Prediction Is Hard

by Dave Schuler on February 24, 2012

Especially about the future. Benn Steil of the Council on Foreign Relationships recalls the Federal Reserve Board of Governors’ predictions made in 2007 of the state of the economy in 2010:

The Fed started publishing the Board of Governors’ and Reserve Banks’ three-year forecasts in October 2007. At that time, the GDP growth forecasts among this group of 17 ranged from 2.2% to 2.7%. Actual 2010 GDP growth was 3%, outside the Fed’s range.

The Fed forecasters told us that unemployment in 2010 would be in a range between 4.6% and 5%. In fact, it averaged about twice that, or 9.6%. The forecasters further predicted that both Personal Consumption Expenditures inflation (PCE, similar to CPI) and core PCE inflation would be in a range from 1.5% and 2%. The former came in at 1.3% and the latter at 1%, again outside the Fed’s range. The Fed’s scorecard on its 2007 three-year forecasts: 0 for 4.

In short, the Fed’s premise that it can speak with authority about the future is flawed. During the two decades to 2006, its own experts were worse than outside ones in predicting one-year economic data. Since the start of the crisis in 2007, its three-year predictions have been worthless.

Or, more pithily, the only function of economic forecasting is to make astrology look respectable. As has happened with weather forecasting I think real-time monitoring, reporting, and recording of economic data will improve. The difference between the weather and the economy is that economics is a science of human behavior and humans as intentional if not intelligent actors respond to the forecasts in a way that the clouds, winds, and air do not.

We will always have would-be economic engineers, Hari Seldons (whom any number of economists credit for inspiring them to go into the field) ready to manipulate the forces of human nature in futile efforts at controlling the economy. When we can’t even agree about what happened in 2007 in 2012, it shouldn’t be too surprising if those efforts remain at best futile and at worst perverse for some time to come. Put your trust in God, my boys, and keep your powder dry.

{ 6 comments… read them below or add one }

Icepick February 24, 2012 at 8:30 am

Hari Seldons (whom any number of economists credit for inspiring them to go into the field)

Really? That very disturbing if true. Asimov’s whole idea with Seldon always seemed very flawed to me, failing to account for the vaguries of life in general, and human life in particular. Of course Asimov thought that too, as evidenced by The Mule and the fact that the only reason any of it ever worked (in the story) was because of a deus ex machina in the form of one R. Daneel Olivaw.

Dave Schuler February 24, 2012 at 8:44 am

See here.

I had college friends who became economists who said exactly the same thing.

Icepick February 24, 2012 at 9:53 am

Well, that explains that.

Icepick February 24, 2012 at 10:01 am

Which is to say, smart enough to appreciate the story but too blinkered to understand (a) its flaws and (b) that concrete examples, especially concrete counter-examples, matter. I guess we should just be happy it was Asimov’s future history these economists found interesting and not Herbert’s. Physics envy and over-reliance on math without any appreciation of either. Jihad for everyone, bitchez!

Hmmm. Maybe they are secret fans of Herbert’s. After all, they seem to love the idea of an aristocracy that tells everyone else how to live. They just love the Corrino era Empire, not the Atreides era Empire. That would be disturbing if it weren’t so common throughout human history, which was one of Herbert’s points.

Drew February 24, 2012 at 11:05 am

Let’s set aside inflation, which I believe to be measured about as accurately as unemployment.

I hope you all will forgive me, but I’ve been beating a drum here for several years. Notice that GDP came in high, but employment low. I’ve been telling people, as an empirical observation of real live businessmen and women, and their deliberations, that they are biased towards not not hiring because of tax and regulatory concerns. Concerns based upon t he rhetoric of fearless leader. I was always told ” it’s demand.”

Again, GDP came in over expectation, employment under. Just chance I guess.

Ben Wolf February 24, 2012 at 12:36 pm

@ Dave Schuler

We must keep in mind the Fed in 2007 – 2010 had misdiagnosed the recession as solely a credit crunch issue. It wasn’t until 2011 I saw any indication they understood the concept of a balance-sheet recession and its effect on spending.

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