20/20 Hindsight

Every now and then I run across some economic forecast from 2006/2007. They are almost always amusing, and a good reminder not to take any of the current prognostications about the economy (in either direction) too seriously.

Here's the TD 'Consumer Pulse' from January 7, 2007 which offers the following insight:

"It is evident that around the world there has been a general trend towards consumers carrying more debt. This is partly a reflection of a sustained low inflation and interest rate environment. However, the accumulation of debt has largely been a rational decision, which is why repeated fears of a consumer-led financial crisis have proven unfounded."

Oops. Maybe not so rational after all.

People often seem to confuse the fact that something hasn't happened yet, with an argument that it won't or can't happen.

Discourse in Wonderland

Imagine three groups of astronomers who have differing models of how fast a distant galaxy is expected to grow.

Group 1 predicts growth of 20% over the coming year.
Group 2 predicts growth of 30% over the coming year
Group 3 predicts the galaxy will shrink by 10% over the year.

So a year passes, the galaxy shrinks by 10% and a leading newspaper runs a story about astronomers predicting galaxy sizes. Does the story tell us that:

A) Groups 1 and 2 are meeting with group 3 to better understand how group 3 predicted what they missed so they can adjust their models accordingly.

OR

B) Group 3 has made their prediction of next year's growth of the galaxy (10% more shrinkage) which is considered newsworthy given the accuracy of their last prediction.

OR

C) Groups 1 and 2 are meeting with each other over a dispute between them because Group 1 is predicting the galaxy will grow 25% for the coming year, while Group 2 is predicting the galaxy will grow by 40% over the coming year. Neither has changed their model since last year and Group 3 is not mentioned.

If you picked C) then you understand how our public discourse works.

Take a story in today's Globe and Mail, for example:

"At a meeting likely to last five hours at the central bank's headquarters in Ottawa, the economists are expected to spend the first 30 minutes duking it out with central bank officials over their divergent views of Canada's prospects.

Following opening remarks by deputy governor John Murray, the first item on the agenda is a discussion on "forecast comparisons and issues arising" from the Bank of Canada's latest policy update and "chief economists' forecasts," according to a copy of the agenda obtained by The Globe and Mail.

Present will be senior policy makers and chief economists from at least 11 of Canada's biggest lenders.

The issue is Mr. Carney's prediction last month that the recession will begin to recede by the end of the year, followed by a sharp rebound of growth averaging 3.8 per cent in 2010. While Bay Street accepts the premise of a recovery next year, the bank analysts expect growth at only about half that pace."

A few comments:

1) First of all, everybody knows that all of these economic forecasts are worthless, so the entire thing is just a big hoax. Not a deliberate hoax as much as everyone just playing along in a game they know is meaningless. Disagree? Then why doesn't the story even mention the accuracy of past forecasts by the two groups? Because they know that the accuracy of the forecasts is irrelevant, that's why.

One of the interesting things about moving from doing math in elementary school and high school to doing it at university was the transition from a world where every year you learn more about all the things we know about math (elementary/high school) to a world (university) where every year you learn more about what we don’t know, what we can’t know and how we know that we can’t know it. Complexity theory, chaos theory, Incompleteness theorems – these concepts have the names they do for a reason.

Sadly, predicting the total value of transactions involving money that we will make in 2010 (i.e. GDP) is one of those things that has proven itself to be not particularly amenable to being modelled mathematically. So far, applying the lessons of history (big debt bubbles cause trouble when they burst) and thinking things through has been much more fruitful as a method of analysis and prediction (for example, see here).

2) Is it just me, or is there something crazy in that the Bank of Canada is meeting with economists from 11 other banks to talk about this. Are there no economists in Canada who don't work for a bank? What about the provincial governments, large (non-financial) corporations, the universities – all of these must have economists on staff, right? I find the dominance of 'bank' economists in Canada very puzzling.

3) As Stephen Gordon points out, there’s not much difference between the two groups anyway.

4) As the first comment on Stephen’s post points out, given that so far both groups have consistently erred on the high side since the downturn hit, continuing to believe they are too optimistic seems reasonable at this point.

5) This is all symptomatic of our accountability free media world where getting heard depends on whose interests you serve, and being right about things is irrelevant. And no matter how wrong you are, or how often, there's zero consequences.

The Trouble With Economists

So many disagreements and misunderstandings seem to arise from people using different definitions for the same word.

Take 'economists' for example. A little while back Stephen Gordon, himself an economist as far as I know, wrote a post entitled "Economists' fatal flaw: Diffidence". It's a short post which argues that economists didn't point out the housing bubble because it didn't fit their models and when the data doesn't fir their models, economists just stay quiet. He concludes by asking, "I wonder to what extent the world would be a better place if economists were as arrogant as non-economists claim they are."

Meanwhile, the other day saw a big headline in the Globe and Mail, "Economists' advice to Flaherty: cut taxes now"

The article starts,

"Canada's top private-sector economists have a message for Jim Flaherty as the federal Finance Minister prepares his critical recession-fighting budget: Cut taxes now, rein in spending later."

and later on...

"Mr. Drummond and others added that tax cuts now would have to be balanced in 2010 and beyond by a tightening of program spending, which throughout this decade has consistently grown faster than inflation and the economy.

"We do have to see these permanent tax cuts - that's really the only thing that will influence behaviour in the economy," agreed Craig Wright, chief economist at Royal Bank of Canada. "But in the out years, when we hope and think the economy will be in a recovery mode, then you can rein in program spending, because that's something that has been running quite rapidly."

The claims about rising federal spending that are made by these economists are easily refuted (for anyone who doesn't do business reporting for the Globe and Mail, at any rate) nonsense, as Erin Weir points out over at Relentlessly Progressive Economics.

But how to square this article with Gordon's theory of the diffident economist? How to square the group of economists in the front pages of the paper offering a series of right wing prescriptions supported by neither fact nor theory with the economist unwilling to point out a housing bubble because it doesn't fit his models?

You can't reconcile these two groups, because these are not the same economists. On the one hand, we have what we might call 'newspaper economists' who seem to function primarily as big business shills and see tax cuts, interest rate cuts and spending cuts as the solution to every problem whether it be boom or bust, surplus or deficit. On the other hand, we have 'academic economists' who take on the thankless and to date mostly unsuccessful (in macroeconomics, anyway) task of trying to understand economics well enough to build a theory of economics that will actually prove useful, occasionally blogging but generally leaving the public stage to the corporate, newspaper economists (although certainly the biases of the media towards simplistic partisan answers doesn't help with the relative coverage the two groups get).

There are a few exceptions to this paradigm, in particular Paul Krugman, but they're more of the exception that proves the rule than the norm.