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May 11, 2001

Forecasting and Politics Don't Mix

When an engineer tells us that a bridge is unsafe, it's rare to hear that judgment questioned. Similarly, if a doctor tells us our blood pressure is high, we accept it as a fact. But if an economic projection of the future delivers unpleasant news, its more likely to be discredited than anything else. 

That's certainly understandable, at least to a point. Nobody likes bad news, and since forecasting the future by its nature is an error-prone process, we're much more likely to see the warts and imperfections in forecasts we don't like, while overlooking those same shortcomings in projections that suit our purposes. 

We cross a dangerous line, however, when we seek out, or willfully construct, only those visions of the future that justify our current policy preferences. Sadly, this line is crossed too often, in both the public and the private sector, in the trench warfare over policies and resources. For all their errors, forecasts that can remain impartial are tremendously useful. Forecasts that are manipulated are not worth the paper they are printed on. 

At least in the private sector there is the hope that the discipline of the market place will punish those who fail to look rationally into the future. Even formerly high-flying companies like Cisco Systems, which two years ago had the highest book value of any company in the world, have been bowed by their failure to see anything but a rosy future when trouble was brewing. 

The budget debates underway in both Washington and Indianapolis present an interesting contrast in how one plans for the future in the public sector. In Washington, where tax receipts don't have to cover all the government's bills, there is an unworldly aspect to the entire process. Even though every incoming Congress makes up its own mind about how much to tax and spend, the Congressional Budget Office's ten-year projection of budget surpluses assumes that the rules being made today will still be in force in 2011. The fact that the procedure is guaranteed to underestimate spending and thus overestimate the surplus is conveniently ignored by those bent on making costly future commitments. 

Indiana state government, on the other hand, is holding an entirely different set of cards. It must balance its books in a two-year period, enforcing a discipline on the revenue and spending forecasting process that is lacking in Washington. 

But the subtle art of constructing visions of the future that justify one's favorite policies carries on in both places. The Bush administration's first days were full of concern over national economic growth, which dovetailed nicely with the new President's prominent pledge to cut taxes. The irony is that it was fast-paced economic growth of prior years, and the resulting black ink in the U.S. Treasury, that gave rise to the tax cut proposal in the first place. 

In the statehouse, institutions that receive significant state support, especially in education, have a similar interest in portraying the Indiana economy in dire terms. But in the world of state government finance, this justifies a tax increase, not a cut. 

Messengers bearing bad news, despite the old adage, have been taking a beating for as long as we can remember. That's bad, but not as bad as it would be if we refused to open the door.

Link to this commentary: https://commentaries.cberdata.org/475/forecasting-and-politics-don-t-mix

Tags: economics


About the Author

Pat Barkey none@example.com

Patrick Barkey is director of the University of Montana Bureau of Business and Economic Research. He has been involved with economic forecasting and health care policy research for over twenty-four years, both in the private and public sector. He served previously as Director of the Bureau of Business Research (now the Center for Business and Economic Research) at Ball State University, overseeing and participating in a wide variety of projects in labor market research and state and regional economic policy issues. He attended the University of Michigan, receiving a B.A. ('79) and Ph.D. ('86) in economics.

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