Tuesday, September 6, 2011

Economists Are Not So Dismal After All

Nate Silver has a nice little piece in the New York Times about economists' predictions and the subsequent jobs reports and finds that economists have been routinely too optimistic during this downturn.  See, we are not a dismal lot after all - we are all optimists at heart!  [Actually, it seems to me the verdict is far from clear - just look at his first graph above]

But why should this be so?  Quips about how economists are a bunch of charlatans don't actually hit home here, because we are not talking about accuracy which would cut both ways, but bias which cuts only one way.  I think the problem is that his data come from news reports - economists quoted in the media.  He wonders about selection bias, suggesting perhaps that only the bullish economists get quoted.  I think there is selection bias but not from the bullish economists being quoted more, but from the fact that most economists that are surveyed in such stories are professional business economists rather than academic economists and business economists might have an incentive to be too optimistic for two reasons.  The first is that it might make their employers happy to hear good news rather than bad and these economists are eager to please  the folks they work for and with.  The second is that being rosy might help overall consumer sentiment which helps the firms that employ these economists.

No need to worry about me, however, I am as dismal as can be these days...

1 comment:

The Oriole Way said...

Most business economists--assuming that they work for investment banks or consultancies--have an incentive to get the number right; that's how their firms' or clients' traders make money.

I think this is much more a data problem; for some reason, the jobs market has undergone a structural shift and the historic data economists use to model changes is no longer as accurate. This would also help explain why subsequent data revisions have also been negative. That is, it's not just the private economists forecasting the number that have a "bias," but it is also the official statisticians compiling the data.