Surely, you recall that Chicken Little once ran around shouting that the sky was falling. Today, we have more adult versions of Chicken Little: they are called experts. They especially like to forecast future calamities for the markets and the economy. They do so with wild abandon, even though they are very often wrong.
Actually, it’s a good argument for free enterprise. Would you want the economy to be run by so-called experts who try to make a name for themselves forecasting the apocalypse?
Case in point: expert opinion universally agreed that if British subjects voted to leave the European Union, the result would be: the sky would fall. It has not turned out that way, so the experts will move on to predict another catastrophe.
Josh Zumbrun analyzed the phenomenon in the Wall Street Journal:
It’s early, but data so far suggest the British decision to leave the European Union could be another example of a recurring phenomenon: expert predictions of dire consequences to political decisions that end up proving overheated.
Economists are good at digging into the forces behind inflation or productivity, or exploring the downsides of wealth inequality. But they face steeper challenges in extrapolating from political events, especially ones with few or any past corollaries.
“Forecasters often feel incentivized to pump up the probability of worst-case scenarios” said Philip Tetlock, an expert in political forecasting at the University of Pennsylvania. Forecasters may inflate the probability of disasters, as a way to increase the salience of a warning, or because they believe that proving prescient will be something they can boast about, while proving mistaken will be something most people forget. “Over time, this has some corrosive effect on trust in the expert community,” he said.
If people start doubting the expertise of experts it will not be coming a moment too soon. Tetlock does make a salient point: when experts are wrong people tend to forget very easily; when experts are right everyone recalls vividly what they have said. The risk/reward ratio for bad forecasts induces people to forecast calamity.
Amazingly, when experts look into their crystal balls they most often see nothing more than their fattened heads.
How has the Brexit vote worked out? Zumbrun explains:
It’s now been two months since British voters on June 23 cast their ballots to exit from the European Union, and it’s becoming unclear if the recession so many feared will materialize—at least in the near term.
It’s worth revisiting the level of concern prior to the vote. George Osborne, the Chancellor of the Exchequer, said a vote for Brexit would cause a “DIY recession.” In the immediate aftermath of the vote, many market economists forecast recession would begin almost immediately.
In the days after the vote, global stock markets indeed fell sharply. Perhaps if it had been just a little bit worse, a broader panic would have sent things into a spiral. Instead, markets have rebounded. The FTSE 100 climbed to near-record levels by the middle of August.
So much for the experts. We recall their shrieking about the Brexit vote before and after it happened. In this case the general public seems to have known beter.
Zumbrun outlines other situations where experts have erred:
Some economists warned the U.S. congressional budget battles in 2013, which led to sharp spending cuts known as sequestration, could throw the economy back into recession. The economy grew 2.7% that year.
Then, in 2010 and 2012, some economists warned the Federal Reserve’s massive bond-buying program would cause hyperinflation, soaring commodity prices and a collapse of the dollar. Nothing of the sort occurred.
Warnings abounded in 2015 that if Greece rejected an international bailout, it could spark a sovereign default or a banking crisis or Greece being cast off the euro. Greece’s economy is far from a success story, but it hasn’t gone bankrupt. Its banking system has been battered and drained of deposits, but hasn’t collapsed. It remains in the euro.
Speaking of non-experts, yesterday Donald Trump declared that the stock market was in a bubble that was being engineered by the Federal Reserve Bank. The Fed wants to keep things looking rosy until after the election, Trump said, because it wants to ensure that Obama leaves office with his reputation intact.
If I had been called on to offer an opinion—I wasn’t—I would say that Trump is right about this. And that he is simply saying what many other savvy market watchers are saying in private but would not dare to say in public. It's not the first time I have heard this view.
Republican presidential candidate Donald Trump repeated his criticism that the Federal Reserve has created a"bubble" and an "artificial stock market" through low rates that were designed to benefit President Obama.
"They're keeping the rates artificially low so that Obama can go out and play golf in January and say that he did a good job," Trump told reporters Monday aboard a flight to Youngstown, Ohio. "It's a very false economy."
The billionaire added that Federal Reserve Chair Janet Yellen has "done a political job" and responded to the possibility of a rate hike in September by saying the low-rate environment has been "created until January."
Trump earlier repeated that he "wouldn't be leading" if the unemployment rate was actually the 4.9 percent that the Department of Labor reports—a position he has taken since he led the Republican field, although he now falls behind Democratic presidential nominee Hillary Clinton in many polls.
One might say that the economy is running on fumes. One might say that the rosy numbers are a mirage masking the economy’s underlying weakness. On these points and on the notion that he would not be doing so well in the polls if the economy was really as good as the media and the stock market suggest, Trump is most likely correct.
But then, if the Federal Reserve is going to raise interest rates after the election and take away the punch bowl, thus bursting of the bubble, why would Trump want to be president when this happens? Because you and I know that if Trump or any Republican is occupying the oval office when the bubble bursts, he will be blamed.