The problem with economists and their predictions

economist at street sign is unsure of recession

economist at street sign is unsure of recession

Looking at economics as a discipline, it would be fair to point out some of the issues with what mainstream, government economists are saying. To begin with, no economic model can predict the future. Economists who do try to predict the future are as likely to be right as Helicopter Bernanke. They are a discredit to the discipline, but they are doing it because they see an opportunity to make money from people who want a prediction. Quite simply, they see demand in a market and they look to supply it (which is proper economics).

Economic models are, by and large, meant to be descriptive rather than prescriptive. That’s not to say that we can’t, with a reasonable amount of accuracy, model the local effects of a particular type of behaviour; the problem with prediction on a macro level is that there are so many unknown variables it becomes impossible to always adequately account for them. An Economist can say, with confidence, that a tax or a subsidy is inefficient, or that market quotas or tariffs are inefficient, or that an increase in demand will cause upward pressure on price in the short-run, but likely downward or equilibrating pressure in the long-run.

How good do you think economists are at predicting the economy?

View Results

Loading ... Loading ...

However, we can’t know, for sure, what other variables may enter the picture or how they will affect the model. Long story short: Economists are necessary to explain why things that have already happened have happened the way they have, and for modeling the likely way to avoid or bring about a similar outcome in a similar circumstance in the future. But we can’t know; and those of you who look to economists to tell you the future are just asking for trouble, so stop it.

Looking at unemployment

It is important to note that the US has a couple of measures for unemployment rates (from U1 to U6). The official rate is the U3 which was 9.7% for March 2010. If you take the most encompassing measure, the U6, which also includes:

  1. “discouraged workers”, or those who have stopped looking for work because current economic conditions make them believe that no work is available for them.
  2. “marginally attached workers”, or “loosely attached workers”, or those who “would like” and are able to work, but have not looked for work recently.
  3. Part time workers who want to work full time, but cannot due to economic reasons.

The U6 unemployment rate was 16.9% for March 2010 which means that an additional 7.2% were unemployed for the other reasons listed above but are not “officially” reported!

Bottom line is that you can’t take any of these statistics at face value: If the numbers look bad, just change the standard of measurement and hope that nobody looks into the details.

The following link gives a good explanation:

The following link is the official Bureau of Labor Statistics if you want official verification of the figures:

On Canadian – US dollar currency parity

While most economists would agree that a high Canadian Dollar could detract people from purchasing Canadian goods, this is not necessarily true in the long run. Products are made by consumer demand and such pressure is good in the long run. Companies should produce goods in a way that is attractive for the buyer, for example: has the features consumers want, are of good quality and are durable. A high currency helps to pressure companies to ensure these things rather than rely on cheapness. This is why European and Japanese Cars tend to dominate (minus the recent Toyota downfall events) because they offer these qualities, but they are still expensive; but also because many Asian car makers have their currency tightly linked to the US dollar. In essence, Chinese manufacturers get an unfair advantage on Canadian and American manufacturers. This was also the case in the 1980s when Japan had its currency pegged to the US dollar.

An expensive currency also presssures companies to become more efficient and competitive. Why? They must manufacture goods that are innovative and get more out of a worker for how much they work. If labour will cost you so much, and if you have to pay a more expensive currency, companies must become more competitive. You can see this with competitive indexes. Canada ranks $9 behind Switzerland, US, Singapore, Sweden, Denmark, Finland, Germany, and Japan; Countries on the most part, more expensive than Canada.

Canadians should not rely on how cheap their products are but rather on things that people want. Research In Motion’s Blackberry devices were not built on how cheap it is to buy but rather it’s practicallity in the office. However, we shouldn’t forget that many of their products are constructed in places like China and not domestically. Indeed, If the Chinese would stop pegging their currency below par in order to undercut North Amercian jobs, the USA would not be in as much pressure to devalue its currency. The US owes the Chinese a lot of money but due to Chinese unfair trade practices, internet attacks, software and literature plagiarism. Therefore, the US shouldn’t give a dime of it back to those thieves who probably have already stolen more through these practices than the US owes them.

Leave a Reply

Your email address will not be published. Required fields are marked *