Tuesday, July 10, 2012

A Projection Is Not a Promise

Incoming presidential administrations tend
to be overoptimistic and don't make enough
 use of their predecessors' experience.
In a post on this blog on November 27, 2008 I commented on the Obama transition based on consulting a 1986 book by Carl Brauer on presidential transitions from Eisenhower to Reagan.

Brauer argues that incoming administrations are inherently overoptimistic, which may explain why — another conclusion — they also tend to underutilize the experience of outgoing administrations.

Overoptimism on the economy was certainly in evidence on January 9, 2009, as the projections by the Council of Economic Advisers on that date were for the unemployment rate — assuming stimulus actions were in place — to peak at 8 percent during 2009.

That peak was topped before mid-2009. The GOP argued that the 8 percent unemployment rate was a broken "promise". PolitiFact rates that charge as "Mostly False".  Here is the PolitiFact Truth-o-Meter summary of three years ago, July 9, 2009, six months after the CEA forecast:
They [GOP critics] are referring to a Jan. 9, 2009, report called "The Job Impact of the American Recovery and Reinvestment Plan" from Christina Romer, chairwoman of the president's Council of Economic Advisers, and Jared Bernstein, the vice president's top economic adviser.

Their report projected that the stimulus plan proposed by Obama would create between three and four million jobs by the end of 2010. The report also includes a graphic predicting unemployment rates with and without the stimulus. Without the stimulus (the baseline), unemployment was projected to hit about 8.5 percent in 2009 and then continue rising to a peak of about 9 percent in 2010.

With the stimulus, they predicted the unemployment rate would peak at just under 8 percent in 2009.

But in June, the unemployment rate was 9.5 percent.

In the past week, the administration has acknowledged its projections were wrong.

Here's what Romer herself said in a July 2 interview on Fox: "None of us had a crystal ball back in December and January. I think almost every private forecaster realized that there were other things going on in the economy. It was worse than we anticipated. What the private forecasters are saying now is that they do anticipate that the economy will start growing again in the second half of the year, and that usually, then, employment and unemployment start to respond shortly after that. So I think that is a realistic expectation."
CityEconomist Comment: With the benefit of hindsight, the projection might be called overoptimistic. The problem for the CEA was that the fourth-quarter economic data were not yet available in January and no one knew yet how capital-weak the banks really were, how unsupervised the banks were, and how worldwide the recession would be. But in no way was the projection a promise — something to stress given that in January the old claim was revived by the GOP.

The experience shows us the wisdom of our forebears. Brauer's advice to new presidential administrations to be cautious is good. Upon arrival, a new administration's projections should lean to the pessimistic side. Similarly, there is a principle among forecasters that if you give a number, don't give a [firm] date. If you give a date, don't give a [firm] number. Especially for the very first forecast.