Forecasting in the Dismal Science: Walter Friedman’s ‘Fortune Tellers’
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 one’s 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 “Fortune Tellers: The Story of America’s First Economic Forecasters.” 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 Friedman’s book isn’t just in the brief biographies of these figures — tuberculosis is a disturbingly common ailment among these pioneers — but also in Friedman’s insights and asides about the business, financial and political context of the time. Friedman doesn’t mention it, but few readers will miss the implicit comparison to today.
Babson is the only forecaster in Friedman’s 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 — proving that those who believe nobody can argue with success haven’t 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 didn’t turn out well, either. But one can sympathize with Prince’s disdain for prognosticators who can’t 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 didn’t 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.
The mythological Cassandra’s curse was to see the future and not to be heeded. Babson’s curse was to see the future but without knowing when it would arrive. Bullock’s curse was to see the future and not believe it himself. Or possibly not to see it until it was past. The audience’s problem then, as now, is to choose among Cassandras — Bullocks and Babsons and dozens of other seers shouting simultaneously at the top of their lungs.
The corollary of being able to see the future is doing something about it when you don’t like what you see. Friedman’s book is best when he touches on this intellectual and political relative of the early forecasting work.
John Maynard Keynes, an early supporter of Bullock and Persons’ work, became less enthusiastic when they didn’t share his interest in formulating policies to flatten the cycles they were forecasting. Keynes suspected they feared the loss of profits if policy eliminated the cycles.
Before Hoover became president, he wanted businesses to take the actions to smooth out business cycles. More knowledgeable about what was going on in the world than most Americans, Hoover was acutely aware of the alternative economic management advocated by the Bolsheviks in the Soviet Union. He thought government should provide the data and the private sector would do the rest.
Hoover worked hard to tap the expertise of Wesley Mitchell, who helped establish the National Bureau of Economic Research in 1920, for his purposes. Both of them suspected private forecasters were more interested in profit than accuracy. As a Cabinet member, Hoover created a business cycle committee and later said that committee deserved credit for avoiding an economic panic.
Nobody remembers Secretary of Commerce Hoover for avoiding a panic in 1923 and 1924. President Hoover is well remembered for the 1929 panic and subsequent Depression that he didn’t avoid. He never even saw that one coming.