Wednesday, September 19, 2007

Greenspan on the futility of Economic Forecasting

Dufour, Jeff and Patrick Gavin. 2007. "Alan Greenspan's a Pessimist on Economists." Yeas & Nays (11 September).

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."


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.


Sandwichman said...

draw significant conclusions about how the inner workings of relationships occur

It's incoherent because it's ungrammatical. Or is it ungrammatical because it's incoherent? What exactly is the difference between a "relationship" and the "inner workings" of that relationship?

What he really meant to say is that the model is useful because it enables the economist to launder his/her preconceptions through a gobbledygook apparatus. The relationships the economist entered into the model as assumptions come out at the other end as inner workings.

Paul Lyon said...

``come out at the other end as inner workings.''

May I assume you intend the alimentary analogy?

Sandwichman said...

May I assume you intend the alimentary analogy?

You may. Shit is shit. said...

Well, of course, Greenspan was long notorious for in some sense operating with his own very short term, constantly evolving, internal model of the economy, in which every morning he would get up early and pore through various documents and reports on prices and activities around the world, focusing on being smack up to date on all these, favoring such obscuranta as daily pig loadings in Des Moines and oddball spreads in the financial markets (and Andrea Mitchell reports he still wallows in such trivia).

He may not have been able to forecast any better with these private indicators, but they did give him power in the one-on-one showdowns that go on in the FOMC and Board of Govs meetings. If somebody disagreed with him, he would outwonk that person with "but did you see what sheet metal loadings in Toledo were this morning?" which of course they hadn't, putting them in an awkward position. "Well, no, but who cares?" was not usually a very effective comeback in those situations.

Anonymous said...

'inner workings of relationships' could be understood as relations among emerging relations within/brought about by the relationships. but that's not what he meant.