Economists foresee a future in the past

My father-in-law was an engineer, and in his later days taught at a university near his home in Maryland. One of his best students surprised him one day by confiding his decision to change his major field from mechanical engineering to economics.

Perhaps still not fully reconciled to having an economist in his own family, my father-in-law could not fathom why anyone would make such a choice -- and said so. The young man explained that he thought that economics was important. "It's true that if you make a mistake in designing a car, people could get hurt," he said, "but if you make a mistake with the economy, millions of people get hurt."

That student's appreciation of the significance of economics provided the motivation for his studies and for those of many others. Their love for economics was not likely to be dislodged by a single newspaper piece highlighting the shortcomings of the subject and its practitioners. On the other hand, suppose there were three.

In mid-December, an op-ed piece in The New York Times began by mocking economists' inability to determine whether we were in a recession, let alone predict if one were coming. This was followed by a Chicago Tribune story with a variation on that theme.

Then, very much in the traditional blues format, the third element was an editorial here in The Herald, "Need a good forecast? Don't ask an economist."

Because economics is both a predictive and an imperfect science, economists learn quickly not to take criticism personally. Still, it stings when the editorial voice of our very own newspaper compares your work to that of a "horoscope, or a politician." Consider me stirred, not shaken.

To start with, part of the criticism is simply bogus. It is true that economists cannot always tell, definitively, if the entire U.S. economy is in recession at any given time. That is because a recession is an accounting concept -- generally defined as two successive quarters of declining total output -- and accounting, by its nature, deals with past, not ongoing current events.

We can sometimes read the signs of decreasing activity, including the traditional economic indicators, but whether they add up to an overall decline in output isn't always clear. The U.S. economy in recent years, for example, has confounded negative forecasts by coming up with growth in unexpected areas.

It is similar with businesses, where profit and loss are accounting concepts dealing with past performance. And anyone who thinks that it is always easy to tell, during the operating quarter itself, whether profits are going up or down simply hasn't been inside a modern corporation recently.

The Federal Reserve recognized the need to link monetary policy to the reasoning embodied in its economic predictions and is launching a new series of forecasts for the U.S. economy. This should be helpful but, of course, it doesn't have the headline value of some hand-wringing economist whining, "We're all going to die."

Economics deserves some criticisms, and it has received some at my own hand. There are three particularly troubling areas:

Getting too cozy with Wall Street's perspective and values.

Becoming intoxicated with mathematics and absorbed by minutiae.

Becoming politicized. That there are liberal economists and conservative economists is both a repulsive idea and a ridiculous one.

It isn't wrong at all to see the humor in economists' mistakes. Most of us have enjoyed the sports "bloopers" tapes that are assembled and replayed for us. There is something inherently funny about an overpaid athlete being beaned by a fly ball, just as there is something funny about an overrated economist being beaned by a faulty prediction.

But the truth is that no one can predict the future without being subjected to the kind of mockery that reality deals out. And human behavior has its own special kind of unpredictable reality. Every coach and sports fan knows this. Halfbacks elude tacklers, receivers drop passes, forwards commit unthinking fouls, catchers throw baseballs into center field.

But economic forecasts are only part of economics. Much of the work involves tracing the effect and unintended consequences of technological, social and policy changes on the economy. To do this we need an understanding of how the economy works, how things get done and who gets what share of the output. These are certainly worth knowing about.

For as long as we have economic forecasts we will have mistakes and mockery. It is the price paid for trying to understand not just how we spend our money but how we spend our lives. Still, there is something fundamentally human, appealing and comforting about forecasting.

By the way, what's your sign?

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.