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Continued: An economic forecast? Good luck with that.

  • Article by: MIKE MEYERS
  • Last update: March 28, 2014 - 6:51 PM

Even as the Fed lowered interest rates to nearly zero late that year in an effort to prod economic activity, the policymakers predicted merely slow growth in 2008 and an uptick in the pace of economic activity for 2009.

In fact, real gross domestic product edged down 0.3 percent in 2008 and fell another 2.8 percent in 2009. The index of personal consumption expenditures, a key measure of inflation, actually declined for much of 2009. Price levels were falling, not rising.

One bit of hopeful news: The Wall Street Journal concluded that the best economic seer at the Fed in recent years was Janet Yellen, who proved to be the most accurate (read: the most pessimistic) in more than 700 central bank forecasts from 2009 and 2012. Yellen, president of the San Francisco Fed and vice chair of the Fed Board of Governors during those years, this year became Fed chair.

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“Economists can supply it on demand.”

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Forecasts are not the product of virgin birth. To a degree, they often resemble their parents.

Every forecast works under the influence of assumptions, some of them convenient for plugging into a computer program but probably untrue in the real world.

For instance, one handy fiction embedded in many models is that everyone has access to the same information and that people usually act predictably. In the parlance of economists, markets are “efficient” and people are “rational.”

If markets were efficient, as billionaire Warren Buffett once observed, he would not be rich. In a world where people are rational, how to explain buying lottery tickets or getting married for the third time?

At times, forecasters have been refreshingly honest about the wobbly nature of their forecasts.

A day or two after the 9/11 terrorist attacks, a leading economic forecaster said he was abandoning technology to change his outlook for the nation’s economy. He was getting panicky calls from clients and had no time to fiddle with the components of a computer simulation. “I’m changing my forecast with a pencil,” he said. Like a clerk at Macy’s marking down merchandise, the economist tried to calculate the price of the terrorist attack by hand.

At least his assumptions were obvious and out in the open. Forecasters aren’t always so transparent.

Consider one of the most-adopted — and pernicious — economic tenets after the Great Recession officially ended (but as economic suffering continued). That view, expressed in some widely quoted forecasts, was that the government was doing too much, rather than too little, to rekindle the nation’s economy.

The Obama administration’s nearly $800 billion stimulus package was too little to do any good, and the growing federal deficit would lead to higher interest rates by choking off borrowing. So went scenarios eagerly adopted by Republican politicos.

The results are in. The forecasts were bunk.

Many advocates of the Obama stimulus program perversely agree with Republicans on one point. Yes, a nearly $800 billion boost in federal spending wasn’t enough to heal all wounds to the U.S. economy. But the nonpartisan CBO estimated the program added 2 million to 4.8 million jobs — over and above what the economy otherwise would have created.

It also gave the GDP a boost of 1.7 percent to 4.5 percent, the agency said. In a $16 trillion economy, that’s a gain measured in the hundreds of billions of dollars.

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