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Predictions are hard -- especially about the future

forecasts.jpg

The New York Times has a cool feature today showing how rarely long-term budget forecasts get the picture right. The image above is a screenshot from it: The dark line is the deficit, while the silver threads shooting are forecasts. As you can see, what forecasters do is extend the current trends. When something happens to break that trend -- a massive financial crisis, say -- they're generally caught unawares. Which is as you'd expect. If they knew a crash was coming, they'd be making money betting against the market, not running budget models.

By Ezra Klein  |  February 2, 2010; 8:04 AM ET
Categories:  Budget , Charts and Graphs  
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Comments

The CBO has NEVER been right.

Posted by: Lomillialor | February 2, 2010 8:25 AM | Report abuse

Just a quick note - other than forecasts of the late 90's made during the mid 90's, it appears the budget forecasts were for the most part too optimistic.

The uncertainty surrounding the projections have to do with the timing of cycles and the trend rate of growth. I don't think forecasters simply continue the past trend. They assume that the economy grows above trend until it reaches 'full employment' and then grows at the trend rate along that path.

The late 1990's surplus was unexpected, in my best guess, because the trend rate of growth was estimated to be too low, and the full employment rate of unemployment too high. I don't have the 1995 budget projections in front of me, but I'd imagine they had unemployment bottoming around 5.5% in 1996, and GDP growing somewhere between 2.5%-3.0%/yr from 1997-1999.

As an aside, I note that the Obama administration forecasts 3.4% GDP growth during this decade, which I suppose is possible given the deep recession (as a comparable, GDP growth averaged 3.3% from 1990-1999). However, looking at the sharp decline in capital investment and the retirement of the baby boomers, I'd expect a number in the mid 2% range - Martin Feldstein is forecasting 2.6% in annual GDP growth over the next decade.

http://www.aeaweb.org/aea/conference/program/retrieve.php?pdfid=449

Posted by: justin84 | February 2, 2010 8:39 AM | Report abuse

This NYTimes chart is awesome, what a great demonstration of rosy predictions of a glorious future to come colliding with the reality of pretty consistently less than expected growth going back 30 years, through both Republican and Democrat administrations, with the only exception being the dot-com boom of the late 90s.

Which means, as I've suspected, we can reasonably expect all these already lousy economic projections over the coming decade to come in even worse than we already think!!

Have a good morning.

Posted by: zeppelin003 | February 2, 2010 8:41 AM | Report abuse

There are lies, damn lies, statistics, and projections. Projections being the most pernicious of these foul untruths.

Posted by: Kevin_Willis | February 2, 2010 9:11 AM | Report abuse

It also seems that most of the predictions are err on the optimistic side of things.

Posted by: t_seltzer | February 2, 2010 10:12 AM | Report abuse

Instead of worrying about the size of the budget deficit in a vacuum you know what would be helpful? An analysis of how budgetary policy affects things like the CPI, the unemployment rate, estimates of capacity utilization, poverty levels, income inequality; you know things that really matter, not just ones and zeros on some computer spreadsheet in the central bank. Something like this:

http://bilbo.economicoutlook.net/blog/?p=4157

If you'd look at past budgets over a time scale that isn't ridiculously short, maybe then you'd see that as those scary deficit lines are plunging down employment goes up.

Posted by: nklein1553 | February 2, 2010 10:20 AM | Report abuse

All forecasts in all periods show improvement in the deficit.

I wrote to Orzag, once, about this Congressional conceit. I didn't get an reply.

Posted by: Amphigory | February 2, 2010 9:00 PM | Report abuse

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