Economy

Dog Gone at Penigma

(433 posts) Tue Dec 18, 2012, 01:11 PM Dec 2012

In the context of the fiscal cliff discussion, and austerity/cuts.....

this was a fascinating article from Robert Skidelsky, at project syndicate:

a brief excerpt from his bio:

Robert Skidelsky, Professor Emeritus of Political Economy at Warwick University and a fellow of the British Academy in history and economics, is a member of the British House of Lords. The author of a three-volume biography of John Maynard Keynes, he began his political career in the Labour party, became the Conservative Party’s spokesman for Treasury affairs in the House of Lords, and was eventually forced out of the Conservative Party for his opposition to NATO’s intervention in Kosovo in 1999.

UK conservatives are significantly different than US conservatives in many respects. For starters, they can be openly Keynsians instead of Austrian School adherents, and they don't tend to be disconnected from verifiable facts and objective reality. What happens in Europe affects us; what we do affects them (possibly more so). We should avoid the mistakes occurring with the economic models in calculating the affects of our political decisions more accurately before we bring each other down economically. Austerity, at least too much of it or the wrong kind, is a huge mistake.

Models behaving badly

LONDON – “Why did no one see the crisis coming?” Queen Elizabeth II asked economists during a visit to the London School of Economics at the end of 2008. Four years later, the repeated failure of economic forecasters to predict the depth and duration of the slump would have elicited a similar question from the queen: Why the overestimate of recovery?

Consider the facts. In its 2011 forecast, the International Monetary Fund predicted that the European economy would grow by 2.1% in 2012. In fact, it looks certain to shrink this year by 0.2%. In the United Kingdom, the 2010 forecast of the Office for Budget Responsibility (OBR) projected 2.6% growth in 2011 and 2.8% growth in 2012; in fact, the UK economy grew by 0.9% in 2011 and will flat-line in 2012. The OECD’s latest forecast for eurozone GDP in 2012 is 2.3% lower than its projection in 2010.

Likewise, the IMF now predicts that the European economy will be 7.8% smaller in 2015 than it thought just two years ago. Some forecasters are more pessimistic than others (the OBR has a particularly sunny disposition), but no one, it seems, has been pessimistic enough.

Economic forecasting is necessarily imprecise: too many things happen for forecasters to be able to foresee all of them. So judgment calls and best guesses are an inevitable part of “scientific” economic forecasts. But imprecision is one thing; the systematic overestimate of the economic recovery in Europe is quite another. Indeed, the figures have been repeatedly revised, even over quite short periods of time, casting strong doubt on the validity of the economic models being used. These models, and the institutions using them, rely on a built-in theory of the economy, which enables them to “assume” certain relationships. It is among these assumptions that the source of the errors must lie.

Two key mistakes stand out. The models used by all of the forecasting organizations dramatically underestimated the fiscal multiplier: the impact of changes in government spending on output. Second, they overestimated the extent to which quantitative easing (QE) by the monetary authorities – that is, printing money – could counterbalance fiscal tightening.

http://www.project-syndicate.org/commentary/why-forecasts-of-economic-recovery-have-been-wrong-by-robert-skidelsky