Choose the word or term that best completes the following series:
Astrology, Numerology, Palmistry, Physiognomy, Phrenology, Graphology, _________.
For a hint, see here (via naked capitalism).
Not a single economist among 85 surveyed by Bloomberg News correctly forecast the 18,000 increase in payrolls in June reported by the Labor Department. Estimates ranged from a low of 60,000 to a high of 175,000. The median was 105,000 -- almost six times the actual number.
The correct response is Economic Forecasting. Of course.
Wait a minute! Surely, this is not a fair characterization of an august and highly respected profession. Well, not according to its practitioners, at least. After yesterday's release of the employment figures, the rationalizations are flying thick and fast. You have to understand, tweaking the numbers is hard. And relying on data that is itself tweaked just compounds the difficulty. “It’s an art and a science doing seasonal adjustments and it’s really hard to predict.” In other words, forecasters seem to be saying, "it's not our fault".
But, take a look at the track record:
The NABE, according to its website, is the “premier professional association for business economists and those who use economics in the workplace.” The recent survey that predicted 3.6% growth in 2011 is from their Outlook survey series, which they conduct four times a year. How accurate are their forecasts? Well, CNN Money talked about their May 2008 survey back on May 19, 2008 (hat tip Nolan Chart). From that article:
A survey to be released Monday by the National Association for Business Economics found a majority of economists now believe the economy is in a recession or will be in one this year. A February survey found a slight majority still expecting to avoid a recession.
The latest survey also found and that forecasters expect unemployment to continue to rise, but that they believe the economy has already weathered the worst of the housing downturn and credit crunch.
How'd that work out?
And this, from the best the government has to offer:
...some notable predictions from none other than Fed Chairman Ben Bernanke over the last couple of years:
Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. The vast majority of mortgages, including even subprime mortgages, continue to perform well. Past gains in house prices have left most homeowners with significant amounts of home equity, and growth in jobs and incomes should help keep the financial obligations of most households manageable.
-At the Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, Illinois, May 17, 2007
Fortunately, the financial system entered the episode of the past few months with strong capital positions and a robust infrastructure. The banking system is healthy… Rather than becoming more crisis-prone, the financial system is likely to emerge from this episode healthier and more stable than before.
-At the Economic Club of New York, New York, New York, October 15, 2007
The Federal Reserve is not currently forecasting a recession.
-Responding to a question after a speech in Washington, D.C., January 10, 2008
Way to go Ben. (Fortunately for him, it's not likely that he'll ever be held, you know, accountable.)
As bad as the record is, it's not as though economists don't know their forecasts will be, for the most part, inaccurate. Google "economic forecast accuracy" and you'll find article after article by people in the profession identifying the problems and addressing possible solutions, or, merely, calling bullshit :
It's less reassuring to see that all three types of forecasts are not particularly good predictors of actual GDP, however. In fact, the average error of the CBO and Blue Chip forecasts is about 0.97% (note that average GDP growth over the period is about 3.1%). On the other hand, a simple rule of thumb that guesses that next year's GDP growth will be the same as this year's GDP growth would have produced an average error of 0.94% over the same period - virtually identical.
That's pretty disappointing to me. It would be like a meteorologist realizing that, despite decades of studying, theorizing, estimating, and modeling, they can not produce a better weather forecast than to simply guess that tomorrow's weather will be the same as today's.
William A. Sherden, in his book “The Fortune Sellers” (published by John Wiley & Sons in 1998) analyses the forecasting skills of several professions, including weather forecasters, futurists, and economists. In the case of economists, he reviewed the leading research on forecasting accuracy contained in twelve studies published during the period 1979 to 1995 and covering forecasts made during the 1970 to 1995 period. His conclusions were:
--Economists cannot predict turning points in the economy;
--Economic forecast accuracy drops with lead time;
--Economists’ forecasting skill on average is about as good as guessing;
--There are no economic forecasters who consistently lead the pack in forecasting accuracy;
--There are no economic ideologies whose adherents produce consistently superior economic forecasts;
--Increased computer model sophistication provides no improvement in economic forecast accuracy;
--Consensus forecasts (more correctly averages of forecasts) offer little improvement;
--There is no evidence that economic forecasting skill has improved over the past three decades.
It's just that the forecasters don't care. There's a lot of money to be made by providing intellectual cover for the kleptocracy. It is unquestionable that they are perpetrating intellectual fraud. Given current economic realities and the real pain being inflicted unnecessarily on much of the population, they ought to be prosecuted for criminal fraud. In a functioning democracy bound by the rule of law, they possibly would be. Alas, we stopped being a functioning democracy bound by the rule of law long ago. At minimum, these charlatans need to be exposed for what they are and be ridiculed accordingly.