Why Expert Economic Forecasts Are Often Wrong: Analysts ignore the regulatory issue.

Author:Wallison, Peter J.
 
FREE EXCERPT

In May 2016, a month before the vote on whether the United Kingdom should leave the European Union, Her Majesty's Treasury told the people of the United Kingdom that "leaving the European Union would tip the UK into a year-long recession, with up to 820,000 jobs lost within two years." At around the same time, the Financial Times polled more than one hundred "leading thinkers" and reported that "almost three-quarters thought leaving the European Union would damage the country's medium-term outlook, nine times more than the 8 percent who thought the country would benefit from leaving." And the Bank of England and the International Monetary Fund both predicted declines or slow growth in key indicators if Brexit was approved.

Yet after the voters in Great Britain ignored these warnings and voted to leave the European Union, the UK economy did not decline as predicted: it began to expand. Table 1 compares the Bank of England's predictions for 2017 with the actual results for key economic indicators.

Something very similar occurred in the United States. Before the election, many financial "experts" who make their living advising others about the direction of the economy predicted that a Trump win would be disastrous for the U.S.--and even the global--economy. Paul Krugman of the New York Times predicted a worldwide recession; Simon Johnson, former chief economist for the International Monetary Fund, predicted that a Trump victory "would likely cause the stock market to crash and plunge the world into recession;" Bridgewater Associates foresaw a 2,000 point drop in the Dow; Macroeconomic Advisers predicted an 8 percent fall in U.S. stock prices; and the Brookings Institution projected a 10 percent to 15 percent nosedive.

On election day in 2016, the Dow closed at 18,330. The next day, when the result was clear, it surged 250 points. Today, eighteen months later, the Dow is well over 24,000.

How can one explain the failure of these experts to foresee that economic conditions in their countries would improve markedly instead of the disastrous declines they were predicting?

There are probably several reasons, including a political bias that blinded them to what others were seeing. But it is also likely that all of them--in Britain as well as the United States--were victims of the same problem: the general failure of economists to understand and assess the costs of regulation to the business communities and the economies of their countries.

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