How Stupid Are Our Economic Forecasters?

Following up on yesterday's post, I thought it would be interesting to look at the economic forecasts of the geniuses who make those things for our government, and see how well they did at forecasting the effects of the 2009-2011 "stimulus" and of the 2013-2014 "sequester."  Turns out that economist Scott Sumner at the Library of Economics and Liberty had already done the work for me.  You literally will not believe how bad this is.

To understand this nonsense (OK, it's in the nature of nonsense that it's not really possible completely to understand it) you need to know a few things about the world view of these people.  They are "Keynesians."  In Keynesian world, the size of a government's fiscal budget surplus or deficit is thought to determine the degree to which the government is giving "stimulus" to its economy, or alternatively imposing "austerity."  More spending and lower taxes constitute "stimulus"; less spending and higher taxes constitute "austerity" (or sometimes, "fiscal tightening").  They then cook up forecasting models in which "stimulus" causes the underlying economy to grow and "austerity" causes it to shrink.  In other words, the more money the government wastes and the faster they waste it, and the more debt they run up, the more successful the country will be!  You would think it would not be possible for people in positions of high responsibility to believe such things, but you would be wrong.  180 degrees wrong.

In the second half of 2012, Congress and the President had previously agreed on a budget-control program known as the "sequester," which was scheduled to take effect in January 2013 unless the two first came to some other agreement.  In August 2012, supposedly to inform the debate, the Congressional Budget Office came up with forecasts of how the economy would perform under two scenarios, one assuming that the "sequester" occurred, and the other assuming that it did not.  At the time of the forecasts, Fiscal Year 2012 was nearing a close (FYs end on September 30), and the deficit for that year was looking to come in at somewhat over $1 trillion.  (The final deficit for FY 2012 was $1.087 trillion, per numbers here.)  The CBO looked at the various spending cuts and expirations of tax breaks scheduled to occur as part of the sequester, and projected that with the sequester the FY 2013 deficit would be $641 billion, and without the sequester the FY 2013 deficit would be approximately $1 trillion.  In other words, there would be a difference of close to $400 billion of "austerity."

Here is the CBO August 2012 forecast of how the economy would perform under the "austerity" conditions of the sequester:

The deficit will shrink to an estimated $641 billion in fiscal year 2013 (or 4.0 percent of GDP), almost $500 billion less than the shortfall in 2012.   Such fiscal tightening will lead to economic conditions in 2013 that will probably be considered a recession, with real GDP declining by 0.5 percent between the fourth quarter of 2012 and the fourth quarter of 2013 and the unemployment rate rising to about 9 percent in the second half of calendar year 2013.

And here's the CBO forecast of how the economy would perform in the alternative scenario where the sequester was averted and the deficit was allowed to continue at about $1 trillion:

The economy would be stronger in 2013: Real GDP would grow by 1.7 percent between the fourth quarter of 2012 and the fourth quarter of 2013, and the unemployment rate would be about 8 percent by the end of 2013, CBO projects.

No real-world economic experiment is ever completely perfect, but this one is about as close as you can get.  The sequester ended up getting delayed a couple of months to March 2013, but otherwise largely implemented, and the final deficit for FY 2013 came in at $680 billion, which is just slightly higher than the $641 billion used by the CBO in its projection for the sequester scenario.  So did the economy go into recession as they predicted?  Sumner:

Obviously the economy did much better than the negative 0.5% RGDP growth and 9% unemployment in late 2013 that were expected by the (Keynesian) CBO. But even more strikingly it did far better than the 1.7% RGDP growth and 8% unemployment at yearend in the alternative scenario.  In fact, RGDP grew 3.12%, and unemployment fell to 6.7%.

It's almost impossible to believe how badly wrong they could be.  And this is what passes for the advice that our Congress gets in trying to decide how much of the taxpayers' money to spend.

So, you ask, is this just an aberration, or are they always so bad?  Obviously you don't pay close attention to these things.  They were absolutely just as bad the previous time they had to make a call that really counted, namely in advising as to the effect of implementing a "stimulus" package as the economy entered recession in 2008/09:

Do you remember the Great Stimulus Experiment of 2009? The time that the unemployment rate didn't just rise much more than expected in response to the stimulus, it rose far more than expected under the alternative scenario of no stimulus!

Arnold Kling comments that "Facts do not change minds."  And remember, it's not just the American CBO that has drunk the Keynesian Kool-Aid in economic forecasting.  It's all of Europe, Japan, and for that matter the IMF in all of its advice to poor third-world countries.

And to end, should we quote Official Manhattan Contrarian Worst Economics Writer Paul Krugman on his February 2013 prediction as to the effect of the upcoming sequester?

[T]he legacy of that year of living foolishly lives on, in the form of the “sequester,” one of the worst policy ideas in our nation’s history. . . .  [T]he doomsday machine will go off at the end of next week.. . .  We should be spending more, not less, until we’re close to full employment; the sequester is exactly what the doctor didn’t order.. . .  This would hit the nation with a double whammy, reducing growth while increasing injustice.

And lots more hyperbole and invective where that came from.  Facts will never change his mind.