Pres. Obama and 'Unexpectedly' Useless Economists

This week, a CNN/Opinion Research poll found only 43 percent of potential voters favor Obama's jobs plan. That means 57 percent aren't convinced this plan will do much. In another poll, 51 percent of likely voters said the plan was likely to have no effect on unemployment.

"But… but… but…" the President's people stammer. "Economists like Moody's Analytics Chief Economist Mark Zandi says it will create 1.9 million jobs!"

That's the problem. The public is starting to realize that economists are "unexpectedly" useless when it comes to forecasting the economy. If you want evidence, do a search on the word "unexpectedly" and any combination of "unemployment," "housing," "prices," "wages," or "inflation."

Today's top story on CNBC:

The weekly jobless claims number, which is closely watched as an indicator for employment trends, unexpectedly rose 11,000 to 428,000, well ahead of estimates of 411,000. 

The consumer price index, meanwhile, gained 0.4 percent…. For the 12 months ending in August, the core index surged 2 percent, the biggest year-over-year increase in nearly three years.

Yes, it unemployment claims rose "unexpectedly" again. Shocking, since they have remained high "unexpectedly" since 2008. You would think that three years of "unexpected" data would indicate to economists they need to revaluate their models — and even their reliance on models. This goes back to my belief that models are only useful if you use best/worst case models to plan ahead, but you cannot use models as predictors.

On a personal level, my wife and I can "model" our household budget. We can model based on one of us losing a job, one of us having a medical emergency, and various pet expenditures. We also add in a car repair. If none of these things happen, our model allowed us to save money for later emergencies. However, we do not "model" to predict anything. We model to plan.

Economists make the mistake of believing they practice a science. They don't. I state that as someone immersed in economic books, theories, and reports. Yes, I really do read regional Federal Reserve reports. When I write that economists are useless when it comes to predicting the economy, I'm not dismissing their skills, I'm dismissing their faith in models.

Of course we no longer trust Pres. Obama and his team of economic forecasters. Consider this analysis of forecasting:

Bad Old Habits Plague Economic Forecasting
Reuters | June 29, 2011 | 10:07 PM EDT 

Three years after the Great Recession ought to have challenged even the most basic assumptions made by economists, they have instead settled back into the costly habits of old. 

The same experts who largely missed the onslaught of the worst recession since World War II have consistently overestimated the strength of the recovery in major Western economies. 

An analysis of Reuters polls shows economists were too optimistic about 20 out of 27 major monthly indicators for April and May in the United States, the euro zone and Britain — a list that includes industrial output, jobs, business and consumer sentiment data, and purchasing managers' indexes.

Twenty of 27 incorrect forecasts? And that was during a relatively "calm" quarter compared to the past two years. Economists wrong 74 percent of the time? Maybe a .259 batting average is great, but it is not the sort of record upon which I want our politicians to rely when planning budgets. I'd rather they use the model my wife and I use: bad case and even worse case — just in case!

According to an August 17, 2011, MSNBC article:

"People want the best information that we have right now. But people need to under- stand that the best information that we have right now isn't necessarily very informative," said Tara M. Sinclair, an assistant professor of economics and international affairs at George Washington University. "It's just the best information that we have." 

The growth rate that the government announces roughly one month after the end of each quarter — news much anticipated in Washington and on Wall Street — has been off the mark over the period from 1983 to 2009 by an average of 1.3 percentage points, compared with more fully analyzed figures released years later, according to federal data.

Historically the GDP has been off by 1.2 percent. Lately, they've been even less accurate? I'd fail a student statistical analysis that met government standards for accuracy.

Let's return to the Reuters story:

All too often these indicators — the May U.S. non-farm payrolls and The Federal Reserve Bank of Philadelphia's June business conditions index, to name just a couple — came in well below even the lowest forecasts provided by dozens of economists from banks and research institutions.

In 2010 the Federal Reserve Bank of San Francisco published a research paper, "Okun's Law and the Unemployment Surprise of 2009," written by Mary Daly and Bart Hobijn. In the paper, the authors admit that models of unemployment have been empirically flawed. If the model used by the Fed was flawed in 2009, I guarantee it is still flawed today. "This time it was different, but it will get back to normal," is patently absurd. Sorry, but government estimates have never been reliable. Why trust them in the future?

I'm not going to trust the Congressional Budget Office, the White House Office of Management and Budget, or the Federal Reserve. None of these organizations has been accurate in the last five years. We could argue they haven't been accurate since the 1960s. Forecasts in spending are generally off by a factor of ten or more! Forecasts in growth? Off by 1.2 percent, on average, which is a huge margin when growth is currently near 2 percent. Being wrong by 1.2 percent is a 60 percent error margin. That's horrible and most statisticians would suggest this makes the models useless.

This problem with forecasts is not limited to the United States, either:

In June 2008, not one of a sample of 24 top economists who track the UK saw a recession coming at any point from the start of 2008 to the end of 2009. 

We know now Britain's recession, one of the worst on record, had already started when the questionnaire went out, and latest evidence shows the UK economy is still barely growing. 

The story was exactly the same with the euro zone survey, in which economists failed to identify that a contraction was already underway. 

Similarly, polls of U.S. economists at around the same time showed no grave concern that the world's largest economy was about to plunge into its hardest times since the Great Depression, citing just a 50 percent chance of any recession.

Economists cannot even "predict" a current recession? And we're supposed to believe their predictions for months and years into the future?

Mark Zandi, whom the White House is now citing daily, appears week after week on CNBC and various cable shows predicting lower jobless claims. And week after week, he's wrong.

And why is the same White House that doesn't like Moody's and S+P citing economists from Moody's and S+P to prove the latest and greatest stimulus plan will create jobs? I thought we weren't supposed to trust the ratings agencies? The White House is quick to point out the forecasts of mortgage backed securities' (MBS) safety and returns were way, way off the mark.

Pres. Obama claims his job plan will stimulate growth and create nearly 2 million jobs. After all, the economists agree with him. Forgive me if I "unexpectedly" don't trust his claims.