(Unconditional) prediction is overrated
By Scott Sumner
While a correct prediction is certainly better than an incorrect one, in many respects prediction is overrated. Would we admire someone who correctly predicted a coin toss? Then why do we admire people who correctly predict recessions, or elections, or Super Bowl wins?
I’m more impressed by people who correctly predict something for the right reason. Thus while a number of people correctly predicted that there would be a recession in 2008, I don’t recall anyone suggesting that the recession would be caused by tight money. I actually have greater respect for someone who suggested that the performance of the economy in 2008 was uncertain but would depend on the stance of monetary policy. Several well-known people who predicted 2008 correctly did very poorly in subsequent years, an indication that luck may have bene involved.
The 2016 election is another example. I recall several well-known pundits predicting that Trump would win the election. But their reasoning process was flawed. They tended to argue that he would win because his views were surprisingly popular with voters. In fact, the polls were basically correct; Trump was not and never has been popular. Indeed in the 2016 election he won 2.9 million fewer votes that Hillary Clinton. Even worse, Hillary Clinton was herself an extraordinarily unpopular candidate, with very high negatives. Had Trump faced even an average candidate, someone like Joe Biden, the popular vote margin would have been much larger. Against a popular candidate like Obama or Bill Clinton the gap would have been even larger.
Of course Trump did win despite this popular vote discrepancy; my point is that he did not win because he was some sort of “master manipulator” who was able to convince most voters of his merit, rather because his message resonated in geographical areas that are particularly important in our Electoral College system. His enduring unpopularity has been reinforced in subsequent opinion polls, and perhaps indirectly by the recent midterms where Democratic House candidates received 9% more votes than GOP candidates (an unusually large margin.)
I actually have greater respect for pundits who correctly predicted that the electoral college would strongly favor the GOP in 2016, and yet also expected Trump to fall a bit short. (I seem to recall that the “538” website correctly foresaw the electoral college tilt, but still thought Clinton would win.)
What about people who foresaw the recent strength in the economy? How should we evaluate correct predictions on that score? In my view, the strength is partly due to the corporate tax cut, and perhaps to a lesser degree to modest deregulation. On the other hand, the last two times a Republican president came into office with tax cuts and deregulation—1981 and (to a lesser extent) 2001—the economy did quite poorly during the first two years of the administration. In contrast, the last time unemployment was this low (1968-69) was a period of rising taxes and rising regulation. Thus while I thought the GOP policies would slightly boost growth, I did not expect the economy to be this strong. Forecasts should not be based on wishful thinking.
Keynesians have a different explanation for the strength of the economy, pointing to the massive increase in the budget deficit. But once again, fiscal stimulus in 1981 and 2001 was associated with a very weak economy, while fiscal austerity in 1968-69 was associated with an extremely strong economy. So the evidence for the Keynesian view is just as weak as for the supply-side view.
The bottom line is that there is only a very weak correlation between any single policy initiative and the overall strength of the economy. Short-term cyclical moves are mostly driven by monetary policy.
Predictions that are based on false premises don’t impress me at all, just as I wouldn’t be impressed if someone correctly predicted a “heads” coin flip by arguing that, “God favors heads coming up because he likes looking at the bust of George Washington.”
Again, don’t misinterpret this post. I’m not saying a correct prediction is not better than an incorrect prediction–it clearly is. But how much better depends on whether the anticipated causal mechanism also came true. For instance, the failure of the administration to slow the rate of illegal immigration does not mean that a border wall is ineffective, as the border wall has not yet been built. Thus predictions that Trump would fail to slow immigration because border walls don’t work (which is my view) might be seen to have “come true”, but clearly not for the postulated reason. So I deserve no credit for that prediction.
To summarize, I’m not saying that prediction is meaningless, merely overrated.