Computer Models Play 'What If' Game With Our Economy

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Economists often use computer models to try to understand the economy. Planet Money checks back in on a model it used a few years ago to predict what would happen with unemployment.

Copyright 2015 NPR. To see more, visit http://www.npr.org/.

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Transcript

ROBERT SIEGEL, HOST:

We all look at the world and play the what-if game. What if this happened? What if that happened? Economists do it all the time using computer models. They tweak an interest rate here, a government policy there. And they ask, how fast did the economy grow? How many jobs have we created? A few years ago, our Planet Money team played around with one of those models. They simulated some very preposterous scenarios. NPR's David Kestenbaum reports, looking back, some of them actually came true.

DAVID KESTENBAUM, BYLINE: The computer model we were playing around with was built by Mark Zandi, chief economist at Moody's Analytics. Back in 2012, I went to see it at his office in Pennsylvania.

Well, first of all, where is the model actually in this building? Like, where is it?

(LAUGHTER)

KESTENBAUM: We're looking at two computer screens. Where is the thing?

MARK ZANDI: Excellent question and, it moves. It's now sitting in Plano in a server farm, so...

KESTENBAUM: Plano, Texas - in some random building in the middle of nowhere or something? Have you ever gone to see it?

ZANDI: I've never seen it, no.

KESTENBAUM: You can think of the computer model as a snow globe version of our economy, a tiny model of the world - but one that we can control with a keyboard. Back then, the unemployment rate was up around eight percent. We wanted to bring that down. So, we started fixing all the things that were wrong. Remember, in a computer model you can do whatever you want no matter how crazy or unlikely. Back then, the European debt crisis was a big concern, so we imagined in the snow globe model people woke up in the morning and they heard this on the news...

(SOUNDBITE OF ARCHIVED BROADCAST)

LAKSHMI SINGH, BYLINE: From NPR news in Washington, I'm Lakshmi Singh.

KESTENBAUM: Just to be clear, this is a fake newscast.

(SOUNDBITE OF ARCHIVED BROADCAST)

SINGH: European leaders surprised the world today when they announced they found 1 trillion euros in the back of a couch in Brussels. This ends the continent-wide debt crisis.

KESTENBAUM: I called up Mark Zandi the other week to reflect on how things actually turned out.

ZANDI: Well, no, (laughter), that did not happen, no.

KESTENBAUM: Was that sort of true in that the European Central Bank created a bunch of new money?

ZANDI: Hey, you know what? I didn't even think of that. It was about a trillion euro, right, $1.3 trillion. So, yeah, good point. They didn't find it in a car somewhere, but they figured out how to inject some real cash into the European economy. So yeah, I'll go along with that - pretty close.

KESTENBAUM: Again and again the things we put into the computer model came to pass, though, not for the reasons we imagined. What if, we said, all the conflict in the Middle East finally got resolved?

(SOUNDBITE OF ARCHIVED BROADCAST)

SINGH: In business news, the price of oil dropped by $20 a barrel.

KESTENBAUM: That detail came true. More than came true. The price of oil dropped by not $20 a barrel, but by $50 a barrel. After fixing a bunch of stuff, we were able to get the U.S. unemployment rate in our snow globe computer model of the economy down from eight percent to a little over five percent, which today - two-and-a-half years later - is where the real economy actually is. The unemployment rate is now five-and-a-half percent. According to the computer model, it could go lower. Zandi says we are not yet at what economists call full employment, which he defines this way...

ZANDI: The idea is that, simply put, anyone who wants a job has a job and anyone who wants more hours can get those hours.

KESTENBAUM: Zandi says we are getting close to that point. According to the computer model, we could get to full employment next year.

ZANDI: I'm being conservative. I mean, with a little bit of luck it could be maybe even late 2015. I mean, we are creating a lot of jobs.

KESTENBAUM: Since November, an average of over 300,000 jobs each month.

ZANDI: So at that pace, we'd be back to full employment by the end of the year.

KESTENBAUM: And finally this wound from the financial crisis would've been healed.

ZANDI: Yeah, finally. It'll feel really good.

KESTENBAUM: David Kestenbaum, NPR News. Transcript provided by NPR, Copyright NPR.