So the OECD has released a post-mortem on their economic forecasts during the economic crisis.
The key takeaway - their estimates of GDP growth were wildly wrong. For the entire period from 2007-2012, their May predictions for GDP growth in the following year were off by an average of -1.4%. That’s a big error - probably not much better than throwing a dart at a blackboard.
But it’s even worse for the years of 2007-2009, where their May prediction for the next year was off by a whopping -2.6%.
So why were they wrong? The first two factors they identified:
Note that economists on the ‘free market’ side predicted that stimulus spending would not be effective in countries with open markets. In general government interventions in the market are more problematic in an open economy where capital and resources can flow around the interventions.
So in essence, they were wrong because they listened to the liberal arguments about the low economic cost of regulations, and ignored conservative arguments that regulations cause market imbalances and prevent the economy from re-structuring after a crash. What they actually discovered is that countries that have higher levels of labor and market regulation crashed harder and took longer to recover than countries with fewer regulations. And until then, the OECD economists believed the opposite to be true.
The other thing to realize is that the predictive power of economics is incredibly low. That’s because the global economy is a complex system that constantly surprises and is fundamentally unpredictable. Keep that in mind the next time you hear someone blathering about how they can forecast CO2 emissions and economic activity 100 years into the future, and can estimate how much economic harm there will be at that time. We can’t even predict the direction of the economy six months into the future.