At The Guardian

The paper asks:

Why, whether figures are good or bad, are economists and City analysts always taken by surprise?

I respond:

Prediction is very difficult, especially if it’s about the future.

Niels Bohr

More seriously, the bits of economics that we’ve pretty much got right are in microeconomics. Rent control is a bad idea, demand curves slope downwards, that sort of thing. Macroeconomics well, there might not actually be any one single macroeconomic model that you could get everyone to agree upon. You can and do find Nobel Laureates vehemently insisting that the signature idea of another one is simply wrong.

And finally, think through what people are actually trying to do when predicting these sorts of numbers. Take, for example, unemployment. Roughly speaking 10% of all jobs are destroyed in the economy each year (so, 3 million of the 30 million total). Again, roughly speaking, 10% of all jobs are created anew each year. Again, roughly 3 million. The unemployment level, the one we’re trying to predict each month or quarter, is the balance of those two processes.

And what usually happens in a recession is not that more jobs are destroyed but that fewer are created, making that balance rise. So we’ve two flows, of some 3 million each way a year, and we’re trying to tell what the balance is going to be at any one point in time to 0.01% of the total number.

That’s just not easy. Thus the people who try to predict are often surprised.

Finally, it’s worth noting how weak many predictions are. Take the US job creation numbers. Last few months these have been 200,000, to 250,000 a month. But the error bar is enormous. They’re really saying that job creation has been between 100,000 and 350,000 (for the error bar is 100,000 either way). And no one is at all surprised by job creation being in that range.

Apologies, just couldn’t resist trying to get something sensible into at least one part of that paper, even if it’s only the comments.

23 thoughts on “At The Guardian”

  1. The comments following yours show just how seductive it is to demonise others rather than listen, consider, reason out.

    Thus commentator after commentator comes on to tell us what economist’s believe and how mad they are to believe it, even though economist’s just don’t believe those things. (Howard Reed and Colin Hines are of course not economist’s, so don’t count).
    Brightdaylor tells us economist’s don’t realise the.Nobel prize isn’t really a Nobel prize, another guy tells us economist’s believe economics is a science (whatever ‘a science’ is). Another tells us that economist’s mistakenly believe all people act rationally all of the time, whatever rational.means and never ever let the word ‘utility’ cross our lips.
    All in all, that paper is fucking depressing; these people might well be in power in 2 months.

  2. Funny how Guardian-readers routinely explain that economists’ failure to predict 2008 in detail proves that they know nothing and the whole of economics is just a sham, but climatologists’ failure to predict pretty much any fucking thing ever just goes to show that They Are Experts who Must Not Be Questionned.

  3. “Why, whether figures are good or bad, are economists and City analysts always taken by surprise?”

    Because no one wants to report on the economists that were right. It’d be dull, smug report after dull, smug report.

    The media likes to frame things in some form or other so with economic figures they go for ‘It’s worse than expected’ or ‘It’s better than expected’ which each then branch off into other angles of ‘Need to do more of X’ or ‘Need to scale back doing X to avoid a collapse’, etc.

  4. So Much for Subtlety

    If the economists and analysts are right, their predictions are priced into the market. In other words nothing happens. If they are wrong, the market price adjusts. There is something to report.

    Newspapers prefer the latter to the former, but actually markets don’t do a lot unexpected. Most of the time they behave as people expect.

    Ironman – “(Howard Reed and Colin Hines are of course not economist’s, so don’t count).”

    I hate spelling quibbles, but Reed and Hines are not economist’s what? Knees? Ankles? Dogsbodies?

  5. I don’t know that they are. OK, you may not be able to predict things exactly, but that’s about the sheer chuffing complexity.

    But who out there in the Milton Friedman Fan Club broadly got Venezuela wrong, or didn’t predict that China and India would blossom once they ditched the economics of Mao and Gandhi?

    You didn’t have to be an economist to predict what was going to happen in 2008. When banks were turning a blind eye to people lying about their earnings, that’s a sure sign that you’re in a bubble. That’s the time when lenders stretch their rules or responsibility – when they’re struggling with their current rules. And well, yes, “austerity” was going to happen. A sailor with a CSE in metalwork who had a hell of a night in Bangkok can explain understands how this works.

  6. I hate quibbling but quibble quibble quibble. You described it as a spelling quibble, so you don’t need to ask the question do you!

  7. Off topic, but elsewhere the Murphmeister quotes with approval a BBC article about tax which includes the quote

    “Any public figure who takes a stand against tax avoidance, indeed, risks having the minutiae of their financial affairs scrutinised for evidence of hypocrisy.”

    So no doubt now in order to avoid a suspicion of hypocrsiy he will be opening up the minutiae of his own financial affairs?

    Will he fuck.

  8. What happened to the wisdom of crowds? The average forecast would be broadly right?

    That it’s usually wrong is a sure sign that economic forecasters are a bunch of jobsworths who check each others forecasts to make sure their’s aren’t too out of line.

    Watch my six! Not sure if it’s theirs or their’s.

  9. @Squander Two.

    I know, I wasn’t saying you were wrong, I’m saying Guardian readers are.

    As for economists, they say you aren’t a good one unless you can explain why your predictions were wrong.

  10. People have surprising difficulty with the idea that, if asked to forecast the role of two dice, 7 is the correct forecast and yet also wrong ex-post more often than not, and 7 was still the correct forecast, even when you role a 2

  11. Next but one bank scandal coming up.

    Macro models are usually based on an old one (BoE, ITEM, Fed) but with a few tweaks.

    XYZ bank pits in a few more small tweaks. Runs the forecast, comes up with a wildly different forecast to the consensus. Management and IT get conniptions, retweak the model and (phew!) come up with something closer to consensus.

    But the traders have got wind of the raw results from the tweaked unretweaked model, which shows certain asset classes heading straight for the rocks.

    Could be a nice little earner. Put options are usually fairly easy to unwind at low cost in normal times but may be very useful if the shit hits the fan.

    And guess what? The shit does hit, the ship does go on the rocks, the bank’s traders make out like bandits.

    And then the regulator comes along and says this is insider trading because you used your model while advising your clients based on another…

  12. So Much for Subtlety

    Pogo – “BiF… I think it’s ” theirs’ ””

    Yeah but is it “it’s ar$e” or “its’ ar$e”?

    Here at TW’s place, we ask the tough questions!

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