- The Washington Times - Sunday, February 15, 2004

A week ago, President Bush issued his annual Economic Report. It is prepared by the Council of Economic Advisers, a group of 3 distinguished economists and an equally distinguished staff. Presently, they include N. Gregory Mankiw of Harvard, Harvey Rosen of Princeton and Kristin Forbes of the Massachusetts Institute of Technology.

This year’s report seems to be getting more than the usual attention. Most of the press has focused on the economic forecast, especially for jobs. This forecast was actually prepared last year in conjunction with the Treasury Department and the Office of Management and Budget. Its main purpose is to give government agencies a basis for planning their budgets.

Since the forecast was completed Dec. 2, clearly it does not represent the administration’s current thinking about how well the economy will do this year. In the intervening 2 months, much new economic data have become available that probably would significantly alter the forecast were it redone today. Nevertheless, the press continues to treat the forecast numbers as if written in stone.

Economic forecasting is not very good in general, and all administration forecasts tend to be fairly far off. For example, the last forecast by Bill Clinton’s CEA in January 2001, confidently predicted there would be no recession. “Let me be clear,” said CEA Chairman Martin Baily, “we don’t think that we’re going into a recession.”

Of course, we now know that at the very moment Mr. Baily spoke we were on the brink of a recession and may already have been in one. According to the National Bureau of Economic Research, a private research group that determines the official dates for business cycles, the most recent recession began in March 2001. However, recent data revisions suggest it may have started in the fall of 2000 and it is possible the NBER will move back the official start of the recession.

Another point to remember is that when an administration makes a forecast error it is usually shared by the economics profession as a whole. For example, in May 2001 — well after the recession had begun — less than a third of the “Blue Chip” economic forecasters expected any recession at all. If you can’t forecast a recession when you are already in one, you are not likely to know when one is coming down the pike.

Even the great Alan Greenspan, chairman of the Federal Reserve Board, has been known to make huge forecasting mistakes. According to the minutes of the Federal Open Market Committee meeting on Oct. 2, 1990, Mr. Greenspan said, “At the moment it isn’t raining. … The economy has not yet slipped into a recession.” Yet according to the NBER, a recession had begun three months earlier in July. And Mr. Greenspan didn’t even have the excuse of not knowing what Federal Reserve policy would be, which often trips up private forecasters.

Finally, it is worth noting administration forecasts are sometimes criticized when made because an aspect appears outside the range of conventional wisdom. But, later, that aspect proves correct. In 1981, the Reagan administration forecast a much larger reduction in inflation than most private forecasters thought possible, and it was widely ridiculed as a “rosy scenario.” In reality, the forecast was not optimistic enough. Inflation fell even more rapidly than the administration predicted. To my knowledge, none of those who criticized the administration forecast ever apologized for being so wrong.

This history is worth remembering because right now a number of liberal economists, such as Brad DeLong of the University of California at Berkeley, say the administration’s jobs forecast is implausibly high. It forecasts a gain of 2.6 million payroll jobs this year, after two years of decline.

I don’t know if the administration figure is too high or too low. But I do know the unemployment rate has already fallen faster than most private forecasters expected. Last July, the Wall Street Journal surveyed the nation’s 54 best economic forecasters. Virtually all thought the unemployment rate in November would be well more than 6 percent. In fact, it was 5.9 percent. As recently as Jan. 2, the same group thought the unemployment rate would not reach 5.7 percent until May. It is already 5.6 percent.

I think the odds favor an optimistic outlook for jobs. I know it has been a long time coming, but with every single other economic indicator pointing upward, jobs must also rise at some point. We may even do better than the administration forecasts by year’s end.

Bruce Bartlett is senior fellow with the National Center for Policy Analysis and a nationally syndicated columnist.



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