Forecasts When the Core Assumption Is Ideological and Wrong

Andrew Ferguson has an interesting article about a jargon-laden and passively voiced mea culpa from the Organisation for Economic Co-operation and Development (OECD) regarding its erroneous economic projections.  The key part — related to many of our battles in Rhode Island, particularly over economic modeling of the sales-tax elimination — is this:

… The biggest mistakes, the economists point out, occurred when they forecast growth rates in countries with a relatively high level of government regulation. This surprises the economists, though it won’t surprise anyone who takes a dim view of government regulation generally. The forecasters, good statists all, assumed that the regulations “would help to cushion financial shocks” in the highly regulated countries and would therefore aid recovery.

Just like the folks in RI’s Office of Revenue Analysis and the developers of the Regional Economic Models, Inc. (REMI) tool that they use for their forecasts, they hew to the belief that a rationally determined allocation of resources must be more effective.  (The humor, for free marketers who catch the joke, is that the insiders then insist that the government behave irrationally… cutting critical services, for example, rather than fluff.)

Ferguson continues:

The economists now say they failed to consider the damaging effects of regulation. In the real world, regulations “delay[ed] necessary reallocations across [economic] sectors in the recovery phase”—which, translated from the Economese, means that government was retarding the ability of businesses to do what they do best: find a way to create value and make money even in calamitous circumstances.

In fairness to the economists, the politicians who set policy allow them to believe that they’re all acting with the same interest of efficiency, rather than securing power for a very limited group.  But even if the politicians were completely well intentioned, the forecasts would fall short.

The reality of the economists’ predicament is that they must acknowledge something that can be divined without their extensive research and education: They simply can’t have the information necessary to make projections and real-time decisions.  Only lowly business-owners and consumers have sufficient information about their own circumstances and the economic resources that it is their right to conduct.

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