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Bruce Lawson @Sapere_vivere
, 19 tweets, 3 min read Read on Twitter
1. A short thread on economic forecasting. I used to work as a trader at some well known financial institutions. We were bombarded daily with forecasts and predictions from some very well known economists. As traders who wanted to keep our jobs we learnt to mainly ignore them.
2. A good case in point would be the USA non-farm payrolls, a very important economic indicator that would move markets. Every month Bloomberg would publish 100+ economists forecasts for last month’s figures. Every month 100+ economists would get it wrong.
3. Why? Too many variables. But the same people are happy to publish their forecasts for how the economy will be in 15 years time. Now here are truly so many variables that it is literally guesswork.
4. Now, have you ever wondered why so many of these forecasts, despite the fact that they are guesses, tend to broadly agree. I’ll be charitable here and ignore any possibility of agenda driven bias.
5. It’s because they all use the same models and they all use comparative forecasts. What they are saying is: “assuming everything else stays the same then we can isolate a couple of variables and tweak this volume knob to arrive at our prediction.”
6. Assume everything else stays the same? Take a massively simplistic model of the world and tweak a volume knob? Yup.
7. So as far as I can make out, the Treasury, Bank of England, etc have said: assuming everything else in the world remains the same if trade in goods and maybe services becomes a bit more sticky then trade and growth will slow.
8. So what does “everything else stays the same” mean? Well it ignores some distinct possibilities. I’m not saying these will happen. In fact it’s possible that the opposite could happen.
9. They ignore: the fact that the U.K. will have greater flexibility and nimbleness to design laws and trade, aid, development, immigration policies that suit the unique make up of the U.K. economy rather than a generic EU economy. (Otherwise known as Germany)
10. They ignore the fact that there could well be benefits for the U.K. to design legislation for its own internal business arrangements., after all the greater part by far of our economy
11. They ignore the fact that without having to cater for special interest vetoes of a few thousand people in a population of 1/2 billion that it might be possible to get trade deals, or the day-to-day trade friendly micro-legislation done in less than 10-20 years.
12. They ignore, as far as I can see, the diminishing position of the EU in terms of global trade, the problems of EU imbalance around the Eurozone, EU demographics and long term structural issues.
13. I could go on, but I’ve highlighted a few areas that taken together and allowing for emergence factors etc make it almost impossible to make any accurate forecast of the future even in a comparative way.
14. Now I’m not saying any of these things will happen but if you start to factor in the possibility that they might or might not then you’re left with so many variables and imponderables that you start to realise that maybe a crystal ball is a more sensible option.
15. So when you see phrases like “all economic forecasts agree” then what you’re really seeing is: “ all proponents of a dodgy art using the same simplistic models are covering their arses.”
16. Economics has undoubtedly some vital uses and contributions but proponents need to realise it’s not an exact science. A little more acknowledgment of this and a little more explanation around, and caveats towards, seeing the future would bring more respect for the profession.
17. You can go back in time, pick your data set, build your simplistic model to agree with it then extrapolate to the future, but it doesn’t make it right. If you had to put hard cash on the outcome I doubt you’d be so confident. Skin in the game .
18. Never forget that you can win a Nobel Prize for Economics without actually being an economist.
19. So if you’re an economist that wants to make a prediction about the future then explain your methodology, explain your margins for error, explain your assumptions, explain the fact that you’re a fallible human being. You’ll get far more sympathy if you do.
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