ECONOMIC FORECASTING:

Some Hits and Misses from 1973

FUTURECASTS online magazine
www.futurecasts.com
Vol. 3, No. 12, 12/1/01.

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25 year economic forecasts:

  Towards the end of 1973, Prof. Robert L. Decker of the University of California polled between 65 and 84 professional economists on a number of questions in a three round delphi iterative effort to ascertain what could be foreseen for the last quarter of the 20th century.
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  Economists were doing very badly with their shorter term yearly forecasts at that time. Thus, there was more than a little interest in seeing how well they would do with longer term forecasts. These would depend more on perceived economic trends and would not be influenced by sudden unforeseeable events like a short war or some temporary supply disruption.
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  As might be expected, the economists had some hits and some misses. However, what they hit and what they missed are instructive indicators concerning the actual economic understanding of professional economists at that time.

Hits:

  Predictions that were agreed to by at least 70 percent of the economists venturing an opinion included some impressive successes.
  • State and local governments would represent a rising share of public expenditures. This was a correct political conclusion that revenue sharing and reliance on state and local governments would likely increase in the years to come.
  • Supersonic airliners will not be used by the domestic airlines, and could be rejected altogether. This was based on fuel efficiency and noise problems.
  • The number of nations possessing nuclear weapons and long-range delivery systems will grow to six before the end of the century. Depending on the definition of "long range," there are now either five or seven with tested systems.
  • An economic depression comparable to the nineteen-thirties will not be experienced in the United States. Of course, there has never been any other depression equivalent to the Great Depression, but considering the growing pessimism of the 1970s, the fact that over 90 percent of the economists got this one right is commendable.
  • Pollution will continue to be a major problem for the economy. It didn't take a professional economist to see this one.

Misses:

  More instructive about the weaknesses in economic theory in the 1970s were the following misses.
  • Fiscal policy will not fall into disrepute, and control of the money supply will not become the primary means of conducting economic stabilization policy. Reflecting the total divorce from reality of the Keynesian theorists of the day, over 90 percent of them agreed with this piece of stupidity.
  • Price and wage controls will become a semi-permanent feature of capitalist economies. Coming after the admitted failures of the Nixon price controls, this is a very revealing indication of the stupidity of economic theory in the 1970s. You could have either price controls or capitalism - not both. Capitalism cannot exist for any appreciable length of time with price controls. Furthermore, no democratic electorate would long tolerate the inevitable disasters of long term price controls. It is incredible that trained economists could have missed this one.
  • The world will remain divided between socialist and capitalist states, but government central planning will increase everywhere. The Keynesians still could not conceive of the extent of the obvious failures that government central planning would inevitably suffer.
  • United States defense expenditures will remain at about 10 percent of GNP for the balance of the century. Professional economists had bought into two stupidities to reach this result - the "mature economy" fallacy that provided them with a very pessimistic outlook for real GNP growth, and the propaganda myth of the "military industrial complex" that incredibly caused many of them to believe that defense expenditures would continue to grow even in the absence of a Cold War threat. Rapid demobilization has always been a feature of democratic post war policy. Even at the height of the Reagan defense buildup, defense expenditures were well below 10 percent, and they ended the century at the lowest level since before WW II.
  • A four day week will be widely used in industry and government. Among other things, this probably reflected "mature economy" and "spread the work" fallacies.
  • Some form of guaranteed income unrelated to employment income, assets, etc., will be enacted. The failure and demise of entitlement welfare programs was completely missed.
  • The multinational corporation will replicate in the world economy the characteristics and power of the oligopolistic sector of the American economy. Another weakness of professional economists of those times was the tendency to underestimate the power of competitive markets - aided by some effective antitrust efforts - to prevent the widespread growth of market power predicted and ardently awaited by left wing theorists since Karl Marx.
  • The degree of unionization in white-collar and public-sector occupations will move up dramatically. Growth has occurred in the public sector, but it has hardly been dramatic in the private white collar sector.
  • Income equalization policies will continue to be favored by Democratic candidates - well, duh - but the actual distribution of income will not change much. This second part is a clear miss.
  • The Federal Government will not have the economic tools and political resolve to maintain inflation at less than 2 percent annually. This prediction is still in doubt, but Greenspan seems intent on making it false. At the very least, the political support for - or at least the political toleration of - monetary growth sufficiently restricted to keep price increases at or below 2 percent would have come as a huge surprise to the more than 90 percent of the economists who agreed with this one.

Softballs:

  Then, there were some predictions so obvious that one wonders why they were even set forth.
  • The Federal Government will not have the tools or political will to maintain unemployment at less than 2 percent. Only a committed Keynesian would be stupid enough to think that it was even possible to maintain unemployment - as presently defined and under modern conditions - at sustained levels of less than 2 percent.
  • The Federal corporate income tax will not be eliminated. Well, duh. Of course, it would be useful to eliminate the double taxation of dividends that so distorts business finances. The best way of doing this would probably be by means of a tax deduction for dividend expenses like the tax deduction for interest expenses.
  • The major nations of the world will not be essentially free of tariff barriers, quotas and other restrictions on trade. Another no brainer, considering the obvious political realities. Elimination is simply not in the cards, but forecasts concerning the success of efforts to further reduce trade barriers would have addressed a more realistic and interesting question.
  • The balance of the century will not be dominated by Republican administrations, and there will not be a consequent decline in the economic role of the public sector. The last twenty four years have been evenly divided. However, there are few "small government" politicians in Washington, even among the Republican members of Congress, so this, too, is a no brainer. However, the type of economic role played by government has changed in important ways. Government economic management has fallen into disrepute, and entitlement welfare programs have been cut back, but the total and variety of government benefit programs continue to grow impressively, middle class entitlements are untouchable, and other entitlement benefits are still strongly advocated.
  • Starvation will not be eliminated from the world economy. As long as undeveloped nations have socialist, kleptocratic, and/or dysfunctional governments that do not permit capitalist markets to develop, this is a no brainer.
  • The institution of inheritance will not be abolished by the imposition of confiscatory tax rates. That this question would even be raised is a reflection of the ideological bias of the economists of those times.
  • The Presidents Council of Economic Advisors would regain its lost prestige and standing as a professional body, if only for a brief time. If they are wedded to Keynesian policies, any recovery of prestige will be limited to a very brief time.

Split decisions:

  Questions on which the economists remained fairly evenly split were also interesting.
  • Inflation in excess of 5 percent was expected - by just under 50 percent of the economists - to continue indefinitely. Before Ronald Reagan, this was a real possibility.
  • Tax simplification was expected by just over 50 percent. How unrealistic can you be? It was, in fact, attempted, but inevitably was very short lived.
  • Increases in various legal restraints on union power were expected by over 50 percent of the economists. Reagan enforcement of existing legal restraints on the power of public employee unions, and the power of competition to limit pricing power - and thus the power of unions as well as management - made enactment of further legal restraints unnecessary.

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Copyright 2001 Dan Blatt