The Wall Street Journal (WSJ) recently published an investigative report that is, if not unique, very unusual for reporting from a mainstream press source. The article looks at the capacity of some of the most influential experts in the federal government to predict the future in their area of expertise and influence. The experts are Federal Reserve policy makers who were analyzed for their accuracy in predicting three key economic factors, growth, inflation and unemployment, over the last four years (2009-2012). The data was based on 700 predictions made by 14 of Fed policy makers, mostly Ph.D. economists.
The WSJ article characterized analyzing expert performance like this: “Examining such predictions is more than a parlor game. Fed forecasts are important now because the central bank is near a turning point that will have a substantial impact on the U.S. economy.” That last comment is probably understated.
Over the last few years, the central bank has exerted real influence on our economy for better or worse. The fed’s unconventional quantitative easing program is massive. Many economists believe that recent Fed policy has been a success and significantly lessened the impact of the financial meltdown and economic failures that were well underway in 2008. Fed predictions many have been more than just important throughout the economic downturn. Obviously, other outcomes cannot be known with certainty because it is impossible to go back in time, do things differently and compare that result with what we know now. Although talent at predicting the future is not the only relevant factor, objectively trying to look at how well key policy makers predict major economic parameters is very important.
The results of the WSJ’s unusual analysis indicate that for all three areas combined (growth, inflation and unemployment), most predictions for each fed policy maker was about the same, or slightly better than, random guessing. The one factor that pulled overall accuracy down was predictions about growth, which tended to be too optimistic. Fed vice chairman Janet Yellen had the best overall score and she was closely followed by William Dudley and Elizabeth Duke. Yellen’s overall score was impressive and ranked as “consistently” making calls in the right direction. That score was defined as half way between being no better than random guessing (“hit or miss”) and “near-perfect” in predicting future events. Fed Chairman Ben Bernanke ranked 9th out of the 14.
The good news is the group of policy makers tended to get things more right than wrong, which is not a trivial achievement. Our economy is complex and dynamic. The sobering news is that as a the group, the average prediction score was closer to being “hit or miss” than consistently right. That is very far below the top rank of near-perfect. This reflects the frailty of experts in their capacity to predict the future.
Why should anyone care?
It is reasonable to ask why anyone should care about this. On its face, this is all about arcane federal reserve economic policy issues. It isn’t that simple. It may be arcane, but what the fed does is very important. The WSJ article is important because it is a rare, maybe unique, example of injecting some objectivity into an opaque aspect of mainstream retail politics. That is something the Reform Party feels is far too scarce. If there are any similar studies in the mainstream media, they must be very few and very far between.
A major criticism the Reform Party has repeatedly leveled at two-party politics is that it is too irrational and unacceptably adversely influenced by factors that have been discussed before. The WSJ article at least raises the issue of expert competence in a key area and how that might be objectively assessed to some extent. The Reform Party has argued that politics is “the art and science of spotting problems, finding solutions, predicting the future and trying to get something done.” Notice the part about predicting the future. That is the focus of the WSJ article. If an expert happens to be bad at predicting the future in his or her area of influence, the expert’s policy choices can easily be off the mark, ineffective and wasteful, regardless of how brilliant or well-educated that expert is.
It is understood that just because an expert has a higher ability to predict the future in a study such as the one the WSJ described, that the expert will not necessarily always be the best person for a given job. However, the point is that such an expert should in the long run, and with all other things being equal, do better than an expert who is not as good at predicting the future in their area of expertise and/or their sphere of influence. Better ability to predict the future should translate into better problem solving with less cost and less waste. In Reform Party opinion, there is no reason to believe that if experts could be more objectively assessed than they are now the U.S. could enjoy 0.5% to 1%, maybe more, in annual GDP growth. In other words, under two-party politics, our economy grows more slowly than it should. That is the penalty Americans pay in return for allowing the two parties to get away with their way of doing business.
The Reform Party has argued that the social sciences may now be sufficiently developed to begin to devise means to address issues of how one assesses the expertise of various players and experts in politics. That would not convey the whole story about an individual, but it would give the public and policy makers a better grasp on relevant strengths and weaknesses. That kind of objective mind set could bleed into politics in unexpected but useful ways. There is some evidence that something like this is starting to take root at the state level. A recent report suggests that states are beginning to apply objective cost-benefit analyses to various state-funded programs. What is surprising about that is that it has taken so long for that kind of disciplined, objective, evidence-based thinking to start to come on line in politics. This kind of thing should have been going on for decades.
The reason that politics grounded in evidence and objective analyses has not dominated government relates directly back to the factors the Reform Party has repeatedly raised in its criticism of two-party politics, i.e., rigid ideology, special interest money and self-interest. Powerful special interests include the two parties themselves. But that makes sense. Under the circumstances, there are no incentives to inject rationality or objectivity into politics because that will often, maybe usually, be a disservice to the ends that ideology, special interest money and self-interest demand. There are major disincentives to make politics rational and objective, e.g., sometimes a politician will alienate a campaign contributor if the politician opposes a tax break that objectively does not serve the public interest. Americans have paid dearly for status quo two-party politics and they will continue to pay as long as status quo two-party dominates politics.
Where are the social scientists?
The Reform Party does not expect much sympathy from either the democratic or republican parties when it comes to attempts to make politics more rational and better focused on service to the public interest. In fact, there will be sustained opposition from the two-party system as a whole. That leaves the question of exactly who will champion the cause of cleaning up irrational politics. The press can only do so much and it has severe resource and other constraints of its own to deal with. The Reform Party is doing what it can, e.g., by presenting these comments and arguments, but that alone can’t force this issue into the mainstream. More is needed.
Since the social sciences is where real progress has been made and it is where the expertise resides, it is reasonable to look there for people to argue that it is time to translate relevant work from the realm of the academic to mainstream politics. The process will no doubt will be messy, experience both setbacks and vicious attacks from the various oxen that are about to be gored along the way. However, over time that process will lead to higher average GDP growth. In turn that will help to reverse the decline/stagnation that the American standard of living has suffered with for many years. All the Reform Party can do is to ask social scientists with relevant expertise, and they know who they are, to think about this and calmly assess the possibility that their expertise can be used to help in some way. Without more voices arguing for more logic and reason in politics, our standard of living will continue to stagnate and/or decline.
1. Link; http://online.wsj.com/article/SB10001424127887324144304578624033540135700.html; WSJ, July 29, 2013, pages A1, A10, article by Jon Hilsenrath and Kristina Peterson.
2. Because the data covers four years, a short period of time, it is hard to know what weight the data should be accorded. The 2009-2012 time was arguably unprecedented and thus not “normal”. In theory, data that spans two economic cycles (maybe 20-40 years) would be more informative because you could then see how an expert performs at two different economic bottoms, up slopes, peaks and down slopes. If a person performs well overall through two cycles, then one should have better confidence in a prognostication skill assessment like what the WSJ has published. It could be that in the four years the WSJ study spanned, the economy was in a sweet spot for some individuals who might not perform so well if that time frame was in a different part of an economic cycle or if it was part of a “normal” economic cycle. Obviously, it is hard to get data on an individual that spans 20-40 years. We have to use what we can get.
3. Dr. Bernanke’s 9th place ranking does not necessarily mean that he is a bad fed chairman. To the contrary, much expert and public opinion consider what he has done to be good to excellent. More factors than just a person’s ability to predict the future need to be considered, e.g., their ability to deal with and listen to others in the fed, the president or politicians in congress, most of whom have massive egos and/or are blinded to varying degrees by their ideology.
4. Some people do not even want the fed to exist. Some believe that unfettered free market forces should be allowed to roam the economic range wild and free, sort of like they did before laws like the 1890 Sherman Antitrust Act or the 1933 Glass-Steagall Act were passed to soften some of the rough edges. Back in the good old days before those laws were passed, banks, cartels and monopolies roamed with much more freedom and wildness. That was real bare knuckles capitalism doing its thing. Appealing as the concept of eliminating the fed might be to anti-government ideologues, things are not so simple now. At the very least, the fed has done what it has done and that cannot be denied. What has been done until now will have consequences. Simply making the fed go away overnight might inflict more than a few rough edges of its own.
5. Major factors that have a net negative impact on service to the public interest: Ideology (http://reformparty.org/reform-party-of-california-essays-what-is-the-proper-size-and-scope-in-government/), special interest money (http://reformparty.org/reform-party-of-california-essays-politics-and-special-interest-money/) and self-interest (http://reformparty.org/reform-party-of-california-essays-self-interest-vs-public-interest/).
7. American Public Media, Marketplace, Sarah McCammon, July 29, 2013 report: http://www.marketplace.org/topics/economy/want-better-government-use-cost-benefit-analysis. McCammons’ report was based on an original Pew-McArthur study on cost-benefit analyses by states: http://www.pewstates.org/projects/pew-macarthur-results-first-initiative-328069.