The Spectacle Blog

Economists: Turns Out We Got Everything Wrong

By on 2.18.14 | 1:33PM

At least phone psychics have colorful personalities. The OECD has a new report out that blasts its own economists for having foggy crystal balls with regards to their recent forecasts. The Wall Street Journal reports:

The Organization for Economic Cooperation and Development Tuesday said it underestimated the degree to which economic and banking setbacks in one country would have negative impacts on others, leading it to consistently forecast stronger growth than actually materialized in the wake of the 2008 financial crisis.

But in the latest analysis of forecasting failures by an international financial institution, the OECD said it didn't share the International Monetary Fund's view that misjudging the impact of budget cuts on growth was a crucial error. (Emphasis mine)

That last part is crucial because it entirely contradicts the progressive viewpoint. Since the recession happened, liberal economists, most notably Paul Krugman, have blamed nearly all of Europe’s economic problems on an underestimation of the damage caused by austerity, meaning budget cuts. They’ve reduced vastly complex economic systems to a single linear scale: more austerity bad, less austerity good. This is why half of Washington throws a four-alarm temper tantrum over seemingly microscopic budget cuts like sequestration. Only now, the OECD concedes that it didn’t underplay the role of European austerity in the wake of the financial crisis at all, but did underplay other factors, especially weak trade and flimsy banks. Also this:

Larger forecast errors over 2007-12 have occurred in countries with more stringent pre-crisis labour and product market regulations (Figure 3). In part this may reflect the weight given at the time to pre-crisis evidence that tight regulations could help to cushion economic shocks (Duval 5 et al., 2007), together with insufficient attention being paid to the extent to which tighter regulations could delay necessary reallocations across sectors in the recovery phase. (Emphasis added.)

In other words, overregulation may have hampered economic growth. Imagine that!

Over at the Washington Post, Robert Samuelson analyzes the OECD’s findings and concludes that it’s time to stop treating economists as technocratic soothsayers who can gaze into the data and predict the future. The problem is, there’s an entire cottage industry of pundits—many of whom used to work at the Post under Ezra Klein—who think charts, graphs, and studies can light the way into a great, big, beautiful tomorrow of government-guided prosperity. Naturally, Dean Baker, a progressive economist, yelps at Samuelson’s conclusion: “Yes, well we have to keep Robert Samuelson away from the really big numbers, he might hurt himself.” And they say economists can’t be clever!

Baker’s only real objection, laid out in a comically unsubstantial blog post, is that Samuelson doesn’t mention the reduction in demand that resulted from the housing bubble collapse. Of course weak demand unquestionably played a role. But the point of the OECD evaluation is that, with regards to Europe, the economic establishment was in total error because it spent too much time on a simplistic demand-side scale (“Austerity!”) and not enough time accounting for other factors.

That error was probably inevitable. Economies are far too intricate to be encapsulated into digestible one-size-fits-all solutions. Helen Rittelmeyer recently wrote a brilliant piece for First Things that examined how intellectuals today have abandoned moral arguments in favor of coldly empirical ones. (Her article is pay-walled, but well worth the $1.99.) With egg on the face of the datamongers once again, maybe it’s time to put away the flowcharts and stop pretending the mirages of economists can solve all our problems.

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