It's time to hold economists more accountable for their predictions. Stock analysts are occasionally held to account for their forecasts, with embarrassing results. But it is rarer to revisit the projections of big-think economists. In recent decades, economists at both ends of the spectrum, as well as those in the middle, have had one thing in common: Most have been profoundly wrong about the economy.
Take the supply-siders, on the right. They told a very coherent story: The economy was constrained by a lack of savings, investment, and growth. Insufficient capital formation, in turn, reflected excessive taxes. In the Reagan era, taxes were indeed cut, but growth in the 1980s remained well below the long-term trend.
In the late 1990s, growth finally exploded--after Bill Clinton's 1993 tax hike on the upper-income brackets. Savings rates actually fell because households treated stock runups as the equivalent of savings. But in a global economy, the world's investors were happy to send capital to the world's most dynamic economy. Give one big demerit to the supply-siders.
The center has been obsessed with federal budget deficits. Also, centrist economists were convinced that the economy could do no better than growth rates of about 2% a year. A lower deficit might slightly improve growth, but we had better get used to an "age of diminished expectations," as Paul Krugman wrote. Well, growth is now running around 4%. The deficit is down, and it isn't the deficit reduction that caused the growth; rather, the growth eased the deficit. Give a demerit to the dour centrists, too.
CASSANDRA CALLING. The right and center deserve two other shared demerits--for first pooh-poohing the idea that the income distribution was growing steadily more unequal (it indeed was) and for scaring us silly about the impending bankruptcy of social insurance. Peter G. Peterson has been playing Cassandra on the latter issue and has institutionalized himself as the Concord Coalition. But higher growth and a little policy ingenuity have all but restored Social Security to full solvency.
Other straight-line projections have proven embarrassing. Richard Darman of the Bush Administration projected in 1991 that health care would be consuming 17% of gross domestic product by 2000. By 1993, the new Clinton Administration was projecting that it would consume 19%. But as Herbert Stein famously observed, "an unsustainable trend cannot be sustained." The year 2000 is now just a few months away, and the total health-care bill is about the same 13% to 14% of GDP that it was early in this decade.
What happened? Policies changed, growth resumed, and some paradoxical factors materialized. As a Duke University study has demonstrated, many very old people are actually cheaper to treat because when the end of life comes, it often comes quickly. And while medical technology is expensive, it can still be a net savings over more invasive procedures.
POLITICAL QUESTION. The Keynesian left didn't fare too well either. President Clinton took office proposing a Keynesian "stimulus package" of a temporary deficit that was supposed to restore growth. But when growth returned, it was driven by technology and not by public-sector pump-priming. There is certainly a good case for some restored public investment in human and physical capital, as well as research and development. But this isn't exactly a Keynesian idea. The left was also wrong that worsening income distribution would necessarily hobble growth. Alas, high growth and extremes of wealth and poverty can coexist all too well. How to redress the imbalance is a political question, not an economic one.
Does anyone in this dismal group deserve some laurels? Both the supply-siders and the liberals can fairly share one gold star for disputing the centrist idea that the economy was forever doomed to slow growth. Krugman gets a point for debunking the assumption of Japanese economic hegemony. The right and the center can take credit for praising the competitive pressure of globalism--and the left gets kudos for promoting global ground rules for labor. The jury is still out on whether the dynamism of the new global economy outweighs the increased risk.
The bottom line: Despite its scientific pretensions, economics still remains more of an art than a science. The future, by definition, is unknowable, as the geniuses at Long Term Capital Management discovered. Anyone who simply extrapolates past trends, however elegant the algebra, is an educated fool. Economics needs nothing so much as a little modesty.