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Gabe Ehrlich is the Associate Director of Research Seminar in Quantitative Economics (RSQE) where he forecasts the US and Michigan economies
After earning his M.A. (‘08) and Ph.D. (’12) in economics from UM, Gabe went to work for the Congressional Budget Office (CBO) in their Financial Analysis Department. With his research fields of macroeconomics and public finance, he was not hired as a forecaster. “When I started, I wasn’t supposed to do forecasting, but someone had just quit and they needed someone to fill in. I hadn’t done a ton of forecasting, it was mostly supportive, but I really got into it at CBO. I worked on forecasting interest rates on the federal debt, which was really interesting. So that has this gigantic impact on the deficit projections and the debt to GDP projections. Right now the interest rates are super low, people expect them to rise but there is this big debate about how much we should expect them to rise and because the federal government has so much debt, whether interest rates rise by an additional percentage point makes a big difference for the deficit going forward.”
Gabe returned UM in May of last year as Associate Director of RSQE. RSQE at UM dates back to 1952 and is one of the oldest continuously operating macroeconometric forecasting outfit of its kind. Lawrence Klein, who went on to win the Nobel Prize in Economics for his work, founded RSQE. This position was especially attractive to Gabe because it is very policy relevant, “We have a very close relationship with the state, and they actually use our forecasts which is cool. Twice a year we go up to the state legislature and present our economic forecast to them as part of their Consensus Revenue Estimating Conference (the next meeting is May 17). When the state government is doing their budgeting, they need a set of economic assumptions to work with. We give them our view on the economic outlook, both for the US economy and also for the state of Michigan. That is one of the very core things that we do. Also, the governor has a round table every year where we present our forecasts directly to the Governor and his staff and answer any questions that they have” (this occurs in November each year).
Gabe is currently working on downward nominal wage rigidity on employment outcomes, which looks at people's wage changes over time. This can be seen in a paper he began while still at CBO, Wage Rigidity and Employment Outcomes: Evidence from Administrative Data. “If you make a histogram of wage changes and look at the part that corresponds to wage cuts, it looks like it is hollowed out. If you look at the positive part of the distribution, it looks like a normal curve with a big spike at zero. The left hand side is missing a lot of wage cuts relative to what you would expect it to look like if you only looked at the positive part of the distribution. Economists interpret that as there being a resistance; workers really don’t like getting wage cuts, obviously. But why should a wage change of minus 1 percent be so different than a wage change of plus 1 percent. Looking at the picture it sure seems like it is different. A big question is whether what we call downward nominal wage rigidity, the reluctance of workers and employers to tolerate negative wage changes, has effects on actual employment outcomes. For instance, if a company gets hit by some sort of negative shock, it is more likely to lay off workers if they can’t cut their wages.” He examined German administrative data from many industries for this work.
When it comes to forecasting, Gabe prefers realistic and responsible over extremes. “Forecasting is actually really difficult and people should be realistic. I think our goal is to distill the best kind of conventional wisdom that we can, but what we don’t want to do is go out on a limb and say crazy things just for the sake of looking like the one group that called this. I think some organizations like to do that to get lots of credit, and that’s not what we do here. We try to stick to the middle of the distribution of possible outcomes. This position is important because the university and the state actually use our information. Its not as glamorous but it's more useful and we are doing our jobs better.” The department has a great deal of resources to help facilitate this work, including a Bloomberg terminal and Haver Analytics.
For more information on Gabe and his work, visit his homepage!