Reliability of Long-Term Economic Forecasts

Ezra highlights a CBPP item, which paints a devastating economic picture:

If we continue current policies, the federal debt will skyrocket from a projected 46 percent of the gross domestic product (GDP) at the end of fiscal year 2009 to 279 percent of GDP in 2050. That would be more than two and a half times the existing record (which was set when the debt reached 110 percent of GDP at the end of World War II) and would threaten serious harm to the economy.

The group’s message is clear – we need to change course in fiscal policy – but the dire forty-year predictions will almost certainly be off the mark.  Forty years ago, could any economist have predicted the invention of microprocessors, computers, and other engines for economic growth?  On the foreign front, who would have predicted the length of the Cold War, Iraq, and Afghanistan?  There are too many variables, a preponderance of black swans, that render such ambitious forecasts useless.

Consider the track record of the CBO, a similar organization:

It is worth noting that CBO completely missed the both the stock market crash and the housing crash. The failure to miss the stock market crash led it to over-estimate capital gains tax revenue by close to $600 billion over the decade from 2001-2011.

Even over a ten year period, economic forecasters can’t predict accurately.  But  while the prediction’s precision may be debatable, the CBPP’s central thrust remains critical.  To keep expenditures from further ballooning out of control, the government must 1) reform health care and  2) carry out a combination of increased taxes and decreased spending.

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