Why Economists Won’t Tell You What They Don’t Know

“After more than a quarter-century as a professional economist, I have a confession to make: There is a lot I don’t know about the economy.” – N. Gregory Mankiw.

The well-kept secret that the media won’t tell you is that, in spite of the fact that they do it all the time, economists find making predictions fairly tough, and they’re really not very good at them

I’ve commented on this before, and past posts are grouped under the Series: The Cloudy Crystal Ball.

If You Have the Answers, Tell Me

In this Sunday’s New York Times column, Harvard professor and economist N. Gregory Mankiw admits with some humility what he doesn’t know.  And he doesn’t know a lot, apparently.  That list includes the very things we care and worry about as consumers, investors, Americans; things such as the future direction of the U.S. economy and unemployment, the future amount and impact of inflation on consumer spending and business investment, and how long the U.S. government will be able to borrow money at such low interest rates.

How refreshing for a professional economist to be humble.

Professor Mankiw’s column is brief and well worth reading.

He concludes with this, “If you find an economist who says he knows the answers, listen carefully, but be skeptical of everything you hear.”

Larry Swedroe has, for many years, expressed similar skepticism about the ability of forecasting to add value.  Mr. Swedroe is director of research for The Buckingham Family of Financial Services, author of several books that I have read with great pleasure, and he is my absolute favorite blogger at Wise Investing.

Never In Doubt, Often Wrong

Here is something he said in 2002.

The track record of economists is dismal (perhaps that is the real reason it is called the dismal science). The track record of market strategists is equally dismal. Despite this, the press and media focus on forecasts (though rarely holding the forecasters accountable, for accountability would end the game) and investors pay great attention to them; allowing the forecasts to influence or even determine their investment strategy.

Buckingham’s Swedroe on Housing, Oil, Investing

In a recent interview aired on Bloomberg TV, which is well worth viewing in my opinion, Swedroe said emphatically, “There are no good forecasters.”

Not merely offering a criticism of forecasters and prognosticators, he also discusses the “right way” to invest.  Specifically, Mr. Swedroe advises controlling risk by widely diversifying, keeping costs down and keeping taxes low.  And, of course, by not buying actively-managed mutual funds. 

Amen.

About the author

Roger Streit, CFP®

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