This comment from Noah Smith caught my attention:
But even in the case of experts, I think you need to be very, very confident in the expert’s record before you give special weight to that expert’s opinion. For example, Michael Boskin is legendary for getting every major macroeconomic prediction wrong since the beginning of time. Paul Krugman is somewhat ahead of the average of pundits, though it’s a small sample. Robert Shiller has an impeccable record of bubble prediction, but that sample is even smaller.
Of course, it’s just as hard to be 100% wrong in (binary choice) predictions as 100% right. Indeed, I’d pay a small fortune for the advice of someone who was 100% wrong in predicting the future. Unfortunately when I followed the chain of links back to the source, I found that Noah had exaggerated Michael Boskin’s skill at prediction; his record is nowhere near as impressive as it sounds. Barry Ritholtz linked to a Jonathan Chait post that made the following claim:
If you are an investor, Boskin’s doomsaying is a sure sign of a coming bull market. Four years ago, Boskin penned a Journal op-ed whose thesis was captured in the headline, “Obama’s Radicalism Is Killing The Dow.” That was the signal for the Dow to go on a tear, doubling over the next four years. As Kevin points out, the Dow’s current “high” is an overstated artifact of dumb, unweighted statistics, but the underlying reality remains that the stock market has enjoyed an incredibly good four years under Obama’s radicalism.
I hope I’d never be silly enough to claim that Obama’s “radicalism” was killing the Dow. But if I was, you can be 100% certain my statement would not be a prediction about future movements in the Dow. After all, I do believe in the EMH. Don’t know if Boskin does, but I’d think Chait would need to find out before making that claim.
The post also criticizes Boskin for predicting the Clinton tax increases would lead to less extra revenue than forecast (note Boskin did not predict less revenue). And also that the Bush tax cuts would cost less revenue than forecast. These are reasonable claims. Then Chait assures us that these predictions turned out wrong. Maybe so, but has he corrected for business cycle effects? I doubt it.
My first editorial was published back in 1993 in the Boston Herald. I’m still quite proud of that essay, although I don’t doubt that if someone could find it they could make me look like a fool, as the general tone was very similar to the Boskin piece that Chait ridiculed. I claimed that Clinton was not governing as the centrist he promised to be in the campaign, and that his policies would not be successful. But the bottom line, and the part I’m most proud of, was my prediction that Clinton would tack to the center. Of course the famous Clinton/Gingrich administration of 1994-98 brought us much lower taxes on capital gains, welfare reform, trade liberalization, serious spending restraint, abandonment of health care “reform,” an HMO boom, privatization, widespread deregulation, etc. And whereas the sluggish recovery of 1993-1994 led to a massive GOP sweep in 1994, the years 1994-98 produced a major economic boom, with low inflation. So I was right that Clinton would change course, and I was right that the new supply-side policies would produce much better results.
Even so, I’m sure Chait would regard my editorial as laughably wrong.
So the bottom line is that we should pay no attention to Boskin’s predictions. I wish I could tell you that Smith was right, or that investors could make a fortune using Boskin as a reverse indicator. But once again we learn that painful lesson, there’s no free lunch.
Shiller’s predictive ability is also wildly overrated. Count yourself lucky if you haven’t followed his stock market advice since March 2009. And don’t forget his “irrational exuberance” claim of 1996.
For what it’s worth I share Tyler Cowen’s skepticism regarding betting on beliefs. Asset prices are the only “betting data” that I care about. I don’t doubt that anti-Keynesians would have lost a bet on high inflation resulting from stimulus in recent years, just as Keynesians who signed that letter in 1981 predicting Thatcherism would result in disaster looked like fools 10 years later. Those bets don’t really tell us much about the validity of various models, but rather that highly fallible individuals often misuse their models. I think market monetarism is the true heir to Milton Friedman’s monetarism, and thus am not surprised than many of my fellow conservatives/libertarians have looked like fools.
HT: Tyler Cowen