Economic Forecasting in the NYT

Greg Mankiw had a piece in the NYT yesterday, That Freshman Course Won't Be Quite the Same, in which he discusses the ways the freshman economic course, or the college economic curriculum, may need to change in order to reflect what we've learned and are learning in the current crisis.

One of the four things he said struck me as funny (not ha-ha funny). (Ok, two things struck me as funny. The one I'm not going to say anything about is the Fed targeting interest at .25 to 0 percent. Free money! Woo!) Under the heading, "The Challenge of Forecasting," Mankiw writes:

It is fair to say that this crisis caught most economists flat-footed. In the eyes of some people, this forecasting failure is an indictment of the profession.

But that is the wrong interpretation. In one way, the current downturn is typical: Most economic slumps take us by surprise. Fluctuations in economic activity are largely unpredictable.

Yet this is no reason for embarrassment. Medical experts cannot forecast the emergence of diseases like swine flu and they can’t even be certain what paths the diseases will then take. Some things are just hard to predict.

Likewise, students should understand that a good course in economics will not equip them with a crystal ball. Instead, it will allow them to assess the risks and to be ready for surprises.

First, he thinks a good course in economics will allow students "to be ready for surprises," and he makes that point in trying to rescue the economic profession from the indictment of "some people." Yet, the point of the indictment is precisely that economists et al. were not "ready for surprises," or at least not for this surprise. The point is precisely that the risks of how we were operating for years before it all went boom were not assessed, with one or two exceptions (i.e., Nouriel Roubini, CalculatedRisk, etc.). To say that a good course in economics, integrating the lessons learned from the current crisis, will prepare people to assess risks and to be prepared for surprises in the future simply asks us to take it on faith that economists now know what they're doing, even if this episode demonstrates otherwise.

Second, I thought the analogy to swine flu, or to infectious disease outbreaks generally, was odd and not a good analogy. Infectious diseases involve a host of non-human factors (like environmental conditions, non-human animals, viruses and bacteria, etc.) Economics is about human interactions. What would be the analog in economics to RNA mutation in a virus that makes the virus more pathogenic? What would be the economic analog to RNA reassortment? There isn't one, not a good one, anyway. To analogize the failure of economic forecasting with the inability to accurately forecast an infectious disease outbreak is as ridiculous as analogizing economic forecasting with, say, meteorological forecasting. One is endogenous to humans, the other is exogenous. Same goes with infectious disease outbreaks.

"The Challenge of Forecasting" was the weakest part of Mankiw's otherwise interesting piece. I don't know where that leaves economics, because I don't know how central to economics the task of forecasting is, or is supposed to be. If forecasting is central, economics appears to be in trouble, at least if Mankiw's argument is the best one going for it.