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.
No, but evidence that some of the things they believe are actually wrong.
And also a general warning against accepting that macroeconomists have any real power to predict the future or to predict the results of various market interventions.
I for one had never heard of the OECD (an international forum for democratic governments to engage in policy analysis) or that it was a key player in the institution of stimulus spending. You learn something new every day around here.
In any event, I don’t see in the quoted remarks where the OECD had admitted to liberal “bias”. The relevant quote suggests that one of the factors in their forecasts being off by a “whopping” 2.6% “may” have been over-reliance on evidence that “tight regulations” could mitigate economic shocks.
Hell, Sam. The best economist I know (former Deputy Director of the CBO) used to have a sign in her office that read, “If you lined up all the economists they’d point in different directions”. So you’re not exactly breaking new ground, there. Economists, and anyone really paying attention, are well aware of the huge inaccuracies inherent in trying to make predictions in such a complex thing as the world economy.
On your second point, you’re making a bit too much. You seem to be leaping from them saying ‘may’ and ‘might’ to ‘is’ and ‘does’. They acknowledge the possibility that tighter regulations might lead to slower recovery. But there’s no outright confirmation that I see.
Also, that thesis utterly ignores the actual role that regulatory bodies play. If unfettered economic growth were the goal we could eliminate all regulations, withdraw the EPA, child labor laws, the minimum wage and so forth. But no one seems to actually - outside of a few weirdos - want that. Even the ones who scream about doing so are largely doing it for rhetorical positioning. Very few people want to return to a Los Angeles like I grew up in…one where in elementary school we had ‘no recess’ days because the air quality was so bad.
So to make the leap you’re making seems both unwarranted by the data and also outside the bounds of the discussion that could be had.
I suspect that this is the only legitimate take-away from the OECD report.
It seems to me that it is also true that the countries with higher levels of labor and market regulation (notably the EU), tended to follow the “conservative” path of austerity while the countries with less regulation of labor invested more heavily in Keynesian government spending.
(There is one camp that actually holds that the recovery would have been swifter and more sustainable with even more Keynes and less austerity. Of course, I will point back to the first declaration in this post to refrain from claiming that anyone practicing the Dismal Science has any clue as to what should really happen.)
I’m not sure I agree with this analysis. First of all, let’s define austerity. For most of life, I never heard that word in business articles, but in the past five years or so everyone’s been using it. But kind of like third graders who have just learned “antidisestablishmentarianism”, they use it without seeming to know what it means.
If a national government is practicing “austerity”, one would expect that to mean that spending has been cut dramatically to historic lows. We’ve been told over and over that Europe is practicing “austerity”, but where’s the evidence for it? Certainly not when we look at spending trends in England and France.
Well, a perfect example of why that politically partisan analysis is wrong is Canada, which unlike much of the EU has an economy very similar to that of the US, and indeed is so closely linked to the US economy that it tracks it very closely. Yet Canada, which has a more regulated marketplace and in particular, a tightly regulated banking and financial industry, weathered the Bush economic and housing crash better than the US did. Indeed, not only was there no meltdown in the housing market, but that market has been exceptionally robust and for many baby boomers has been a major factor in a comfortable retirement. And as far as the economy is concerned, according to the World Bank here is how GDP growth compared in the years leading up to and then following 2008, the year that Obama inherited the Bush debacle. The first number in each pair is GDP growth for Canada, the second is US:
I’m very surprised. I would have thought the existence of the OECD was as well known as, say, that of the UN. I certainly hear about it I guess at least once a week, and it’s almost always mentioned when people talk about economic predictions. I would have needed to live under a rock for most of my life in order not to hear about it.
At the risk of hijacking, I’d be very curious to know if this ignorance is commonplace. My first thought was in fact “maybe Jackmannii is American and the OECD in unheard of in the USA?”
At least it’s a break from the normal thread subject which is that everything conservatives think and do is wrong. It’s good to have a little diversity!
And a year ago the IMF said austerity was damaging and they were wrong to push it so hard. I’m waiting for an economist to stand up and admit they just made everything up.
The problem with your Canada example is that Canada is not following the same path at all. Our ‘stimulus’ was much smaller as a percentage of GDP, and we are actually planning to balance our budget next year. We are one of the only countries actually doing anything you could call ‘austerity’. Our plan is to actually run supluses for the next five years and pay down our debt to 25% of GDP. Our government didn’t meddle in the economy nearly as much as the U.S. government has during and after the recession.
The reason we had no meltdown in the housing market is because we had fewer government interventions to ‘stimulate’ home ownership. We don’t have NINJA loans and 0% down mortgages. We don’t have a Fannie and Freddie buying up mortgages and packaging them into derivatives. The OECD report mentions that too - that higher interference in the economy pre-recession may have contributed to the severity of the crash.
Well, they admit they were wrong in this instance, but they’re not willing to admit that this may be because the future state of a complex system is mostly unknowable. Instead, their takeaway is that they just have to learn from this and tune their models a little better, and next time by golly they’ll be right on the nose.
If economists admitted they have very limited capability to predict the future, they would become much less valuable to politicians and business leaders. Can’t have that. In the same way, if stock analysts admitted that they do no better than chance over the long term, they’d be arguing themselves out of a job.
I’d like to see a cite that economists ascribe more reliability to their forecasts than is warranted. Do they give “error bars” for their projections?
One difficulty in influencing or predicting economic outcomes that you hint at is the global nature of markets. The Fed injects money into U.S. hands, but much of that is invested overseas. This suggests that more government influence, not less, is appropriate. Fiscal spending, rather than monetary stimulus, would be a more certain way to increase U.S. GNP.