Economic Forecasting: Why Does It Matter?

Forecasting is a tough business, leading some people to question the value of forecasting altogether. However, economic analysis and forecasting are important for at least two reasons:

-They immediately affect stock markets. Financial analysts and economic forecasters generate on daily basis a lot of news which can easily change a market sentiment and move the markets easily by several percentage points. As a result billions of dollars of wealth can be evaporated or sublimated within seconds. One of the most notable recent examples of such impact is Kenneth Bruce’s August 2007 prediction that Countrywide Financial might go bankrupt. This prognosis was one of the key events that triggered bursting the housing bubble.

-They have direct impact on policymakers. The Feds use (at least in theory) their figures in setting up monetary policy. The federal government bases federal budgets and decisions on taxes, government spending and transfers on their forecasts.

And that is why I think that economists are directly responsible for the current crisis.

Why not consumers?
They are not informed properly (at least not all of them), they heavily rely on economists and government, they are moved by greed, and finally they did not have any incentives to be modest and sustainable. Why should someone be modest in this frenzy of spending with easily available credit?

Why not business (e.g. predatory lenders)?
They are moved by greed and animal spirits only ("The markets are moved by animal spirits, and not by reason" J.M.Keynes). They will do whatever is possible to take advantage of the situation. And everybody knows it. Can we blame predators for being carnivorous?

Why not the government?
Well, the government and Feds share responsibility. They did not act properly. However, the major reason for that -they heavily rely on economists in their decision-making.

So, the role of economists in this uncharted sea of modern global economy is to measure depth and foresee obstacles rather than guess where we will be in five minutes with the same wind and depth. To be useful economists must become whistblowers, not heralds.

In the next article we will consider what economic forecasters specifically overlooked.