During the Referendum campaign, Michael Gove notoriously commented that the British public had “had enough of experts”, in particular of economic forecasters. This article explains a little about (i) economic forecasting and (ii) why economic forecasts may be useful even if they cannot be completely accurate.
Economic forecasting is like medical diagnosis. The economy and the human body are both complex systems that are still imperfectly understood. Your GP has to make a diagnosis on the basis of limited information: headache; flue; or meningitis? From the perspective of public health advice, the situation is no less difficult. For example, official advice on diet is much contested. Advice changes as new evidence becomes available.
When economists forecast or predict the impact of Brexit, they start with a diagnosis of the current “health” of the “patient”. Is the UK economy delicate or in rude health? Since experiencing the economic equivalent of a heart attack during the Global Financial Crisis of 2008-09, the UK has undergone stagnant productivity (and, hence, wages), low investment, record levels of household debt, public sector austerity, and now low growth during a world economic upturn. Economists diagnosing the patient along such lines would tend to recommend against administering a shock to the patient. However, economists, like doctors and medical researchers, differ in their diagnoses. Other economists might point to unprecedented levels of people in employment and conclude that the UK economy is more or less fit, and that Brexit is just the tonic needed to make it thrive.
Even when medical experts can give an accurate diagnosis (headache or a brain tumour), they will typically be unable to give a completely accurate prognosis (if the diagnosis is a brain tumour, does the patient have weeks, months or years to live?). There are too many unknowns. However, the well-trained and experienced medical expert may be able to give useful guidance. It is similar in economic diagnosis/prognosis (or, in economic terminology, analysis/forecasting). Government ministers confronted with politically inconvenient forecasts often dismiss them by pointing out that forecasts are predictions of the future, which is unknown. In any case, they often continue, economic forecasts are usually wrong. Yet, just as medical diagnosis and prognosis are useful for guiding treatment, so economic forecasts – even though not precisely accurate – can be useful for guiding government policy. For example, forecasts of economic growth enable the planning of government borrowing and/or tax changes to fund spending commitments. Such forecasts offer broad guidance on the future state of the economy and thus a rational basis for policy. In short, expert forecasts are the alternative to wishful thinking. As such, economic forecasts help to guard against astonishment and panic as the drivers of policy.
One reason why economic forecasts were so easily dismissed during the Referendum campaign – and subsequently – is that most forecasters failed to foresee the Global Financial Crisis. Unfortunately, for most – although by no means all – reputable economists, financial crisis was an “unknown unknown”. (In public health, a rough analogy would be failure in the early 1980s to predict the appearance and rapid spread of AIDS.) In contrast, forecasting the economic effects of Brexit – and now its more or less “hard”/”soft” variants – is to think about “known unknowns”. “Known”, because we know roughly what is coming; but “unknown”, because we cannot know its precise consequences. The consequences of Brexit are unknown and so must be estimated – in other words, forecast. In preparing businesses and government for Brexit, economic forecasts, if used within their limitations, have the potential to enrich understanding of likely threats and opportunities and thus improve preparations.
Disclosure: the author voted Remain, and would do so in future if given the opportunity.
Professor Geoff Pugh, Staffordshire Business School