Friday, October 17, 2014

Former Top Government Economist Slams Government Forecasting Capabilities

By Edward Lazear, who was hairman of the President’s Council of Economic Advisers from 2006-09, is a professor at Stanford University’s Graduate School of Business, is out with an op-ed that warns about government forecasts. It starts with the title to the piece: Government Forecasters Might as Well Use a Ouija Board

In the piece Lazear writes;
The CBO and administration (through Troika) put out annual forecasts on economic variables including the gross domestic product, unemployment rates, inflation and interest rates. Real GDP growth is perhaps most important for a variety of reasons, not the least of which is estimating how economic growth will affect government revenues and program costs. Yet the forecasting error by CBO and the administration is very large.
My analysis of 1999-2013 reveals that the CBO’s real GDP growth forecasts for the next year were off, on average, by 1.7 percentage points, either too high or low.
Administration forecasts were similarly off by a slightly larger 1.8 percentage points on average, also to high or too low. Given that the average growth rate during this period was only 2.1%, errors of this magnitude are substantial.
Lazear then goes on to point out that the forecast problems go well beyond GDP projections:
 In 2007, the CBO estimated that in 2013 SNAP [ the Supplemental Nutrition Assistance Program] would cost under $40 billion. The actual cost was more than $83 billion...
The 2012 and 2013 CBO estimates of the 2015 budgetary impact of the ACA [the Affordable Care Act] differ by 35%, or about $30 billion.
He also warns in the article:
 Occasionally, these cost estimates receive unwarranted credence because their methodology is obscure. One good example involves the American Recovery and Reinvestment Act of 2009, aka the stimulus.
In 2009, before the American Recovery and Reinvestment Act passed, the CBO forecast the effect of the $840 billion stimulus plan on GDP over the next few years. In 2014 the CBO issued a report stating that GDP increased by almost exactly the amount it had projected. Was the CBO’s forecast that good? No, the CBO simply used almost the same model—not actual data—to estimate the effect of the stimulus in 2014 as it had in 2009.
Bottom line: Forecasts  by the government are the least reliable and the most often rigged. They are pretty much useless.

1 comment:

  1. Isn't it Lew Rockwell who regularly reminds his readers of two things:

    1) Anything the government says is a lie

    And because of that:

    2) You should always do the opposite of what the government tells you. (e.g. "no need to buy gold or guns" means you should buy gold and guns).