In his latest newsletter, John Mauldin pulls no punches about economists and their failures. Here are a few excerpts.
If you’ve suspected all along that economists are useless at the job of forecasting, you would be right. Dozens of studies show that economists are completely incapable of forecasting recessions. But forget forecasting. What’s worse is that they fail miserably even at understanding where the economy is today. In one of the broadest studies of whether economists can predict recessions and financial crises, Prakash Loungani of the International Monetary Fund wrote very starkly, “The record of failure to predict recessions is virtually unblemished.” He found this to be true not only for official organizations like the IMF, the World Bank, and government agencies but for private forecasters as well. They’re all terrible. Loungani concluded that the “inability to predict recessions is a ubiquitous feature of growth forecasts.” Most economists were not even able to recognize recessions once they had already started.
In plain English, economists don’t have a clue about the future.
If you think the Fed or government agencies know what is going on with the economy, you’re mistaken. Government economists are about as useful as a screen door on a submarine. Their mistakes and failures are so spectacular you couldn’t make them up if you tried. Yet now, in a post-crisis world, we trust the same people to know where the economy is, where it is going, and how to manage monetary policy.
Central banks say they will know the right time to end the current policies of quantitative easing and financial repression and when to shrink the bloated monetary base. However, given their record at forecasting, how will they know? The Federal Reserve not only failed to predict the recessions of 1990, 2001, and 2007, it also didn’t even recognize them after they had already begun. Financial crises frequently happen because central banks cut interest rates too late and hike rates too soon.
Trusting central bankers now is a big bet that (1) they’ll know what to do, (2) they’ll know when to do it. Sadly, given the track record, that is not a good wager. Unfortunately, the problem is not that economists are simply bad at what they do; it’s that they’re really, really bad.
. . .
Why do people listen to economists anymore? Scott Armstrong, an expert on forecasting at the Wharton School of the University of Pennsylvania, has developed a “seer-sucker” theory: “No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.” Even if experts fail repeatedly in their predictions, most people prefer to have seers, prophets, and gurus tell them something – anything at all – about the future.
There’s more at the link. (Click the ‘Download’ button to read the entire article in Adobe Acrobat – i.e. .PDF – format.)
I regard economists in the same light as I do climate change alarmists. Both disciplines work with models that attempt to predict developments in their respective field. Unfortunately, in both cases, their models usually can’t even duplicate past observations correctly, where outcomes have been measured and are known with certainty. If they can’t reproduce the past accurately, why should we believe the models’ predictions about the future?
The only economists and financial commentators I trust are those who have, in the past, correctly – and preferably repeatedly – forecast economic developments that have, in fact, occurred. That’s a fairly short list. They may be wrong in future, but at least their track record suggests they’re likely to be less wrong than others in their profession!