There are at least two common misuses of economic statistics in public policy: the belief that the science of economics is capable of making long-term predictions with any degree of accuracy, and the use of absolute economic statistics without context or proportion. These mistakes are even made by those who ought to know better.
Economists should never commit their predictions to paper, where they can later be checked. In a September 1982 memo to Martin Feldstein, the Chairman of President Ronald Reagan's Council of Economic Advisors, Princeton Economist Paul Krugman and presently a NY Times columnist, with colleague Larry Summers who became Secretary of Treasury in the last two years of the Clinton Administration, marshaled their MIT/Yale/Harvard educations to make a now embarrassing prediction. Inflation had just cooled from over 10% to just under 6% and these professional economists confidently concluded "...that it is reasonable to expect a significant reacceleration of inflation in the near future...Our very rough guess is that correction of ... distorted relative prices will add at least 5 percentage points to future increases in consumer prices... This estimate is conservative..." This would have put inflation back to over 10%. The 1932 graduate in economics from Eureka College, Ronald Reagan, followed his own counsel. Contrary to learned predictions, inflation continued to drop and remained 5% and lower (mostly lower) for the rest of the decade.
One measure of the maturity of a science is its ability to make accurate predictions. Astronomers can tell us the position of the moon will be centuries in the future with great precision. Other sciences are less mature. Meteorologists are largely constrained in their predictions by limited measurements of the present state of the atmosphere for predictions. Meteorologists can perhaps make predictions up to a week or so before the use of climatology is just as accurate.
What made the Krugman-Summers prediction so disappointing is that one could have made a more accurate prediction using the simple assumption that, in the short term, current trends would continue. Even the simpler assumption that things would not change from their current state - persistence - would have been more accurate. Modern scientists are usually able to bound the accuracy of their predictions, specifying increasing uncertainty as the prediction horizons increase. This is discipline and humility is too often lacking from economic predictions.
Last year, the government predicted a $426 billon budget deficit for 2005. We are now in 2005, additional data have come in, and this week the budget deficit estimate for this year was just reduced by $94 billion. This means that while pundits argue about the budget deficits years in the future, there is a demonstrable 22% error in budge deficit estimates less than a year old. The predictions of $500 billion deficits as a result of the Bush tax cuts never materialized. If the deficit predictions had been underestimates, one can be sure that this information would be ammunition in Liberal punditry against the Bush Administration. The rapid decrease in the budget deficits, will, of course, be duly reported, but will certainly escape notice of all but the most attentive.
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