Robert, hardly anyone predicted the 2007-08 GFC. Especially the mainstream
economists, who contended that it couldn't and wasn't going to happen. It is
one thing to say that things don't look good. It is another to predict that
things are going to be very, very bad. But Nuriel Roubini along with some
others did. And Roubini was told to stop predicting a financial disaster as
it would be deleterious to his reputation. The only reason that it didn't
reach the awful proportions it did in the 1930s is that governments bailed
out the banks, who were the principal perps in this case, along with some of
their friends in Wall Street. Piketty has a graph from Saez and/or Zucman
that shows that the top 1% had to dip into their savings for the first and
only time after the 1929 crash. They didn't this time.
The economic system we have is inherently unstable. If we didn't have the
automatic stabilizers, the system would gyrate more than it has done during
some past years. But the automatic stabilizers don't work very well when you
hobble them, as Osborne has been doing.
While economic activity may not be random in the strict sense, it is
certainly unpredictable in important meaningful ways. We are more sensitized
to the likelihood of a burst bubble at the moment. But the bubbles that
burst before the GFC were taken as evidence by many mainstream economists
that the system worked reasonably well. And it is only recently that any of
them have shown any understanding of the futility of austerity programs,
with the exception of the German elites led by Wolfgang Schaeuble. They
still want to inflict it on others because it is in their interests, they
think. Look at the comments by the IMF over the past year or so.
It would be quite salutary were the economics profession as transparent and
self-critical as the meteorologists. Unfortunately, I don't see this coming
about any time real soon. It doesn’t help as you mention that the theories
mainstream economists use have no relationship to reality. This is true of
the New Keynesians as well. Have a look at Wren-Lewis's reaction to the
protests of the UK econ students in his blog, Mainly Macro. Dreadful. His
attitude almost beggars belief. Mankiw was no better and may even be worse.
Economic forecasts are largely meaningless, for reasons others have
mentioned and I think I may have mentioned. They will not get any better
until the theories that are employed to produce them become more related to
reality. I think there is an unsettling similarity between neoclassical
economic theory and string theory in physics. Both are highly mathematical
and both unrelated to reality. Tweak the parameters, adjust the equations,
and in string theory's case, add another dimension or two and it will all
fall into place. The difference seems to be that we don't know whether
string theory is true or not, while the evidence shows that neoclassical
economic theory is clearly false.
larry
Dr L Brownstein
[alt-e:] mailto:[log in to unmask]
-----Original Message-----
From: email list for Radical Statistics [mailto:[log in to unmask]] On
Behalf Of Moore, Robert
Sent: Thursday, April 21, 2016 12:35 PM
To: [log in to unmask]
Subject: Re: RADSTATS Digest - 19 Apr 2016 to 20 Apr 2016 (#2016-58)
The weather is different from the economy in all the ways that Dave and Andy
suggest, and some more. Weather _systems_ on the whole behave in rather
predictable ways and we can be caught out when they do not. But in the
mid-19th century the whole idea of forecasting the weather was derided in
Parliament and elsewhere (cf Galton vs Fitzroy). Now it is routine. The
meteorologists are very good at their jobs and they observe a high degree of
transparency - they are constantly talking to one another and reviewing
their results self-critically. Occasionally they do seem to give confidence
levels in their forecasts - though I'm not sure what a ten per cent chance
of rain actually means.
Economic activity is not entirely unstable and random and even
non-economists could see that the aggressive lending to people who could
never pay back - and then trading those loans in a market was going to lead
to trouble. Didn't every one of us predict the 2007 crash? It's just that we
couldn't say _when_ it was going to happen. Plainly the hedge funds and
short sellers don't really care about much of this, pension funds and banks
do, but what about our colleagues in economics? Do economists follow the
example of the meteorologists and have transparent exchanges of data and
models, do they do rapid and open reviews of whatever predictions they make
--- is it just that I don't read economics journals? I suppose if any
economist did become a reliable forecaster he or she would be snapped up by
a City institution and their work would become a trade secret.
The thoughts in Ludi's first paragraph are spot-on. Past performance by
economic forecasters cannot be entirely without technical review, so where
is it?
Robert
Professor Robert Moore
School of Sociology and Social Policy
Eleanor Rathbone Building
The University of Liverpool
L69 7ZA
Telephone and fax: 44 (0) 1352 714456
________________________________________
From: email list for Radical Statistics [[log in to unmask]] on behalf
of Andy Turner [[log in to unmask]]
Sent: 21 April 2016 10:44
To: [log in to unmask]
Subject: Re: RADSTATS Digest - 19 Apr 2016 to 20 Apr 2016 (#2016-58)
Another big difference between weather forecasting and economic forecasting
is that with weather, it pretty much acts as it does before so within a
given time scale it is possible to predict the path of a storm say based on
what has happened before. Economic forecasting is less like this though
there are occasions when things are more predictable. I would say that
economic forecasting is a bit more like predicting earthquakes.
With regards Ludi's post: "useful", probably, "interesting" definitely :-)
In general, warning levels are a good idea, but inherent instability (house
of cards like feedback mechanisms) is also important to appreciate.
Simultaneously measuring inherent risk and exposure to these risks is
important and perhaps economic forecasting and predictng a crash is just as
difficult as say predicting a road accident. However with road accidents
peoples (mis)perceptions perhaps come into it more. Yet there are a lot of
things that try to stabilise the economic system which is perhaps much more
like a precarious balancing act.
Best wishes,
Andy
http://www.geog.leeds.ac.uk/people/a.turner/index.html
-----Original Message-----
From: email list for Radical Statistics [mailto:[log in to unmask]] On
Behalf Of BYRNE D.S.
Sent: 21 April 2016 10:08
To: [log in to unmask]
Subject: Re: RADSTATS Digest - 19 Apr 2016 to 20 Apr 2016 (#2016-58)
There is a fundamental difference between weather forecasting and the
current form of economic forecasting. What matters for weather forecasting
is predicting system change i.e. what will happen that is different. Weather
systems are complex and the models are subject to chaos so very small
difference in initial parameters can engender qualitatively different
outcomes. It isn't the butterfly's wing flap that causes the hurricane - it
is a difference of that magnitude in initial parameter specification that
generates or does not generate a hurricane in the model's prediction.
However, it is not the chaotic development that matters so much as the
complex nature of the system being described as with climate regimes as
opposed to short term weather. Conventional economic forecasting is based on
linear models which deal in incremental change, not changes of kind. That is
why they were so useless at predicting the crash. Econo physicists - a trade
which now has its own journals - are using non-linear models generally based
on difference rather than differential equations (although there are
non-linear differential models) but even these have limits as to predictive
validity. Qualitative knowledge of systems is the best guide so anyone with
a qualitative knowledge of what was happening at the bottom end of the US
housing system - liar loans arranged by brokers working on commission to
refinance the houses of poor people without health insurance - see the
brilliant Bird and Fortune video on this - could and did predict that
derivatives based on these and massively multiplying the risk would go
wrong. No mathematical modelling required.
David Byrne
________________________________________
From: email list for Radical Statistics [[log in to unmask]] on behalf
of Ludi Simpson [[log in to unmask]]
Sent: 21 April 2016 09:55
To: [log in to unmask]
Subject: Re: RADSTATS Digest - 19 Apr 2016 to 20 Apr 2016 (#2016-58)
It would be useful to review the success of past forecasts - what's the
distribution of errors around forecasts of GDP and GDP change, 1 year ahead
and 10 years ahead? The same for unemployment and other key indicators used
in public policy. Unlike weather, the economy is not forecast frequently
enough for there to be a great deal of data to go on. But perhaps it's
already been done, enough to know whether the uncertainty is sufficiently
stable to use to judge new forecasts.
But a claim like 'Brexit with a bilateral agreement between UK and EU would
reduce GDP by £4,300 per household' is a conditional forecast. The success
of past forecasts would only show the uncertainty around things not
determined by the Brexit condition. The assumptions made about what Brexit
would involve are fixed by the forecaster and would take further unpicking:
argument over their validity would add more uncertainty, perhaps a lot more.
There may have been a lot of work done on this already. If anyone knows it
and could consider turning it into practical advice for evaluating claims,
it would make a good RadStats article - or a chapter in the RadStats books.
From my experience in population forecasts, there are key needs where
uncertainty matters a lot (school rolls; town planning; adult care), and
there are quite a lot of data in the UK. But very few evaluations.
Ludi
------------------------------
Date: Wed, 20 Apr 2016 17:10:56 +0100
From: John Bibby <[log in to unmask]>
Subject: Fwd: Letter: "All forecasts are wrong. But some are more wrong than
others" (Derek Jerram,"Forecasting is art, not science", Letters in "i",
2016april20, p.14.
Please see email below - all comments welcome! JOHN BIBBY
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---------- Forwarded message ----------
From: John Bibby <[log in to unmask]>
Date: 20 April 2016 at 17:09
All forecasts are wrong, but some are more wrong than others. Forecasting
should not lead to a "precise" number or "point forecast" - like the recent
Treasury £4300 in their research on leaving the EU. Instead, it should lead
to a "50% confidence interval forecast", such as £4000-£5000 - the interval
being calibrated so that the researcher is 50% confident that the forecast
is correct. This has the advantage of falsifiability - if an accurate
forecasting method is used, exactly 50% of forecasts will be true; the other
50% will be false. (Alternatively, forecasters may choose a wider interval
if they require a higher level of confidence e.g. £3000-£6000 with 90%
confidence.)
My forecast - most forecasters will not listen to this, because it gives us
a way of distinguishing the fraudulent forecasters from the genuine ones.
JOHN BIBBY (01904-330334)
1 Straylands Grove
York YO31 1EB
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