Expert view: Soothsayers should consider the battle of Seattle

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The Independent Online
The millennium provides a ready excuse for looking to the distant future. But for economic forecasters, 1,000 years is asking a bit much. They have good reason to be humble about their abilities, and so usually stick to predicting only a year or two ahead. Not surprisingly, asking them to produce forecasts for 10 years or more ahead often yields little more than a glorified extrapolation of long-run trends. About the only thing we can be confident about is that life will be much more exciting than that.

The sad truth is that the future is unpredictable. Yet because economists have succeeded in getting it wrong in so many interesting if not always elegant ways, people keep asking them to do more forecasts. More seriously, another truism is that forecasting is unavoidable. Most spending decisions and all investments and plans rely on views of the future. Economists, in trying to beat simple guesswork, typically base their forecasts on past behaviour. They build "models" based on previous relationships, such as the tendency for people to spend more when their incomes rise or for prices to rise when wages go up.

Inevitably, like all relationships involving people, these economic relationships can change, or even break down. So economists have to make judgements about how they will change in the future: and that is where their pseudo- science gives way to art. And the further ahead the forecast, the more artistic it gets.

It turns out that economists making long-term forecasts are a conservative bunch who stick to the beguiling safety of long-term trends. The year- to-year swings of the real economy are replaced by boring straight lines of long-run averages.

Yet economists equally know it is the natural cyclical volatility of the economy that sparks off many of the structural or policy changes that can have long-run effects. Just ask the British manufacturers wiped out in the recession of the early 1980s or the internet entrepreneurs made rich in the current boom in the US. Indeed, the latter are a reminder of the recurring risk that people will assume the boom will never end, get carried away, over-invest and so inevitably bring on the next downturn.

Remarkably, some economists caught up in the latest bout of American- inspired euphoria argue that we are on the brink of a "long boom" that will see not just strong but stable economic growth. Strong growth? Perhaps. But stable? Don't bet on it.

Nevertheless, it's hard not to be excited by the progress of the new technologies and their potential to transform the economy. Although it is a vision that is still only dimly appreciated, it has certainly electrified the world's stock markets over the past few months. The internet has brought us a world where a couple of students in a back room can dream up a business which threatens a multinational company. Forecasting in such a world is the economists' answer to modern art. The supposedly well-established relationships built into their forecasting models are likely to be blown apart.

Now indulge me on my latest picture. In fact, let me paint you two. In the optimistic picture, the new technologies hold the potential to add a new dimension to global competition. In this hyper-competitive world, inflation will be contained and producers must improve productivity if they are to prosper. The rapid non-inflationary growth seen in the US over the past four years might then provide a foretaste of the world economy in the next decade.

In the gloomy picture, the potential of the new technologies fails to be fulfilled as social and political resistance derails the trend towards free markets. The market liberalisation of the last decade has created losers as well as winners. Indeed, even some of the winners now allow themselves the luxury of questioning their affluence. The violent protests outside last week's world trade talks in Seattle hint at troubles ahead.

In principle, the winners in these global structural changes should be doing well enough to compensate the losers. However, redistributive taxation is off the political agenda, and the "trickle down" of prosperity requires sustained economic growth. But the economic cycle cannot just be abolished, and another downturn lies in wait.

So, while forecasters generally agree that a global economic recession is at least a couple of years away, the eventuality strengthens resistance to market liberalisation and globalisation. The "battle of Seattle" could turn be the first skirmish in a new economic war.

Of course, all of this is far too exciting to be incorporated in a long- term economic forecast. But then life's like that.

n Mark Cliffe is the chief economist at ING Barings.