Economic Forecasts, Humility, and Corporate Planning

I received a telephone call from a TV talk show producer looking for two economists to talk about the administration’s tax policy.  (This was a few years ago, when President Bush’s tax cuts were being debated.)  I told her what I liked in the tax policy, and what I disliked, and concluded that the policy would not have a large impact on the economy either for better or worse.  She thanked me, and said that they were looking for a couple of people to duke it out, so she wouldn’t need me.

Hard set positions make good theater, but not good economic forecasting.  Even away from politics, the hard-core advocates of boom, or of bust, are entertaining. But please don’t use them for anything more than entertainment.

If someone tells you he or she is sure what is going to happen in the next 12 months, that person is either 1) stupid, or 2) lying.  That’s not to say that economic forecasts are useless.  When the consensus sees a slowing of economic growth, there’s a high likelihood that they will be right.  But no one is good enough to be sure.

Surety leads the forecaster to dismiss new information that contradicts his view.  If the view is right, then the new information is either irrelevant, misleading, or erroneous.  Humility helps the forecaster see the economy evolve.  Most of us–but not the most famous among us–have acquired a good bit of humility with experience.

Doing some business planning?  Grabbing one of the econo-extremists will make for a lively discussion at the planning retreat.  However, using a more humble economist will allow you to see several possible directions the economy could take.  You can then do some contingency planning for each, and be ready for whatever comes.  Be sure to ask your economic consultant, what will be the signs of each scenario?  "How will we know if changes are playing out this way, or that way?"

That brings up corporate planning retreats.  Typical pattern: the executive committee meets and sets the agenda for the coming year.  Then a managers meeting comes, with 200 people filling a ballroom to hear the corporate direction.  And an economist is hired to provide an economic outlook.  And usually the economist’s view did NOT enter into the executive committee’s strategic planning exercise.

Better business planning: bring in an economist to sit through the entire planning retreat.  Assuming that you find his or her input valuable, then ask for a presentation at the managers meeting, with the presentation laying out the economic rationale for the corporate strategy.