How Seriously Can We Take Economic Forecasts?

Milton Friedman: An authority, but not necessarily right

I’m being coy here, because Economics is, of course, a real field of study.  There is a nobel prize for economics, and some of the most important evens of the decade have been due to economic factors.  As a professional field, however, it has key differences with other social sciences. Rather, it is a quantitative science , and yet some of the most contentious political debate of our time revolves around central issues of the field.

The problem is that there is a huge split in opinion and what is considered “true” within the field of Economics.  Even the most leading minds in the field can’t agree on basic issues like the effect of taxes and government spending.  Paul Krugman and Milton Freidman, both Nobel Prize winners, would barely agree that the sky is blue.

One of the common rebuttals to this seeming disparity in views is the argument that Economics is essentially all about modeling: a process that predicts broad trends without always yielding perfectly accurate results.

Perhaps. But often, the real reason Economic forecasts fail are because they are politicized: any result can be interpreted to justify most ends. Indeed, instead of testing theories based on observations, partisan economists come up with models that appear to work to them and then use them to explain current phenomena. A glaring example of this is the debate over who caused the housing crash. Ask a conservative, and it was the government’s cheap money and low-income housing legislation that saturated the market and undermined the benevolent forces of free market competition.  A liberal will tell you that thanks unrestrained capitalism, credit default swaps took all the risk out of lending, so sub-prime lenders could make money by giving bad loans.

It’s amazing that the influence of politics (and big money as well) is so strong it can completely overwhelm an entire academic discipline. Academic integrity and the public that needs relevant, accurate information are the losers.

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