And so a once honorable and useful profession becomes as useless as teats on a boar. It has become so bad, even places like The Guardian are beginning to notice.
Economists and reports get the 'dismal science' wrong all the timeEconomists overestimate their own prowess, official reports have major flaws, and much of the fuss is really just noise
Suzanne McGee theguardian.com, 29 June 2014 11.30 EDT
If you felt depressed all winter, it turns out that it wasn’t just because the weather was dreadful.
It may have been because the economy fared worse – much, much worse – than anyone had expected it to during the first three months of 2014. The latest, latest revision to gross domestic product showed that the US economy shrank by 2.9%, the biggest drop since 2009.
Those dire economic figures also include some messages for all of us about how – and whether – we should react to the sober pronouncements of economists, as a general rule.
So let’s rewind. Back at the end of April, we all knew that the first quarter of 2014 had been a fairly dreadful period for economic activity. We weren’t shopping; we weren’t eating out. Construction was weak.
It was completely logical that by the end of April, economists were predicting that gross domestic product, aka GDP, or the measure of all the goods and services produced during that period – would grow at a very slow annual rate of only 1.2%. They dismissed that low growth, however, as an anomaly.
Come the fateful day, and the actual number was far worse: a mere 0.1%. The initial GDP figures are just estimates, and get revised, not once, but twice. Thus the first revision turned that tiny positive number into a 1% decline in May.
Then, this past week, the Commerce Department dropped a bombshell. It turns out that this winter we witnessed the biggest economic contraction recorded since the immediate aftermath of the financial crisis in the first three months of 2009. The economy actually contracted by a whopping 2.9%.
For economists, this is a confusing and intense time of introspection about how things went so wrong. They can – and will – agonize overwhat it means and just why the initial readings were so far off base. (Could Obamacare’s rollout have affected spending on healthcare?)
The problem? None of this is terribly useful information for most of us.
The GDP data measures everything that happens across the entire economy – and it does so for a period that is now several months in the past.
You see the problem: our financial lives are shaped by what happens today, and by the perceptions of what might happen in the future.
When economists start making predictions, they focus on broad-brush factors: the consumer price index (CPI), GDP, the unemployment rate. For most of us, these are so broad as to be virtually useless. So even if the economists are deadly accurate in their forecasting, why pay attention to what those forecasts say?
Consider one particularly problematic indicator: the CPI, the most commonly-used measure of inflation, or how much the prices of our groceries and other goods rise.
If we believe CPI, then we would never believe we're paying more at the supermarket: it’s never come close to the 4% level where we can begin to even discuss real inflation.
The problem is that the CPI understates the impact of some key expenses: college tuition and medical expenses are two of the most striking. Both have grown at exponentially faster rates than other CPI components: college tuition bills have soared some 130%.
Core CPI also doesn't include food and energy costs, so it ignores everything we spend at the supermarket and the gas station – two key places for most American families. Again, what economists say in this case is interesting, but it doesn't exactly validate the impact of rising prices on our personal finances.
The other problem: economists overestimate their own predictive prowess. Plainly put, they're often dead wrong. The first quarter GDP forecast is simply the latest example of that. The IMF gets it wrong andso does the Fed.
In fact, for a bunch of folks collectively representing a profession often referred to as “the dismal science”, they are remarkably over-optimistic.
That has always been the case. Economists underestimated the extent to which the US economy could grow back in the late 1990s; China hasn’t stagnated, as they were confidently predicting would happen just a few years ago; there wouldn’t be any recession in 2008 or 2009. Whoops. And then, after the financial crisis struck and the recession did show up, all they could see were recessions – few of which ever materialized. (Remember Nouriel Roubini, aka Dr Doom? Even he is sounding relatively optimistic these days.)
Economists and their forecasts may be more useful than gazing into a crystal ball if you have to make big economic policy decisions about where a business or a nation will be in a few years’ time. As far as the rest of us are concerned? It’s background noise. more