Alan Greenspan Says Economic Forecasting Can't Predict Economic Futures . . .
By Tom Foremski - September 19, 2007
I got home late Tuesday and watched my Tivo recording of Alan Greenspan on "The Daily Show."
I was shocked: He said if he was able to measure how fearful or hopeful people are about the future, then he would not need any mathematical models of the economy, he would be able to predict our economic future.
But he said no one can measure people's sentiments accurately. Mr Greenspan added that in his more than fifty years of making economic predictions, he is no better at it now than when he started.
I couldn't believe what I was hearing. During his time at the helm of the economy, he and his colleagues at the Federal Reserve raised and lowered interest rates implying that they could cool or heat up the near-future economy at will. Now he is saying that he knows of no metric that can forecast the economy except consumer sentiment, which apparently cannot be quantified.
This is interesting since Mr Greenspan has founded a consulting group advising on financial markets. But maybe this makes sense since he is selling his new book: "The Age of Turbulence."
What better way to inject some turbulence into markets than for Mr Greenspan to undermine the accepted notion that the Federal Reserve knows what it is doing?!
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Comments (7)
You missed the point entirely. What he said does NOT imply your stated conclusion - all he was saying is that the science hasn't improved in 50 years.
Secondly, he was making the point that if it were possible to base forecasts on a reliable model of human behavior - that might be a better model than what they use today.
Posted: September 19, 2007 8:20 AM
Our ability to collect and process massive amounts of past economic data is the difference between now and fifty years ago. Yet that makes no difference in predicting the future economy. That's amazing. Economics truly is a dismal science if it is a science at all...
Posted: September 19, 2007 9:50 AM
Every branch of science (pick one) bases forecasts on a model - some model. The modeling is never exact. Those with an appreciation for the scientific method understand the bounds of what a model can do for prediction. I would guess that economists make predictions keeping this in mind. Obviously, its impossible to emphasize the limits of modeling EVERYTIME one makes statements or presents predictions or designs policy. There just isn't the time in the world we live in. Hence the assumptions of modeling and the improvements (however small) to it over time get obscured in the media. What gets presented is the "final" analysis. Economists (and anyone else in Policy making) have to always balance risks based on an in-exact science.
It'll never be exact. The science can only improve.
What is expected of the media is this in-depth analysis and critique of the process the Fed goes through to arrive at a rate cut or hike or any other policy decision. What we get instead are 30-sec gut reactions that have no substance.
Posted: September 19, 2007 12:25 PM
Anonymous: Yes, I used to think the same way about economics believing that George Bernard Shaw was being mean when he said:"If you laid all the economists end to end they still wouldn't reach a conclusion."
However, I always suspected Shaw was right. After reading "The Black Swan" I would say economists are more closely related to witch doctors than to any scientist, (and have less credibility than witch doctors.)
Posted: September 19, 2007 4:59 PM
We give Greenspan too much credit. He now admits to being wrong in supporting the Bush economic policy. He is a political animal as much as an economist. Further, we may not be able to predict public sentiment but we can create it. Well executed marketing campaigns succeed far more than Fed rate manipulations in changing the economic future. Consider the stuff people have bought this year that they really didn't realize they needed last year. How many stood in line for hours to buy an Iphone? Greenspan needs to read Malcolm Gladwell's Tipping Point because that's the game he has always tried to play at the Fed, psychologically speaking.
Posted: September 20, 2007 7:39 AM
Patti: You are right. The logic of Mr Greenspan's comments means that marketing rather than interest rate adjustments would be more effective in managing the economy.
I remember when Mr Greenspan could make a subtle comment and cause massive market and economic changes--all without any interest rate changes.
The scary thing about Mr Greenspan's comments is that they all apply right now. The Federal Reserve is no better at predicting the future economy than it was 50 years ago. Shocking.
Posted: September 20, 2007 9:39 PM
Don't forget it was under his watch with his total support ,when they passed Glass- Steigal which is the reason why we're having the sub prime crisis. Most experts from Wall Street have a vested interest and are marketing something. Rarely is it in the interest of the average American, unfortunately.
Posted: October 10, 2007 11:46 AM