Economic Analysis and Predictions: Worth Anything?
Economists continue to debate the economy. Are we still recovering? Are we slipping back into recession? Did we ever leave the recession in the first place?
This economist sites that data to support position A. Then that economist sites other data to support position B. Is it any wonder you can get pretty confused reading too much economic "analysis"?
The silliest disputes between economists come about when they argue numbers. Is the unemployment rate really 9.5% - or is it 10.4% (when you count in the most recent class of "discouraged" workers who've stopped looking for work). Or maybe it should be 16.5% - when you count not only the "discouraged" workers, but also the "under-employed" (the ones who've lost their real jobs and taken part-time jobs that pay a pittance).
But is this really what we want from economists? Are the actual numbers what you're looking for when you read some economists comments?
Caroline Baum doesn't think so. In a recent Bloomberg column, she hits the nail on the head. "I'm interested in the big picture," she says. I think that's about right.
Even more important than nailing down exactly what's going on this very moment is how things are going to play out - or at least some reasonably thought out idea of what we can expect in the months and years ahead. Wouldn't that be more helpful to you?
For one thing, it might help you make better decisions about what to do with your money. It might help you figure out what to do about getting a job if you were laid off: should you keep trying to get your old job back, or start thinking about changing careers - meaning you need to learn new skills, make new contacts, etc.
Then there's the whole dispute on the table about whether to let the Bush tax cuts expire. (Click here for a recent blog entry on this.)Economists have been debating this one for months. And the government's been going back and forth on it too, although now it seems they're leaning towards letting the tax cuts expire - which effectively means taxes will be going up on a whole list of items.
Now, the government's going to do what it will, but economists' debates get downright silly here too. Ms. Baum points out that you really can't scientifically determine whether tax cuts will benefit or harm the economy. The reason she points to is that, in a dynamic economy, you can't hold everything else constant while you change tax rates. Unless other factors remain the same, how can you accurately gauge the effects of the change you apply to tax cuts - or to raising taxes, for that matter.
Of course you can guess or estimate. But when you listen to economists, you get the feeling they'd like their guesses or estimates to be treated like the hard sciences - you know, like chemistry or something. It doesn't work that way.
Don't get me wrong. I'll keep reading economists - at least some of them. But I stopped letting them drive me crazy a long time ago.
I once worked for a big money center bank. We had our own in-house economist - he was actually a "chief investment officer." His economic analysis was pretty detailed, pretty comprehensive stuff. He'd be dragged out all the time to talk to clients at meetings and events. I was always amazed at how carefully people listened to his every word.
Even pretty sophisticated rich people focused carefully on his presentations. (Of course, they're always seeking information that might give them some advantage. And the really sophisticated ones listen, then add it to their pile of other info, and - in the end - draw their own conclusions...that is, if they're really sophisticated.)
Anyway, the thing I always puzzled over was why no one ever asked our chief investment guy how accurate were his predictions over the last few years. If they had, they'd notice that his annual predictions were pretty much the same year after year. And the accuracy at the end of the year was sometimes good, sometimes awful.
When he kept predicting increases of "around 9%- 11% "for stocks for the year 2000, 2001, and 2002 - and stock dropped each and every year (remember?), was when I realized I had better get sophisticated and start thinking for myself - which I've been doing ever since.
Hey, maybe that's why I wound up starting up my own firm after years of working at these other financial outfits. I realized I'd have to think for myself anyway, so why not see what I could make of it?
Which is all just a long-winded way of saying you've just got to take a lot of this economic analysis with a grain of salt.
This economist sites that data to support position A. Then that economist sites other data to support position B. Is it any wonder you can get pretty confused reading too much economic "analysis"?
The silliest disputes between economists come about when they argue numbers. Is the unemployment rate really 9.5% - or is it 10.4% (when you count in the most recent class of "discouraged" workers who've stopped looking for work). Or maybe it should be 16.5% - when you count not only the "discouraged" workers, but also the "under-employed" (the ones who've lost their real jobs and taken part-time jobs that pay a pittance).
But is this really what we want from economists? Are the actual numbers what you're looking for when you read some economists comments?
Caroline Baum doesn't think so. In a recent Bloomberg column, she hits the nail on the head. "I'm interested in the big picture," she says. I think that's about right.
Even more important than nailing down exactly what's going on this very moment is how things are going to play out - or at least some reasonably thought out idea of what we can expect in the months and years ahead. Wouldn't that be more helpful to you?
For one thing, it might help you make better decisions about what to do with your money. It might help you figure out what to do about getting a job if you were laid off: should you keep trying to get your old job back, or start thinking about changing careers - meaning you need to learn new skills, make new contacts, etc.
Then there's the whole dispute on the table about whether to let the Bush tax cuts expire. (Click here for a recent blog entry on this.)Economists have been debating this one for months. And the government's been going back and forth on it too, although now it seems they're leaning towards letting the tax cuts expire - which effectively means taxes will be going up on a whole list of items.
Now, the government's going to do what it will, but economists' debates get downright silly here too. Ms. Baum points out that you really can't scientifically determine whether tax cuts will benefit or harm the economy. The reason she points to is that, in a dynamic economy, you can't hold everything else constant while you change tax rates. Unless other factors remain the same, how can you accurately gauge the effects of the change you apply to tax cuts - or to raising taxes, for that matter.
Of course you can guess or estimate. But when you listen to economists, you get the feeling they'd like their guesses or estimates to be treated like the hard sciences - you know, like chemistry or something. It doesn't work that way.
Don't get me wrong. I'll keep reading economists - at least some of them. But I stopped letting them drive me crazy a long time ago.
I once worked for a big money center bank. We had our own in-house economist - he was actually a "chief investment officer." His economic analysis was pretty detailed, pretty comprehensive stuff. He'd be dragged out all the time to talk to clients at meetings and events. I was always amazed at how carefully people listened to his every word.
Even pretty sophisticated rich people focused carefully on his presentations. (Of course, they're always seeking information that might give them some advantage. And the really sophisticated ones listen, then add it to their pile of other info, and - in the end - draw their own conclusions...that is, if they're really sophisticated.)
Anyway, the thing I always puzzled over was why no one ever asked our chief investment guy how accurate were his predictions over the last few years. If they had, they'd notice that his annual predictions were pretty much the same year after year. And the accuracy at the end of the year was sometimes good, sometimes awful.
When he kept predicting increases of "around 9%- 11% "for stocks for the year 2000, 2001, and 2002 - and stock dropped each and every year (remember?), was when I realized I had better get sophisticated and start thinking for myself - which I've been doing ever since.
Hey, maybe that's why I wound up starting up my own firm after years of working at these other financial outfits. I realized I'd have to think for myself anyway, so why not see what I could make of it?
Which is all just a long-winded way of saying you've just got to take a lot of this economic analysis with a grain of salt.
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