by Mike Kimel
Why Economists (On Average) are Terrible Forecasters
My colleague, Rebecca Wilder, had a post at her site entitled Economists are terrible forecasters – why trust them anyway?. The reason why economists as a general rule are lousy forecasters is obvious: there are no penalties to being wildly wrong.
Prominent examples abound. Dow 36,000 anyone? No housing bubble in 2005. I can go on forever, but these aren’t even as as it gets. At least these are bad forecasts of the future. There are plenty of bad forecasts of the past, or even the hypothetical past, too. My favorite example, in fact, of a bad forecast came in 2002, when a group of prominent policy economists, advisors to the then President, told the world that barring the 2001 recession, the US would have enjoyed double digit growth in fiscal 2002. And nobody said peep. It wasn’t front page in the newspapers. It wasn’t in the newspapers at all! Nobody involved paid any price for it, except the public who had to endure the policies “supported” by such an incredibly inane analysis. In fact, just about everyone involved went on to bigger and better things – Governor of Indiana, Dean of the Business School at Columbia, etc.
If there are no penalties to being wrong, there also usually aren’t any benefits to being right. Consider, well, me for example. Regular readers know I don’t make predictions often, but I like to be right when I do make ’em. I can’t think of anyone else who called both the start and end of the Great Recession, in both cases running against the grain, but you aren’t likely to see me on TV any time soon. (I will admit my forecasts weren’t perfect: I misunderestimated the stupidity of the policy responses of both Bush and Obama and thus didn’t expect it to be quite as bad as it turned out.) I can even think of two forecasts made for a then employer that I suspect together cost me a job, despite the fact that the forecasts turned out to be spectacularly right.
Its been said its better to be wrong in the same way as everyone else than to be right alone. That’s certainly true for economists. Unfortunately, that is a bad thing for anyone who listens to economists.