Back in August 2008 Olivier Blanchard, the recently retired[1] Chief Economist at the International Monetary Fund, published a much acclaimed paper, The State of Macro. It was a review of the state of macroeconomics[2]  (“Macro”).  At the bottom of page 2 the last sentence, apart from footnotes, reads:

The state of macro is good

As we shall see economists do have a way of talking up the power of their so-called “discipline”. But is their hubris justified?

The following month, on 1 September 2008, Blanchard assumed his post as the IMF’s chief economist. Two weeks later Lehman Brothers, then the fourth largest investment bank on Wall Street, filed for bankruptcy. The “Great Recession” was arguably already under way and neither the IMF nor its new chief economist had seen it coming. Perhaps the “State of Macro” was not so good after all.

The IMF and its new Chief Economist were not the only ones who failed to foresee the Great Recession. Almost no one saw it coming. Not no one; but almost no one. The consensus outlook at the time was, if not exactly rosy, far from calamitous.

Were there warning signs? Was the oncoming calamity foreseeable?

With the benefit of hindsight there are always warning signs. And there are always professional prophets of doom who point them out and enjoy their fifteen minutes of fame when, as happens from time to time, markets crash and economies go into recession.

But the fact remains that none of the most influential economic forecasters, not the Fed, not the Bank of England, not the European Central Bank and, as we have seen, not the IMF, foresaw calamity.

In fact it gets worse. The Federal Reserve Bank of Philadelphia (The Philadelphia Fed) publishes a quarterly Survey of Professional Forecasters. As late as the third quarter of 2008 the consensus view among these (highly paid) professionals was for slow growth in the coming twelve months.

Let’s compare the third quarter forecasts with reality:

Actual vs Forecast: Annualised percentage GDP growth rates.

Year Quarter Forecast* Actual**
2008 03 1.2 -1.9
04 0.7 -8.2
2009 01 1.6 -5.4
02 2.1 -0.5
03 2.5 1.3

*The forecasts are as published in the Survey of Professional Forecasters released on 12 August 2008.

**Actuals are sourced from Economagic

The professional forecasters could not have been more wrong. It’s not simply a case of under- or over-estimating growth or recession. They got the direction wrong. They were pointing “north” and the economy was going south.

This is not a mere academic exercise. Because of the Great Recession millions of Americans lost their livelihoods, their homes and, in many cases, their children’s futures. Families were plunged into poverty.

Nor was the misery confined to the US. The Philadelphia Fed survey focuses on the US economy. In fact the global economy contracted by more than 5% between 2008 and 2009[3].

Economic forecasting guides decision making. Could better forecasting have helped governments avert the Great Recession? Forewarned of impending catastrophe could governments have taken action to avert it?

I shall deal with that question in subsequent posts. For now here are the take-home lessons.

  • The “State of Macro” is NOT good
  • To the extent that economic forecasting guides policy the “state of macro” is bad for all of us.

In subsequent posts I shall explain how economics is not really a discipline worthy of the name at all. In fact there is no such discipline as economics.

[1] Blanchard retired in October 2015.

[2] Linked page has a great short video explaining the topic

[3] Source: World Bank World Development Indicators

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