Letter: Perils of predicting the national wealth

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The Independent Online
BRIAN CATHCART ('Economists? Who needs 'em?', 27 September) tars the entire profession with the same brush. I tried to persuade policy-makers from autumn 1986 onwards of the consequences for inflation and the balance of payments of the credit and house-price boom then beginning, and warned of the dangers in relying entirely on high interest rates to crush it. Moreover, I warned of the need for a sterling devaluation not just two weeks ago, but last autumn.

Forecasting is inherently difficult. First the structure of the economy changes: think of UK financial liberalisation in the 1980s or of the current German attempt to integrate the decrepit economy of East Germany. Second, the behaviour of politicians has to be forecast: how will the ongoing battle between Chancellor Kohl and the Bundesbank end? Repair of the central faultline in the ERM could occur in weeks, months or years. My bet is on it taking weeks but I could well be wrong.

Third, the data with which economists work are often poor. One of the unforgiveable blunders of Thatcherism was to slash the statistical monitoring of the economy just as some of the biggest policy experiments in history were being performed on it.

John Muellbauer

Nuffield College

Oxford

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