Why Economists Overestimate Future Growth Just Like Politicians Do.
Over at The Weekly Standard, Andrew Ferguson tucks into a new report by the Organization of Economic Cooperation and Development (OECD) cataloguing that group's own awful predictions about economic growth before, during, and after the global fiscal crisis. A snippet:
In May 2010, for example, with one-third of the calendar year already over, the OECD economists predicted the U.S. economy would grow 3.2 percent for the year. As it happened, gross domestic product grew 1.7 percent. Note that this is not a small error. That 1.5 percentage point spread between the two numbers means the original projection was off by nearly half. It's as if you thought you saw a car go by at 60 miles per hour while it was actually going 30.
Read Ferguson's whole take, which stresses that economists' "detachment from the real world of human activity is matched only by their enormous influence over it, and by their unearned assumption that this arrangement is well deserved." [Hat tip: Hot Air]
Take a few moments, too, to run through the OECD report itself, which is online here. Economics may be called the "dismal science," but the folks at the OECD (not to mention many boosters of President Barack Obama) are forever seeing the future through rose-colored scenarios: "GDP growth was overestimated on average across 2007-12," notes the report, "reflecting not only errors at the height of the financial crisis but also errors in the subsequent recovery."
In other words, don't stop believin' kids. Among the problems identified was the OECD's belief that highly regulated economies would respond to the crisis better precisely because of regulations:
Larger forecast errors over 2007-12 have occurred in countries with more stringent pre-crisis labour and product market regulations. In part this may reflect the weight given at the time to pre-crisis evidence that tight regulations could help to cushion economic shocks, together with insufficient attention being paid to the extent to which tighter regulations could delay necessary reallocations across sectors in the recovery phase. A third possibility is that it reflects a correlation between restrictive regulations and the pre-crisis build-up of imbalances that was not fully captured in forecasts.
Tighter regs might delay the ability of markets to sort things out? That's a meaningful concession to a basic point we've been making at Reason.com for some time.
Of course, the OECD isn't the only group making upbeat assessments. Remember the claims made by the Obama administration and its press cheerleaders regarding the stimulus? Here's a reminder from summer 2012:
Current unemployment in the good, old US of A? According to the government's latest number, it's at 6.7 percent (and with a lower labor-force participation rate that before the crisis started).
To add to a point made by the OECD: If tight regulations make it difficult for markets to respond to economic shocks and reallocate resources, there's also a huge role played by regime uncertainty. To the extent that a government is seen as constantly changing the rules of the game (sometimes in contradictory ways, as when the Federal Reserve pours money into banks but them pays them interest on reserves to keep that money sitting in vaults), it freezes most hopes of recovery. Government isn't the sole cause for the business cycle and for economic booms and busts (though its actions tend to make things more extreme, I'd argue). But government attempts to forestall, cushion, or mitigate upswings and downswings inject huge amounts of uncertainty that almost certainly freezes businesses. How can you plan for the next few years—or even the next few quarters—if you have no good idea on how much you'll be paying for employees' health care? Or what tax rates will be, or even what the federal budget will be? Etc. The sort of manic interventions into all aspects of the economy that started under Bush and keep on going under Obama aren't helping the recovery. They are making it take a helluva lot longer to happen.
That's one of the essential—and largely unlearned—lessons of FDR's New Deal. Constantly throwing up new interventions into the economy, however well intentioned, freezes things up instead of chilling folks out.
From 2008: "Obama's New New Deal: As bad as the old New Deal?"