What do economists do all day, and why should anyone care?
Working economists promote their “science” on the basis of their forecasts. But are their forecasts any better than throwing a dart at a board? Recent reports say “No.”
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.
Both unearned and undeserved, as a new OECD report on their own economists’ reports makes clear enough. Translate this from economists’ blancmange, and this is damning:
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.
And it’s not just the OECD’s alleged economists who get it famously wrong.
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 make excuses for their failure. They say accurate forecasting is not the role of a forecaster. They use words like “endogenous.” They say things like “it’s not the numbers that matter but the qualitative analysis of risks and market direction.” And they complain about things from the real world that throw off their neat models like “oil prices, fiscal policy, the course of the euro crisis … turning points in the business cycle, the beginning and end of recessions, changes in trends in productivity,” “the impact of new banking regulations …), global droughts, earthquakes in Canterbury, snow storms during lambing in the South Island, and government policy change.”
But the world is full of stuff that changes every day – either things they can’t foresee so don’t model, or things (like recessions) they should but don’t.
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 favourite 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.
Read the whole article: “Wrong Again: The Economists’ Confession,” by Andrew Ferguson, WEEKLY STANDARD
[Hat tip Jeff Perren Novelist]
- When economists make predictions, just walk away ... – NOT PC, March 2008
- The forecasting delusion – NOT PC, July, 2008
- Government Economists: About as Useful as a Fork in a Sugar Bowl – NOT PC, Nov 2013
- The Blindness of Modern Economists – NOT PC, August 2013
- The Truth About Economic Forecasting – NOT PC, May 2013