Expect economists to be wrong

Palm Beach Post Deputy Editor of the Editorial Page

Saturday, March 07, 2009

At one time, lawyers were pretty much the most-hated group in America. The media have come in for their share of hatred as well. And it's always been popular to consider politicians unpopular. Lately, bankers have been the target for extreme fear and loathing, and I can't argue with that.

But over the past excruciating months as I have listened to, watched and read report after report on Wall Street, oil prices, job losses, auto bailouts, retail sales, foreclosures, housing starts and on and on, a new group has emerged that, it seems to me, has earned a spot at the front of the most-hated line: economists.

I'm beginning to believe that we're in this crisis not because of greedy, over-borrowing consumers or shady subprime loans cooked up by financial pirates. We're in it because of economists. And, specifically, because of economists' "expectations."

Here's an example of what I'm talking about from the March 19, 2008, Washington Post:

"Wall Street giants Lehman Brothers and Goldman Sachs reported earnings yesterday that beat analysts' expectations, calming fears that investment banks were in imminent danger of collapse and sending U.S. stocks to their biggest gains of the year ...

"The Dow Jones Industrial Average of blue-chip stocks rose 420.41 points, or 3.51 percent, to 12,392.66, its biggest gain in nearly six years."

Pause for a moment to look at that stock market close from a year ago. Then look at this week's close, if you can do so without weeping.

Six months after economic analysts' "expectations" induced suckers to buy Lehman Brothers' stock, the brokerage firm went bankrupt.

Goldman Sachs fared a little better - going on to become, according to opensecrets.org, the second-biggest source of campaign contributions to Barack Obama.

Over the past year, economists and their "expectations" have been disastrously wrong. This is all the more disconcerting because economists are very smart, highly educated people. They use theories and equations that give every appearance of being based on science. Investors fall into the habit of treating economists' "expectations" as significant, factual milestones.

In the example above, if Lehman Brothers and Goldman Sachs had achieved exactly the same earnings but they had been below economists' expectations, there is a good chance that financial stocks would have tanked that day. It's all in the expectations. And it is astonishing how often those expectations are wrong.

There are hundreds of examples. Here are a few from recent news reports:

  • Jan. 29: "New home sales fell 14.7 percent in December to a seasonally adjusted annual rate of 331,000 ... The results were far worse than analysts expected."

  • "Feb. 6, 2009: The latest net total of job losses was far worse than the 524,000 that economists expected ... The increase in the jobless rate from 7.2 percent in December also was worse than the 7.5 percent rate economists expected."

  • March 5. "The deepening recession caused worker productivity to slide by a worse-than-expected amount in the fourth quarter ... The 0.4 percent decline in productivity was far weaker than the 1.5 percent increase that economists had expected."

    The drumbeat of "worse than economists expected" negatively affects the nation's psyche and further depresses the economy. If economists had been better at predicting just how bad things were going to be, things wouldn't have gotten as bad as they have.

    What the economy needs, obviously, is economists who will start expecting that the economy will be much worse than economists expect. Only then can we expect the economy to get better.

    Jac Wilder VerSteeg is deputy editorial page editor of The Palm Beach Post. His e-mail address is jac_versteeg@pbpost.com

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