There is a basic problem with economic forecasting, and that problem is insuperable.
Here is the problem: Economics is only a behavioral science, and human behavior is famously impossible to predict.
(If it weren’t, you undoubtedly can think of numerous examples of the failure of economists to tell the future as in–oh, I don’t know–the Wall Street debacle. An example in a different context: the numerous mistakes that parole boards make on something as seemingly foreseeable as the propensity of a prisoner to commit another crime?)
As a result, economists always seem to be talking out of both sides of their mouths, having it both ways, being two-faced–pick your favorite cliché.
What got me thinking about this concern in the past week has been several articles that quoted economists, starting with one of my favorite punching bags, Robert Shiller. The Yale economist who is co-creator of the Case-Shiller Index said this in a thoughtful column last Sunday:
The question now is whether a strong case has been built for a new bull market since the home-price turning point in May 2009. Though there is no way to be precise [emphasis added], I don’t believe it has.
The italicized phrase is the one that stimulated this post, yet I found myself agreeing with the substance of his conclusions:
Recent polls show that economic forecasters are largely bullish about the housing market for the next year or two. But one wonders about the basis for such a positive forecast.
Momentum may be on the forecasts’ side. But until there is evidence that the fundamental thinking about housing has shifted in an optimistic direction, we cannot trust that momentum to continue.
Then, one day later, the Times reported that the seven economists who determine whether we are out of or still in a recession had found the evidence difficult to decipher.
Several economists on the committee told the newspaper that they thought a “double-dip recession” was unlikely. The report went on:
But, they said, the duration and severity of the contraction have made it hard to determine with authority that a recovery has begun.
Right! But note that the special committee of the nonprofit National Bureau of Economic Research (NBER) now has had it both ways by revealing that, on the one hand, they wanted to say the recession was over but, on the other hand, were chary of saying so out loud.
By Tuesday, one member of the panel, called the Business Cycle Dating Committee, actually came out in the newspaper. Said economist Robert J. Gordon of Northwestern University and one of the seven committee members:
I strongly disagree with the committee’s decision. It is obvious that the recession is over.
Even if the probability of a double-dip was extremely small, Gordon said, “the committee thought that. . . it would be very costly to the committee to be proved wrong after the fact.”
Good for him and even for Prof. Shiller for taking a stand. For that NBER committee, however, the group that prefers dating to expressing a commitment, a Bronx cheer from me.
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