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.
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.
True, the national debt has grown by 18.5 percent from 2009 to 2013 under Obama (compared with 20.5 percent growth in Bush’s second term). But also true, interest rates remain the lowest in generations, with no specter of inflation on the horizon.
Meanwhile, the wave of austerity — at the federal level and, especially, in states — has jettisoned more than 2 million jobs from public payrolls and has proved to be a drag on economic growth, the CBO concluded last year. My, my, who could have seen that coming?
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“When economic forecasters find themselves in the unemployment line, at least they know why they are there.”
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In my youth, one of my favorite writers on matters economic was John Kenneth Galbraith, a liberal icon who had taught generations of Harvard students. In the late 1970s, I mentioned that affinity to a gathering of Princeton economists. They were aghast.
“Where are his data?” one professor said with a sneer of condescension. It was the age of econometrics. An economist without a computer model was like a fashion model without high heels.
The high-water mark for economic forecasters may have been in the days of the Carter administration, when any medium-to-large U.S. corporation or bank was eager to find a Nostradamus to guide them through the era of high inflation and rocky financial markets. Fear breeds calls for guidance.
By the late 1980s, the U.S. economy had settled into a comfortable pattern of growth and lower inflation. Many companies started shedding Ph.D. economists from their payrolls. Occupants of the executive suite could buy prophecies from independent economic forecasting firms for less than the cost of an economist on staff.
Plenty of economic forecasters today remain employed, of course. They’ll probably continue to drive economic decisions, public and private.
That’s OK, as long as everyone understands the obvious: To continue could be misleading.
Mike Meyers, a former Star Tribune business reporter, is a writer in Minneapolis.
The Opinion section is produced by the Editorial Department to foster discussion about key issues. The Editorial Board represents the institutional voice of the Star Tribune and operates independently of the newsroom.