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
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,
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
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
- "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
- 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
Jac Wilder VerSteeg is deputy editorial
page editor of The Palm Beach Post. His e-mail