What's the difference between an econometric model and a mechanical link?
Not much if you're in the government forecasting business, according to an editorial in today's Wall Street Journal, "Government Forecasters Might as Well Use a Ouija Board."
Government economic forecasts receive a great deal of attention and are used to make a case for or against legislation or public policies. How good are the forecasts? The answer: not very. Forecasting is an inexact science at best, and the trust that Congress and the public invest in these estimates is not warranted.
The author, Edward P. Lazear ,a Stanford business professor and a former 2006-2009 chairman of the Council of Economic Advisers, writes about government predicted 1999-2013 GDP growth:
My analysis of 1999-2013 reveals that the CBO’s real GDP growth forecasts for the next year were off, on average, by 1.7 percentage points, either too high or low. Administration forecasts were similarly off by a slightly larger 1.8 percentage points on average, also to high or too low. Given that the average growth rate during this period was only 2.1%, errors of this magnitude are substantial.
Perhaps most damning: History is a better predictor of annual growth than government forecasts. Simply assuming that GDP growth will be 3.1% in each year—the average annual rate for the 30 years that precede the study period—results in an average forecast error of 1.5 percentage points.
We've been writing about these suspect predictions for some time. Lazear goes on to point out that no actual data is used but rather a similar approach method employed to forecast jobs created or saved numbers.
The same approach is used to forecast jobs “created or saved” by the stimulus. Government economists generally assume a mechanical link between forecasted GDP growth and forecasted job growth. This means that estimating job effects is subject to the same qualification as estimated GDP effects. Both are based on models, not actual experience. The CBO described the methodology in its report, but those who reported or trumpeted the CBO’s stimulus numbers were generally unaware of how GDP or jobs numbers were generated.
Our one beef with Lazear's article is comparing Ouija boards to these model-driven, mechanical forecasters is an extremely unkind cut to all those dusty Ouija boards packed away in cluttered closets everywhere.
http://online.wsj.com/articles/edward-lazear-government-forecasters-might-as-well-use-a-ouija-board-1413503121
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