Wearing my increasingly tattered futurist’s hat, I was struck by this otherwise not hugely exciting article at the Guardian about the IMF’s forecast for the UK’s economy. The IMF has changed its forecast for 2011:
The IMF said it was cutting its growth forecast for the UK to 1.1% this year — down from 1.5% in June, 1.7% in April and 2% at the start of the year.
I’m very, very far from an expert in economics, economic forecasting or the workings of the IMF, but… but… I’m surprised that this seems perfectly normal. The Fund has issued four different forecasts about growth for 2011. It has changed its mind three times in nine months. Its most recent forecast is half its original one.
I have no doubt that it’s extremely difficult to predict how something that’s both complicated and, possibly, hard to define as a country’s economy will change with much precision. Which leads me to wonder… why do they try to predict it with this much precision, and why does anyone still take the forecasts seriously?
If (or when) someone calling themselves a futurist rashly made a forecast like this for some time in 10, 20, 50 years, and got it wrong, we’d look back and laugh at their naivety. So why is it fine to be continually this wrong about the year we’re currently in? This is a genuine question.
(All of which reminds me of this article by Michael Blastland from 2010 about the Bank of England’s predictions for GDP. Be sure to click the “Click here to see what actually happened to GDP” link below the graph.)
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Adrian Hon at 21 Sep 2011, 1:23pm. Permalink
I'm not sure if many people do take the forecasts seriously, any more than people take debt rating agencies seriously. I would expect that most big banks and investment firms have their own in-house predictions and they understand the margins of error involved in these public predictions. The problem is that these figures get presented as fact, because people are desperate for any kind of number. Even if there were error bars around these numbers I'm sure the media would remove them, as they do for scientific results.
Generally speaking I agree with you though.
Phil Gyford at 21 Sep 2011, 1:28pm. Permalink
Yes, I expect there are plenty of people in the know who either don't take the figures seriously or know it all already. But I meant more that these forecasts are taken seriously enough to be presented uncritically as fact in the media. Over and over again. That seems serious enough.
Adrian Hon at 21 Sep 2011, 1:38pm. Permalink
I suppose the short answer is that forecasters will do whatever they can get away with, as long as no-one notices or complains too much, or it doesn't cause them to lose money. Why don't people complain? Probably because they don't know or remember that the forecasts were wrong, and journalists don't see a big reward in reporting it.
In other words, the ability to be repeatedly wrong is very valuable to economists, but most people don't individually care about it that much, even though collectively they should since it causes all sorts of bad decisions to be made. Reminds me of the end of James Meek's pieces in the LRB about the NHS and regulatory capture (although he doesn't call it that):
"In The Charterhouse of Parma, Stendhal wrote: ‘The lover thinks more often of reaching his mistress than the husband of guarding his wife; the prisoner thinks more often of escaping than the jailer of shutting his door; and so, whatever the obstacles may be, the lover and the prisoner ought to succeed.’ In the governance of Britain, it is as if the marketeers have internalised a modern version of this. The salesman thinks more often of making a sale than the consumer thinks he is being sold to; the lobbyist thinks more often of his loophole than the politician thinks of closing it; and so, whatever the obstacles may be, the salesman and the lobbyist are bound to succeed."
www.lrb.co.uk/v33/n18/…
D. Rabiega at 22 Sep 2011, 1:05am. Permalink
There are plenty of economists who will refuse to make predictions with this level of precision or certainty. Some of them have exceptional accuracy. Certainty get headlines, not accuracy.
just another skeptic at 22 Sep 2011, 1:31am. Permalink
As with weather forecasts, these can be adjusted or refined to reflect what we know about the future the less, er, in the future it is. It's one thing to say it's going to rain, another to say where, at what time, and and how much. And many a layman can make his own predictions if he understands where he lives.
I wonder how this ties to the constant refrain that America's "job creators" won't invest due to "uncertainty." Whatever happened to entrepreneurs and risk takers who knew that uncertainty was part of the game and could lead to big rewards? As someone said, the best way to predict the future is to invent it. I'm not sure we have what it takes to do that anymore if vague economic forecasts can stifle entrepreneurial drive.
I wonder why we treat The Economy as if it was an autonomous entity, rather than our creation. It works for us, not the other way 'round. We can structure it, regulate it, prime it, drain it, as we see fit. Worshipping it or fetishizing it seems wrong to me.
David at 22 Sep 2011, 5:40am. Permalink
Even in the presence of uncertainty, it is reasonable and often useful to report your best prediction, as that can be better than nothing when you are trying to make plans for the future. What's missing here is any quantificatino of confidence or variance. Weatherman get it right: instead of telling us it will rain 2 inches tomorrow they say there's a 60% chance of 1-3 inches of rain.
I wouldn't be surprised if the IMF was making similar uncertainty-quantified statements, but the details were being lost when filtered through the media.
Designs Review at 22 Sep 2011, 7:25am. Permalink
Well keeping the current economy in mind. I think they may have to downgrade the thing to 0.8 or so. FTSE is going downhill.
Phil Gyford at 22 Sep 2011, 9:03am. Permalink
> I wouldn’t be surprised if the IMF was making similar uncertainty-quantified statements
I wondered that and had a quick look at the actual report. I didn't read it in detail, but the tables that list this 1.1% figure for the UK (among many other figures) didn't have an obvious note about levels of uncertainty. While the 'Assumptions and Conventions' page at the start of the document does acknowledge projections have a margin of error, it doesn't explicitly say this should be taken into account, or state what the margins might reasonably be.
Matthew at 22 Sep 2011, 11:49am. Permalink
I'm a graph and stats geek, and over many years of watching wonderful projections I've noted a trend. The future is always rosy and smooth, the past was rocky and complex.
It makes me wonder if most forecasting is a form of hi-tech sacrifice to the harvest, the priests go away and ponder and examine goat entrails, come back and announce the next years harvest will be good. The villagers go out and make babies and plan for the future with confidence that the crop will be good and the weather predictable. And don't bother the chieftains about their worries of floods and starvation, what could the chief do about it anyway?.
To turn it on it's head, if the economists actually told the public at large what they were thinking, what benefit could it possibly serve? It won't make things any better, and at worst it will drive the giant ponzi scheme that is banking into the ground faster than a mustang at an airshow. But if you tell everybody that things are fine, fudge the stats, talk up the future, there is a small chance that enough people will be believe and the dance will go on.
Matthew at 22 Sep 2011, 11:56am. Permalink
I should have said that... If you ever get the chance to ask a bunch of economists for a show of hands on whether they believe their peers vision for a rosy future do so, the results will be in no way surprising or shocking. And if they as a group don't believe what they're peddling why do journalists publish it?
Scott at 22 Sep 2011, 1:03pm. Permalink
Two things I would say about the value of economic forecasts:
1. The difference between 2% growth and 1.1% growth is not so large as to imply the need for dramatically different policy decisions. In both cases, you're talking about anemic growth and should respond with whatever you think the right response to anemic growth is. With 1.1%, you just want to do more of it and faster. That's not to say that other factors that might be driving that difference (say unusually high unemployment) wouldn't require different policy solutions, but all other things being equal, 2% growth and 1.1% growth are essentially the same problem.
But the difference between 5% growth and 2% growth would likely mean significantly different policy responses. So getting within the right vicinity tells you important things about where and how action can/should be taken.
2. Any responsible forecaster will include in their report and updates information about the assumptions that they've made in producing the forecasts. So with multiple updates, you can compare those assumptions about what would happen this year (both in terms of economic activity and political activity) to the facts of what actually happened this year, and think about what that means in terms of the differences in the various forecasts. Again, there's valuable policy guidance about how to behave in the future in that evaluation.