Let's face it. Not many people are good prognosticators. In fact most of us do not even bother trying to imagine what the world will be like in 20 years. But in this article, Paul Krugman explains why most economits' predictions are wrong. My explanation for why most economists' predictions are wrong includes the following:
- Many of our predictions are not wrong. The basic supply and demand models work very well most of the time.
- Our macro models, dealing with inflation and unemployment, are generally quite poor.
- It's hard to predict what politicians are going to do.
- Rational expectations and adaptation: if we predict prices are going to go down a year from now, and people believe us (ha!), they'll sell now, and prices will go down now, not a year from now.
Here are some predictions Paul Krugman made back in 1998:
The lesson to be learned? Economists are not much good at predicting the future .... and if we were, we'd do it rather than write about it.* Productivity will drop sharply this year. Nineteen ninety-seven, which was a very good year for worker productivity, has led many pundits to conclude that the great technology-led boom has begun. They are wrong. Last year will prove to have been a blip, just like 1992.
* Inflation will be back. Wages are rising at almost 5 percent annually, and the underlying growth of productivity is probably only 1.5 percent or less. Sooner or later, companies will have to start raising prices. In 1999 inflation will probably be more than 3 percent; with only moderate bad luck--say, a drop in the dollar--it could easily top 4 percent. Sell bonds!
* Within two or three years, the current mood of American triumphalism--our belief that we have pulled economically and technologically ahead of the rest of the world--will evaporate. All it will take is a few technological setbacks or a mild recession here while Europe or Japan recovers a bit.
* The growth of the Internet will slow drastically, as the flaw in "Metcalfe's law"--which states that the number of potential connections in a network is proportional to the square of the number of participants--becomes apparent: most people have nothing to say to each other! By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's.
* As the rate of technological change in computing slows, the number of jobs for IT specialists will decelerate, then actually turn down; ten years from now, the phrase information economy will sound silly.
* Sometime in the next 20 years, maybe sooner, there will be another '70s-style raw-material crunch: a disruption of oil supplies, a sharp run-up in agricultural prices, or both. And suddenly people will remember that we are still living in the material world and that natural resources matter.