The economists’ confession.
Mar 24, 2014, Vol. 19, No. 27 • By ANDREW FERGUSON
It's hard to find nice things to say about economists. Their detachment from the real world of human activity is matched only by their enormous influence over it, and by their unearned assumption that this arrangement is well deserved. That all changed last month, however. Now we can say something nice about at least some of the economists at the Organisation for Economic Co-operation and Development, and it is this: They may not be very good at what they do, but they’re not afraid to admit it.
Last month they released a report, “OECD Forecasts During & After the Financial Crisis: A Post-Mortem.” It is not beach reading, unless you’re the sort of person who works for the OECD or The Weekly Standard. The report’s watery tone and obscure nomenclature are common to the literature of professional economists—and are indispensable when it comes time to hide an unflattering conclusion from the prying eyes of laymen. The unflattering conclusion here, though, is straightforward, if understated. The OECD economists looked at their own work forecasting the direction of the world economy over the last several years and admitted: “GDP growth was overestimated on average across 2007-12, reflecting not only errors at the height of the financial crisis but also errors in the subsequent recovery.”
The passive voice in the first clause of that sentence is squirmy; a flat assertion in the first person -plural would be more seemly and more accurate. But give them credit for the rest of the sentence. How big were the errors? Pretty big.
In May 2010, for example, with one-third of the calendar year already over, the OECD economists predicted the U.S. economy would grow 3.2 percent for the year. As it happened, gross domestic product grew 1.7 percent. Note that this is not a small error. That 1.5 percentage point spread between the two numbers means the original projection was off by nearly half. It’s as if you thought you saw a car go by at 60 miles per hour while it was actually going 30.
The new report is not solely an admission of error. It is also a catalogue of errors by type. The biggest mistakes, the economists point out, occurred when they forecast growth rates in countries with a relatively high level of government regulation. This surprises the economists, though it won’t surprise anyone who takes a dim view of government regulation generally. The forecasters, good statists all, assumed that the regulations “would help to cushion financial shocks” in the highly regulated countries and would therefore aid recovery.
The economists now say they failed to consider the damaging effects of regulation. In the real world, regulations “delay[ed] necessary reallocations across [economic] sectors in the recovery phase”—which, translated from the Economese, means that government was retarding the ability of businesses to do what they do best: find a way to create value and make money even in calamitous circumstances. The concession is implied, but it’s clear the economists regret letting an ideological assumption in favor of government intervention overwhelm their forecasts as the recession swept the globe, raining on the regulated and unregulated alike.
Failures of foresight are common among experts—commoner among them, probably, than among the rest of us, who are unburdened by the expertise that tends to bind rather than liberate habits of mind. The OECD economists are happy to point out that their failures in figuring out the economy from one country to the next are no greater than those of the profession as a whole, especially in the years before and after the recession. Yet no amount of publicity about such spectacular failures deters their clients, whether in government or business, from asking economists for more.
In late 2009 the economist William McEachern impishly looked back at the previous year’s forecasts by the Wall Street Journal’s panel of economic experts. The Journal surveyed its experts in September 2008 when U.S. unemployment was at 6.2 percent; the average prediction among the economists was for the rate to stay more or less flat. By the following September the unemployment rate was 9.8 percent. At the same time, the average prediction among Journal economists was that growth for the last quarter of 2008—the quarter, you’ll note, that was just about to commence—would be 1.2 percent. Instead it was -2.7 percent.
Economists, in other words, not only fail to predict the future, they can’t even predict the present. The OECD offered various reasons for its abysmal record. “The OECD forecasts,” the report says, “are conditional projections rather than pure forecasts.” Why this should let them off the hook is unexplained. The conditional projections, they go on, “rest on a specific set of assumptions about policies and underlying economic and financial conditions.” Oil prices, fiscal policy, the course of the euro crisis—all of these, they say, are beyond an economist’s control and bound to throw him off his game.
And we shouldn’t doubt it. The oft-cited (by Democrats or Republicans, depending) Congressional Budget Office makes similar demurrals when it owns up to its forecasting failures, which are regular and very large. “Sources of large forecasting errors,” one CBO report says, “have included the difficulty of predicting: Turning points in the business cycle—the beginning and end of recessions; changes in trends in productivity; and changes in crude oil prices.”
The world is a crazy place, no doubt about it. Most events that occur—even the actions of governments, sometimes—are beyond the control of economists, much as they might like to daydream otherwise. But isn’t that the point? This admission just begs the question of why anyone should pay attention to their wizardry to begin with. The forecaster’s chief conceit is that by feeding numbers into one end of a statistical model he can see the future come out the other side. The conceit touches off a phantasmagoria of argument in Washington, where politicians and policymakers sift the numbers from one set of econometricians or another, and then use their favorite figures to determine how they will orchestrate the activities of the folks back home. In thrall to economists, government policy-making is a fantasy based on a fantasy.
Perhaps I’m wrong to say the OECD economists aren’t very good at what they do. They may be champs, for all I know. It’s just that what they are trying to do is worse than worthless. The fault, if that’s the word, lies with the people who are soliciting their forecasts, and why.
In an autobiographical essay published 20 years ago, the left-leaning economist Kenneth Arrow recalled entering the Army as a statistician and weather specialist during World War II. “Some of my colleagues had the responsibility of preparing long-range weather forecasts, i.e., for the following month,” Arrow wrote. “The statisticians among us subjected these forecasts to verification and found they differed in no way from chance.”
Alarmed, Arrow and his colleagues tried to bring this important discovery to the attention of the commanding officer. At last the word came down from a high-ranking aide.
“The Commanding General is well aware that the forecasts are no good,” the aide said haughtily. “However, he needs them for planning purposes.”
Andrew Ferguson is a senior editor at The Weekly Standard.
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