I read this Brad DeLong post about the US unemployment numbers, and the Obama administrations incorrect forecast of the future path of said numbers with a sense of familiarity.
After all, in Britain too, we’ve been exposed time and again to the weaknesses of forecasting, whether it be Denis Healey being forced to make more drastic cuts than he needed to on the basis of wrong predictions for the economy, or the way in which economic shocks like market crashes are always unexpected.
So here’s my question: Why do governments bother making such definitive predictions of the future? Why not adopt a system of range forecasting, where we work within assumptions of probability of different outcomes?
Yes, it might be embarrassing to admit that there is always a chance the ecnomomy might decline in the next year, rather than grow, and it may be awkward to discuss how far borrowing might rise under stressful conditions, and of course Governments would need to explain why they anticipate one scenario over another.
Despite all those problems, it still strikes me as a more honest, more accurate and more reliable way of debating the future. At the very least, it might force us to discuss why growth will be at the top or bottom end of projections rather than relying on a projection which is bound to be wrong – merely wrong to a greater or lesser extent.
So why not admit uncertainty in forward projections of the economy? The Government can aways set out what it plans to spend as a result of the judgement of others on the most likely path within that range, and how that puts forward spending within a range of future GDP, depending on inflation, growth etc. That would form the basis of spending reviews, and then these could be adjusted as reality begins to narrow the range and different economic requirements become clearer.
I suppose what I’m getting at is the importance of having political debates that reflect, not our assumptions about what the future is going to be like, but the way our decisions shape and respond to actual events and data.
We spend too much time discussing futures that will never happen, and not enough time talking about the present choices that decide the future.
8 Comments
July 2, 2009 at 4:06 pm
I agree.
The Bank uses ‘fan charts’ in it’s forecasts for growth and inflation.
http://www.bankofengland.co.uk/publications/inflationreport/ir09mayo.pdf
(Pages 3 & 4 od the above)
Something the Treasury should consider.
July 2, 2009 at 4:32 pm
They already do something like this with the regional strategies – economic and spatial. It’s common to see projections into the future of gold, silver and bronze scenarios. The problem is that even the least optimistic scenarios have to be acceptable to the local power-brokers, and the forecasters monkey around with the figures until the people who commission them are happy (it’s subtly done, but in the end he who pays the piper…).
To my mind, the bigger issue is the need to treat these guesses (educated or otherwise) with the scepticism they deserve. We never hear about the failure of the OECD and the IMF to predict the recession, but every time they publish a prediction we get a league table in the media saying UK growth will be worst in Europe (or best, or whatever). If we really are interested in discussing future options we should debate the factors behind the headline guesses, not just some crude league table based on one overall figure. And treat all these predictions with a healthy dose of reality.
And another bug-bear of mine – this week the Q1 GDP figures were dramatically revised, from -1.9% to -2.4%. If this doesn’t lead people to realise they have to treat provisional data with a little bit more caution, and remember that all data has a margin of error, then i don’t know what will.
July 2, 2009 at 5:51 pm
The only pro about making these predictions is to instill confidence in the consumer to begin spending again, but overall it would be better to be realistic about the economic environment so a false sense of security in spending doesn’t dig us deeper in this mess. In Britain, even the Queen is asking for a pay raise. Check this out: http://www.newsy.com/videos/britain_s_royal_financial_dilemma
July 3, 2009 at 8:51 am
The issue of why politicians insist of repeating these forecasts is down to Gordon Brown’s mantra, which is ‘if you keep telling people something is true, they will eventually believe you, regardless of whether or not it is in fact true’. His recent performances over public spending cuts illustrate the point quite beautifully.
I also suspect that confidence in international currency markets is also critical.
July 3, 2009 at 11:29 am
[...] might want to subscribe to the RSS feed for updates on this topic.Powered by WP Greet BoxHopi Sen asks question that’s both intelligent and naïve: Why do governments bother making such definitive [...]
July 4, 2009 at 12:31 am
[...] http://hopisen.wordpress.com/2009/07/02/all-forecasts-are-wrong/ [...]
July 6, 2009 at 8:49 am
All forecasts are wrong, but the future is the terrain of competition, so we keep trying to see it. That’s the human paradox. For some help see http://tinyurl.com/5mdu2c
July 10, 2009 at 6:49 am
[...] http://hopisen.wordpress.com/2009/07/02/all-forecasts-are-wrong/ [...]