It always relies on assumptions, and as recent experience demonstrates, the optimism you put in can be overwhelmed by the reality that comes out.
More than 35 years ago, I learned I had no future in modeling.
No, not the kind that involves baring leg for the camera. (To anyone who knows me, I hope I haven’t put you off finishing today’s breakfast.) The modeling I mean was on a mainframe computer at Princeton University, where I was impersonating a grad student, one of many being initiated into the dark art of economic forecasting.
In the age before PCs, econ students were given the daunting task of running a program called “Econo-World.” The purpose of the exercise was to prepare a simulation, to show how our policy decisions — setting government spending levels, money supply and interest rates, for instance — would play out in the real world.
More often than not, the computer spit out my thick batch of IBM punch cards with a wry message: “To continue could be misleading.” That bit of Ivy League drollery was the techie’s way of saying, “Garbage in, garbage out.” In other words, the time had come to start over again.
Frustrated as I was to read that message, it’s a lesson too few economic seers heed trying to forecast growth, employment, inflation and interest rates in the months and years ahead.
“To continue could be misleading” should be tattooed on their foreheads.
The last six years, since the start of the Great Recession, have left a trail of sorrow for economic sages. Most didn’t detect the economic downturn until the nation was six months — or more — on the skids. And many, whether they peered into the mists ahead for the Federal Reserve, the Congressional Budget Office (CBO), financial institutions or consulting firms, remained optimistic of a happy change in fortunes for far too long.
These bent bellwethers would be the stuff of farce had not so many decisions — past and present — been guided by misdirection.
In June, the nation will mark — not celebrate — the fifth anniversary of the official start of the economic recovery. It’s been a period short on income, short on jobs and short on accurate economic predictions.
Economic prognosticators have lived up to all the old jokes that surround their vocation.
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“Forecasting is like driving a car blindfolded with help from someone looking out the rear window.”
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Words like “robust” and “resilient” laced the commentaries of economic forecasters in the decade before the worst recession in 75 years gripped the economy.
The recently released transcripts of the behind-closed-doors meetings of Federal Reserve policymakers offer disturbing examples of how the default position on the economic outlook was “more of the same.”
In the fall of 2008, nine months into a recession that started at the end of 2007, members of the Federal Open Market Committee (FOMC) seemed clueless about how fast the nation’s economy was tumbling.
A New York Times analysis of the transcript counted the word “inflation” mentioned 129 times, while the word “recession” was raised only five.
Translation: Fed officials seem to worry more about an overheating economy than about a downturn, which in 2008 already had claimed more than a million jobs by August.
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