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.
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