Should we, or can we, stop pretending we know what lies ahead or should we see what we can do when we know that predictability is an illusion? Steven Levitt of Freakonmics fame did a recent interview on NPR about the current economy that points to this question. The part that jumped out at me was his statement about macroeconomics at around 3:40 into the interview. Levitt compares macroeconomics to the weather in that both are complex systems that may be predicted in the near term but are â€œterribleâ€ for long term predictions. Levitt is quite honest when he states that â€œeconomists are really stabbing in the dark a lot when we try and say what will happen. I think you wouldnâ€™t want to believe any economistâ€™s, individual economistâ€™s, forecast about what will happen in the future but what we are better at is thinking about the past and whatâ€™s happened in the past and how weâ€™ve got to where we are.â€ That idea reminds me of Nassim Talebâ€™s work such as Black Swans (although there is a small paradox about the prediction that predictions will fail).
John Cassidy of Portfolio.com has a recent article with some chilling thoughts about the future of the economy. The most stark point for me was the comparison to Japan:
Yet it isnâ€™t entirely clear what [Bernanke] should do. During Japanâ€™s â€œlost decadeâ€ of the 1990s, it discovered that navigating a deflationary real estate and credit bust is far from easy, no matter what you do. To be sure, the Japanese government made some initial mistakes in following an inflexible monetary policy and allowing banks to hide losses. Eventually, though, it did most of the things that outsiders such as Bernanke had recommended, like recapitalizing the banks at the taxpayersâ€™ expense and experimenting with new monetary rules. Even then, prices kept falling, and the economy barely managed to expand.
As for the Japanese stock market, I can hardly bear to talk of it. In 1989, when I first visited Tokyo, the Nikkei was approaching 39,000. Ten years later, when I returned, it was languishing at about 14,000. Today, it is below 10,000. Before shifting what remains of your retirement fund into an S&P 500 index fund to take advantage of a coming rebound, you might want to take a look at the Nikkei chart. It is quite a sight.
Nate Omanâ€™s post on and the comments about the bailout have some thoughts on the specific comparison, but here I am suggesting that a larger issue may be in play. As Levitt offers we may have to change the perspective that the future will be rosy because this is a cyclical matter. Levitt then posits that the question returns to whether we make goods and services for which others will pay. (see also Nateâ€™s post on CDS and the comments for more on this idea). Levitt notes that the idea is to think of long term ways to make America more productive and not focus on the short term boosts that may become entitlements. He notes that infrastructure investment that impacts long term productivity is a good way to proceed. Now that sounds like a prediction. But I think the idea is not a prediction. It is a prescription or guideline that may embrace unpredictability. More on that idea soon.