Every month, the business news channel CNBC brings together a screen full of talking heads to guess what the U.S. non-farm payroll report will say about the number of jobs created in the preceding month. Every month, most or all of the heads are wrong, sometimes by a lot. Keep in mind that this high error rate applies to events in the past.
The inability to know what happened in the economy only last month, of course, is no deterrent to the endless, time-consuming and costly endeavor to forecast the future. Republicans, for example, can estimate down to single digits how many jobs will be lost by raising the minimum wage. Democrats can say exactly how many families will gain exactly how much by raising it.
Economic prognostication is unique in that repeated failure does nothing to dent oneís reputation. Precision that should be laughable as soon as it appears is taken with great seriousness.
Walter A. Friedman takes us into the early years of this industry in ďFortune Tellers: The Story of Americaís First Economic Forecasters.Ē He introduces the characters who would have filled any CNBC screens almost a century ago: Roger Babson, Irving Fisher, John Moody, Charles Bullock, Warren Persons and Wesley Mitchell. They were in fact steady writers for newspapers. President Herbert Hoover gets a big supporting role.
The value of Friedmanís book isnít just in the brief biographies of these figures ó tuberculosis is a disturbingly common ailment among these pioneers ó but also in Friedmanís insights and asides about the business, financial and political context of the time. Friedman doesnít mention it, but few readers will miss the implicit comparison to today.
Babson is the only forecaster in Friedmanís Pantheon to even remotely see the Wall Street crash of 1929 and the subsequent Depression, but he was generally viewed as a quack by his more academic and rigorous contemporaries ó proving that those who believe nobody can argue with success havenít met an academic.
Of course, Babson first began predicting the crash in 1926. Clients who heeded his words would have paid a steep opportunity cost by missing the bull market that continued until late in 1929. Citibank CEO Charles Prince may have been mis-channeling Babson in 2007, when Prince said that as long as the music kept playing, the bank would keep dancing.
That didnít turn out well, either. But one can sympathize with Princeís disdain for prognosticators who canít say when catastrophe will strike.
Bullock and Persons, founders of the Harvard Economic Service, brought far more rigor and data to their analysis than Babson, but, alas, still didnít see the big economic megillah ahead. In fact, they needed about a year to identify it in the rear-view mirror. Bullock later sought to restore his reputation by retroactively finding that his analysis had indeed forecast the crisis. He had simply doubted that things could be as bad as his charts suggested.