The macro-economic discipline can be thought more-or-less as an evaluation of a constant stream of surprises, many of them unpleasant. A constant stream of bad news activates the stress response and can have a major impact on physical and mental health, increasing susceptibility to depression, anxiety, and addiction. Not surprisingly, its practitioners tend to escape away from reality, building fantastical models of how the world should work, rather than how it does. It is not surprising that macro-economic forecasts based on these models fail. One approach, which I recommend, is to admit that most forecasting is an exercise in futility and instead redirect effort into understanding more about the present. But almost everyone thinks macro-economics is about forecasts, so forecasts they must have, even if they will almost always fail to identify the surprising, and therefore salient, features of the future.
I read with some bemusement Tony Yates critique of the Bernanke report in today’s FT (here: https://www.ft.com/content/f76c5487-f94b-4376-aa0e-3f49e9b0f242 ). The brief for the Bernanke report was “to review economic forecasting at the Bank, with a particular emphasis on how forecasting can better support policymaking and communication”. Today’s article strongly suggests Professor Bernanke has failed to achieve the aim of his remit. Thank goodness, for if central bankers succeeded in addressing the cause of their repeated errors some of us would have to find something else to write about.
The article is quite long but can be summarised in its penultimate sentence: “the report’s flaws — its opacity, its open-endedness, the wood lost for the trees — will also limit the damage it could have done”.
I wonder how such damage could be quantified, especially when compared to the erosion of monetary trust caused by prevailing central bank approach.
The article does raise some interesting points. Early on Yates writes: “…as the report itself notes, the Bank of England’s forecasting errors are not out of line with those of other central banks and private sector economists. So does everyone need a Bernanke Report? Or, if the recommendations to move the Bank’s practices towards some other peer are followed, can we expect nothing to improve? Is this actually a report on macroeconomics in general?” Surely all these possibilities should be considered, especially the last. But that is just too much for Mr Yates, it seems.
In his view, it seems, we should ignore the report and the misunderstanding in economic modelling it has revealed. Because to ask deep and meaningful questions about the operation of macro-economics would be too ‘damaging’. He reminds me of a priest meeting an atheist and after listening for a few minutes exclaiming, “but surely you don’t really believe there isn’t a God?”
Still, on the positive side, I assume Mr Yates views will prevail within the Bank, because otherwise staff really would have to throw their arms up and admit both a) serial blunders and b) a sobering quantity of ignorance in the entire macro-economic discipline. That is very bad news for welfare of the monetary system, but great news for those who criticise central bankers. The game continues.