rather than just the value of Rodgers.
Spencer Bradley Hall
Nov 7 2021 at 11:51am
All the Packers have to do is throw to chiefs Sorensen’s side. Mahomes has completely lost his mojo.
Michael Sandifer
Nov 8 2021 at 1:18am
Scott,
I agree wholeheartedly with this post, but given this perspective, why do you express as much doubt as you do about the risks of inflation running too high for too longm in other recent posts? You haven’t predicted that will occur, acknowledging markets aren’t predicting it will occur, but why don’t you seem more confident in market predictions in this case? Or, am I misreading you?
Of course, from the perspective of most, I’m biased, in that I think there’s too little inflation expected beyond next year, but I can see things from a more traditional perspective that sees current monetary policy as being just about right.
Also, NGDP and the S&P 500 both returned to the pre-crisis growth trend level at the same time this year, and the approach I use to translate between changes in NGDP growth expectations and changes in the S&P 500 indicated a roughly 4% NGDP growth forecast ex ante, as you may recall in comments I made. What would it take for you to believe that the stock market is in fact a more precise indicator of NGDP growth expectations than you’ve previously acknowledged?
Scott Sumner
Nov 8 2021 at 12:02pm
The markets are predicting modestly above 2%. That’s also my view.
MarkLouis
Nov 9 2021 at 8:25am
Modestly above 2% on top of an existing overshoot means the Fed has abandoned FAIT. That’s very different from “modestly above 2%”. What is the Fed’s new framework? Will we be allowed to know?
Spencer Bradley Hall
Nov 8 2021 at 9:42am
As I said, the Packers scored their only point against Sorensen.
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