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Friday, March 27, 2020

Let Sanity Prevail

Professional experts can make a big difference for the better. They can also make catastrophically bad contributions if they choose to be irresponsible with how they go about their business.


In 1988 I visited East Germany, Czechoslovakia and Hungary. If you haven't heard about the first two countries, that is because soon after, they ceased to exist. The Soviet empire, which ruled eastern Europe literally with an iron fist, began crumbling in the fall of 1989 when the Berlin Wall came down. That summer of '88, though, the Soviet experts in the West were still convinced that the Stalinist empire would continue to exist for the foreseeable future.

Fast forward to 2007. The Bush Jr. economy is humming along and mainstream macroeconomic forecasters predict that a year later the U.S. government will balance its budget. The exact opposite happens: the budget deficit explodes as a result of the Great Recession.

I could go on and on, stacking forecasting disasters on top of each other all day long. I could point to the ridiculous predictions of falling health-insurance premiums in the wake of Obamacare. I could point to the liquidity bottlenecks in our banking system following Dodd-Frank. And so on. 

Economic forecasters are especially bad at forecasting, but as the Soviet example shows they are not alone. So long as forecasters keep their blunders to themselves or their corporate loved ones, the damage is limited. The problems start emerging when those forecasts are being tossed around in the public and used as a reason for major policy decisions.

The latest public-policy forecasting catastrophe is called Neil Ferguson and is based at Imperial College in London, UK. In mid-February he predicted 400,000 deaths in the U.K. as a result of the coronavirus epidemic. Specifically, he said it was "not an absurd number", in other words making it the mainstream forecast.

A bit over a month later the same man suggests that the total number of deaths is unlikely to exceed 20,000. 

In other words, this man admits openly and unabashedly that he was 95 percent wrong. And yet, it is based in good part on his predictions that many countries, the United States included, have taken to draconian policy measures in response to the virus. Four states have gone on lockdown, several cities in other states have done the same. Schools and colleges have been closed for the rest of the year and events and conferences as far out as September have been cancelled. 

Our Constitution has more or less been put on hold in response to a virus that has thus far had a death toll at 1.3-1.5 percent. That half the roughly 70,000 cases nationwide are concentrated to one state, New York, does not make the national hysteria any less conspicuous. 

Now that the source of the draconian policy response has admitted to being 95 percent wrong, perhaps it is time to re-evaluate our policy reaction. Maybe it is time to lift the mad restrictions on the people's ability work for a living, to exercise free commerce and to make grown-up decisions about how to best live their lives. 

The U.S. economy will rise back to its pre-virus vigor as soon as the restrictions are lifted. Our underlying macroeconomic numbers are strong, and the current situation is not a recession - it is a regulatory disruption. However, that does not mean families aren't hurting. They are, and the longer this irresponsibility continues, the worse the situation will get for them. 

For the future, though, this is a major lesson for everyone in elected office. President Trump has shown remarkable leadership, resisting the most overboard crazy ideas like putting the entire country on lockdown. He has deferred to the states to handle the ground-level situation and helped them out with resources to respond as the governors see fit. Yet he has also had to compromise and take some steps that he, the grown-up he is, would not want to take. Just to mention one example, he has had to deal with the reckless political log-rolling that the Democrats engaged in with the Congressional stimulus bill.

At the state and local level, the lesson from all this is apparent: perhaps it is a good idea next time to not run out and disrupt children's schools, the learning that goes on at colleges and the business activities that - if nothing else matters - pay your taxes. Or maybe you fear being sued? Well, perhaps next time, when that lawyer panic urges you to make the wrong decision, pause and remember the forecasting disaster that made you go into panic mode last time. Consider how your reliance on a terrible forecast can actually be used against you when the crisis is over and some business owners have had to close doors as a result.

Some people will, understandably, ask what to do when you cannot rely on forecasts. There is a plain and simple answer to that: take a deep breath, hesitate and consider what other variables you can make your decision based on. It is part of holding public office to be able to face an uncertain situation, where you never have enough information, and to be able to make decisions without letting the herd and the loudest voices make the call.

Decision making under uncertainty is difficult. But, needless to say, we don't elect people to public office to make easy decisions. We elect them precisely for those difficult moments when it is time to make decisions under uncertainty.

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