UM Economists' Cloudy Crystal Balls

The University of Michigan's "Research Seminar in Quantitative Economics" predicted last week that Michigan will lose 60,300 jobs in 2010 and unemployment will rise to 15.8 percent. In 2011, the figures will be 16,200 jobs lost and 15.1 percent unemployment, according to the forecast.

This is the crew that creates the economic projections on which state budgets are based. In November 2008, they said Michigan would lose 108,000 jobs in 2009, but the job situation in 2010 would be "much better."

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In fact, Michigan has lost 178,200 jobs so far in 2009.

Here’s some of their earlier crystal ball reports:

“From mid 2004 through the end of 2005, (RSQE’s Joan) Crary said she expects Michigan to see a two percent job growth rate." (MIRS News, Oct. 14, 2003)

Actually, Michigan lost 20,200 jobs between June 2004 and December 2005.

"Joan Crary said the outlook for 2005 for a net gain of 32,000 jobs will mark the first job growth since 2000 and that growth over the next two years will only make up for losses in 2003 and 2004." (Gongwer News, Jan. 13, 2005)

In 2005, Michigan lost 28,200 jobs and another 79,700 jobs in 2006. Obviously, that didn't "make up" for the 68,400 jobs lost over the previous two-year period.

Anyone can be wrong, of course, but these academics nevertheless deserve criticism on two counts. First, the ludicrous precision of their predictions — "will lose 16,200 jobs," "will rise to 15.8 percent," etc.

This is a byproduct of a deeper problem, which is that the so-called "econometrics" practiced by mainstream academic economists isn't really economics at all, properly speaking, because it undervalues the most critical factors of economics: incentives and future expectations.

As I put it in an earlier article, human beings are not automata proceeding irrevocably along certain paths, immune to real and perceived changes in the potential risks and rewards of their economic choices — including the effects of current and expected tax and regulatory burdens.

"I have found, over a long time, that some people are natural economists. They don't take a course, but they understand — the principles seem obvious to them. Other people may have Ph.D.s in economics, but they're not economists. They don't think like an economist. Strange, but true." -Milton Friedman