The Magazine

Just Soothsayin’

The economy acts as predicted. Except when it doesn’t.

May 5, 2014, Vol. 19, No. 32 • By IRWIN M. STELZER
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The nonpartisan Congressional Budget Office regularly revises its forecast of economic growth, the deficit, and other variables it studies. The economists at the International Monetary Fund likewise periodically revise their forecasts, at one point claiming that “downward revisions to growth forecasts .  .  . highlight continued fragilities”—which, translated, means: “Our forecasts were wrong because we didn’t foresee weaknesses in various economies.” 

Alan Greenspan testifying before Congress (1998)

Alan Greenspan testifying before Congress (1998)


Recently released minutes of meetings of Federal Reserve Board policymakers show that they were musing about the dangers of inflation just as the failure of Lehman Brothers was about to shake the world financial system to its core and tip the world into a deep recession. And, more recently, Janet Yellen, newly ensconced in the chairman’s seat at the Fed, told the Senate that she can’t yet tell whether some new economic data reflect slowing or snowing, but that she would soon huddle with her staff and policymakers to try to “get a handle” on it. 

There’s more, but you get the idea: Economic forecasting involves peering through the windshield in an effort to see where the road is taking us, remaining alert to be able to change course at the emergence of the latest bit of economic data. Don’t blame economists: Those who are in the forecasting business are responding to the market’s demand for some guidance as to whether to buy or sell, build or pile up cash, hire or fire, or, in the case of policymakers, whether to raise or lower interest rates, step up government spending at the expense of higher deficits, or retire government debt. These poor souls must not only peer through heavy fog as they appraise the road ahead, but they must do so even though the rearview mirror is equally fogged, with frequent revisions to data purporting to tell something about past performance. 

“Economists,” reports the Economist, “are notoriously bad at predicting sudden turning-points in global growth.” And, the writer might have added, much else. The good news for economists is that their continued failures only whet corporate appetites for more. As the Wall Street Journal reports, “With more data available than ever before and markets increasingly unpredictable, U.S. companies—from manufacturers to banks and pharmaceutical companies—are expanding their corporate economist staffs.” But before concluding that, for economists, nothing succeeds like failure, take a look at two books that, between them, serve as a history of economic forecasting: Walter A. Friedman’s Fortune Tellers is true to its title, while Emanuel Derman’s Models. Behaving. Badly. paints a picture, warts and all, of the current state of play in the forecasting business. 

Friedman traces the careers of Roger Babson, Irving Fisher, John Moody, C. J. Bullock, and Warren Persons, men who thrived in the boom years following World War I, thanks to what Friedman calls “the inherent wish of human beings to find certainty in life by knowing the future,” but who failed to predict the Great Depression. (Oddly, or not, Babson, Fisher, and Persons all contracted tuberculosis: In the days preceding the discovery of antibiotics, the responsiveness of the disease to recommended cures such as lots of fresh air was disconcertingly unpredictable.)

Readers interested in the details of these prognosticators’ lives, careers, and methods are in for a treat, as Friedman writes with a combination of accuracy and dramatic flair. Others might benefit from his comparison of those early days of forecasting to the situation today. Friedman concedes that today’s globalized economy is more complex, the amount of data available to today’s economists infinitely greater, and the volume of transactions a multiple of what it was in the days of his early “fortune tellers.” But the desire for certainty remains. And when forecasts go wrong, the cast of characters and the blame game that has gone on since the 2008 financial upheaval seem amusingly similar. Then, it was Yale’s Irving Fisher; now, it is Yale’s Robert Schiller—the difference being that Fisher did not see the Great Depression coming, while Schiller did predict the Great Recession. In 1930, the press “blamed the Harvard Economic Society for promoting false optimism”; in 2008, the Financial Times ran a piece titled “Blame It on Harvard.”