Greenspan on the futility of Economic Foreasting

Dufour, Jeff and Patrick Gavin. 2007. “Alan Greenspan’s a Pessimist on Economists.” Yeas & Nays (11 September). http://www.examiner.com/blogs/Yeas_and_Nays/2007/9/11/Alan-Greenspans-a-pessimist-on-economists

When you gather together three Nobel prize winners, four former members of the White House’s Council of Economic Advisers, a Congressional Budget Office head and a former treasury secretary, you sure don’t expect them to be told that, well, their life’s work has all been for naught.  But, at a private dinner Friday held at the Washington Club to honor Brookings Institution economist George Perry and Yale’s Bill Brainard (both the retiring editors of the renowned Brookings Panel on Economic Activity), former Federal Reserve Chairman Alan Greenspan told the audience that economists don’t really know anything.

“The one thing that struck me is that, despite the extraordinary sets of articles, insights and analysis by the people in this room and the other colleagues in BPEA, our ability to forecast the business cycle has not improved one iota,” Greenspan said.  “The best models don’t work all that well.”

Ouch.

But don’t cry just yet, wonks: Greenspan was actually asked by BPEA to discuss the inherent difficulties in economic forecasts (economists are gluttons for punishment, don’t you know) and Greenspan — in the type of English only he can employ — said the uselessness of their jobs actually creates usefulness!

“It doesn’t, however, induce us to then conclude that, if the model doesn’t forecast — which implies that it has not captured the appropriate structure — we nonetheless tend to use the structure of the model to do analysis and draw significant conclusions about how the inner workings of relationships occur even though the coefficients which we’re employing clearly don’t forecast anything worthwhile.”

Exactly.  What he said.

Thanks to Doug Henwood who posted this to the LBO mailing list.

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