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"The Secret to Economic Growth? We Just Donít Know."
Old 11-07-2011, 12:23 AM   #1
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"The Secret to Economic Growth? We Just Donít Know."

Business Week reports on a study of economists' ability to predict the economy:
What’s the Secret to Economic Growth? We Just Don’t Know - BusinessWeek

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A few years ago, Prakash Loungani of the IMF looked at the accuracy of short-term economic growth forecasts by industry experts across a range of countries. Sixty recessions occurred in the countries he studied during the period covered by the forecasts. A grand total of two of those 60 were predicted by forecasters a year before they happenedówhich means the other 58 took economists by surprise. Two-thirds of all recessions remained unpredicted by April of the year in which they occurred. ďThe record of failure to predict recessions is virtually unblemished,Ē Loungani concluded.

So donít put too much credence in predictions either of a double-dip recession or of an economic recovery in the U.S. over the next 18 months. We just donít know. Pretty much the only safe bet is that something will happen.

Lounganiís study was relatively limited in scope: It looked at economistsí attempts to predict economic shifts a year or two out in a set of largely advanced countries. Imagine the much larger challenge of predicting longer-term growth outcomes in a wider range of countriesónot just rich ones, but also the Nigerias and Vietnams of the world. In fact, thereís no need to imagine: We are awful at it.

In their 1997 paper trying to explain ďAfricaís Growth Tragedy,Ē former World Bank staffers Bill Easterly and Ross Levine noted that in the 1960s, Africa was expected to grow faster than East Asia over the next 30 years by many, if not most, development economists. In the same decade, the economic model in the Soviet bloc was widely touted as a harsh but highly successful approach to escape povertyónot least because the Soviet Union had an immensely high investment rate. We know now, of course, that Africa stagnated and Eastern Europe collapsed, while East Asia boomed.

And so predicting future growth in developing countries is pretty much a foolís errand. But economists are not much better at simply explaining why growth happened where and when it did in the past.
In defense of economists, it's also tremendously difficult to predict hurricanes, earthquakes, and other natural disasters...
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Old 11-07-2011, 06:19 AM   #2
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In defense of economists, it's also tremendously difficult to predict hurricanes, earthquakes, and other natural disasters...
Pretty harsh on the meteorologists and geologists, aren't you? Remember what Galbraith said: there are two classes of economic forecasters: Those who don't know, and those who don't know they don't know.
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Old 11-07-2011, 08:47 AM   #3
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When it comes to earthquakes which are pretty frequent in SA, I have found this site to be very helpful and a constant reminder to keep our earthquake kit/ family plan, refreshed and accessible

Earthquake predictions, largest regional earthquakes
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Old 11-07-2011, 09:58 AM   #4
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In defense of economists, it's also tremendously difficult to predict hurricanes, earthquakes, and other natural disasters...

Are you making the comparison to economists based on two years out

Because they are getting pretty good at hurricanes... and are not horrible on some natural disasters such as floods... at least better than 2 in 60.... if you look at the normal lead time for these disasters...

PS... usually not that bad on snow storms either from what I see on TV...
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Old 11-07-2011, 03:28 PM   #5
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Short term forecasts in economics are similar to weather forecasts. They're trying to pick a near term trend in a chaotic (literally) system. Longer term, the trend dominates, and we can get a better guess.

Here's a little something I worked up on the longer term trend, built on the behaviors economies show in balance sheet recessions (AKA credit crunch or liquidity crunch).

Non-political economists (the ones you never hear about, and who don't get invited in TV) don't see GDP growth getting up to the 3.5-4% range until late 2015 to 2016, and unemployment remaining above 6% until 2016. Those are consensus numbers. The 'Blue Chip' numbers (August 2011 Blue Chip Consensus Forecast extended with March 2011 Blue Chip long-run survey of 50 private sector forecasts) has real GDP chugging along at around 2.6-3.1% til 2021 (it doesn't go past that...), and unemployment over 6% til 2017.

Most of this is due simply to the impact of the balance sheet recession and the sheer amount of time it takes to pay consumer and commercial debt back down from the highs of 2007 (300% of GDP) to the longer term more normal level around 50% of GDP. Various proposed federal fiscal policies and programs move the GDP growth number up or down by about 0.4% and unemployment number by about 1%.

This will be a long haul...
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Old 11-09-2011, 01:04 AM   #6
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Pretty harsh on the meteorologists and geologists, aren't you?
I'm married to a meteorologist who used to be the ops officer at the military's Joint Typhoon Warning Center. I watched the sausage getting made every day. And every night. And weekends & holidays too.

I'm referring not to the 10-day forecasts but rather to the prognosticators who say "The Bay area is overdue for a 7.6 earthquake!" or "There will be five CAT4 hurricanes in the Atlantic this summer" along with other incredibly precise "estimates".
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Old 11-09-2011, 07:43 PM   #7
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Reminds me of a graph I saw (I think) in one of Mankiw's textbooks. It was consensus inflation predictions at different points from 1975 through 1985. On the way up, the consensus consistently underestimated future inflation rates. On the way down, they consistently overestimated. I think the point was that it's very hard to get away from a bias to predict a continuation of recent experience.
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Old 11-10-2011, 12:27 PM   #8
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Pay off your debts. Don't spend more than you take in unless your growth rate is higher than the interest rate you're paying. Any country (or person) not grown & prospered by doing that?
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