HUNDREDTHS OF A GOAL AND FAR-OUT FORECASTING

Fast is fine, but accuracy is everything. ~ Wyatt Earp 

Here are 2 examples of published numbers that for me cross an important line of credulity (in the mental sand of my mind). These examples illustrate a bothersome and unfounded inflation of perceived accuracy in printed statistics.

Hundredths of a Goal.  First, I’ve enjoyed watching the Women’s World Cup soccer matches being played in Canada, and remain hopeful that the US team will again capture the Cup. There’s been much to enjoy as favorites like the US and Germany, as well as “Cinderella” teams like Canada, have navigated FIFA’s very strangely-composed brackets towards the July 5 championship game. One thing that’s distressed me, however, is related to one of my eccentric pet peeves, unwarranted and misplaced accuracy.

Throughout this tournament, the media has highlighted the lack of goals scored in the games. This isn’t surprising because the US has scored a total of just 7 goals through its first 5 winning games. So much for being an offensive powerhouse (so far). The latest example is the US 1-0 victory over China on June 26.

However, media stories about this lack of scoring have routinely transgressed my trust. A piece in The Guardian said, “The average goals per game at the end of the group stage was 2.97…” A New York Times article stated, “The tournament was averaging 3.08 goals a game entering Monday (June 15)… The first-round scoring average was only 2.24 goals a game entering Monday. The 2011 event finished with an average of 2.69 goals a game.”

Let’s take a minute of stoppage time to think about these stated averages. Soccer goals only come in whole numbers e.g., 1, 2, (or 10 if you’re Germany). Thus there’s only 1 or at most 2 significant digits in a soccer team’s goal total for a game. To display the average number of goals in hundredths of a goal with 3 digits (e.g., 3.08) is absurd and actually no more accurate than stating the average in tenths of a goal (e.g., 3.1). Come on; can Abby Wambauch score a hundredth of a goal? Never; so why add 2 decimal places to this average? It’s done so these averages appear to be more precise and accurate than simply saying “about 3” or “3.1.” But they’re not more accurate. With only 1 or at most 2 significant digits as inputs, the quotient’s average cannot meaningfully include more than 1 or 2 numbers. This escalation of false “precision” is readily-obtainable to anyone – including a reporter – who has a calculator in their smartphone; where you are shown 1.66666667 as the result of dividing 5 by 3.

Will this trend continue; so the average number of goals scored in the 2016 Olympic soccer tournament be presented with 3 decimal places – 3.141? I hope not.  False precision is more widespread than just reporting soccer scores.But the next time you read any news article that offers numerical results, see if the number of decimals printed exceed the number of significant digits being referred to. My bet is the resultant’s decimals will exceed the relevant input digits, illustrating unfounded accuracy. That’s bad numerical form.

Bridges to the Future.  Second, precision is an issue that forecasters constantly face. It’s the unstated underpinning for the apocryphal quote, “if you have to forecast, forecast often.” The longer the forecast period, the more likely the prediction is going to be erroneous. We economists have difficulty accurately forecasting economic changes over the next 12 months, let alone several years. Weather forecasters feel lucky when they get their 5-day forecasts right.

In The Signal and the Noise, Nate Silver states that despite the challenges, short-term weather forecasts are overall more reliable than other types of predictions, including economic and financial forecasts. Yet complex environmental models are being used to somehow predict impacts during the next 85 years. That’s right, forecasts over 85-years.

A recent New York Times story cited an EPA report that provides long-term quantitative measures of the consequences of not abating fossil-fuel consumption. The report states that by 2100 (85 years in the future), there will be 12,000 deaths from extreme heat and cold, and 720 to 2,200 bridges would become structural vulnerable and cost $1.1 billion (B) to $1.6B to fix. Forecasting deaths, bridge collapses and costs 85 years in the future? Really?

As many people do, I believe global climate change (né global warming) has been underway for a considerable time increasingly due to humanity’s actions. These induced and detrimental effects need to be mitigated now by a series of specific public policies, such as imposing a meaningful tax on all carbon use.

Ironically, justification for implementing such policies does not require forecasting at all. Environmental policies can be rationalized based on measured changes in what’s already happened to our environment, and continues to happen. Nevertheless, I find it highly doubtful that predicted really long-term effects of climate change have much quantitative credence. Yet I haven’t seen much discussion about these far-out forecasts’ precision. I consider these multi-decade predicted deaths and costs to be decent examples of imaginary numbers.

Think about it; who in 1930 (85 years ago) could have foreseen key details of our present economy such as its size, the composition of our economic output, let alone the number of bridges that are now in operation, and how many may now need repair. For some perspective, the US real GDP last year was more than 16 times as large as it was in 1930. In 1930, 21% of our labor force worked on farms (10 times what it is now).

The use of such far-out forecasts to substantiate needed environmental policies unfortunately gives climate change deniers an opportunity to be listened to. I don’t understand how any scientist – environmentalist, climatologist, economist or engineer – can place much credibility in such truly long-term forecasts. And yet, these far-out forecasts are presented and discussed as if they accurately represent what will actually be happening nearly 100 years in the future. It’s all quite puzzling, and unfortunate. 

4% GROWTH AND OTHER FANTASIES

Economic growth doesn’t mean anything if it leaves people out. ~ Jack Kemp 

There’s now a 16-ring circus of candidates performing for the 2016 US presidential election. Four Democrats and a dozen Republicans have thrown their collective hats into the 24/7 blazing media spectacle. As the New York Times recently pointed out, each of these men and women are searching for economists to dance with them in their efforts to formulate economic positions, distinguish themselves from the other 15 hopefuls, and ultimately win the nomination and presidential election that’s now a mere 504 days away, OMG.  

Even at this prematurely early date, several candidates are running up economic policies on their flag poles to see which way the political winds blow them. Given the clear need to attract media attention, the candidates’ economic proposals can be quite fantastic, including re-treads from long-ago campaigns.

For example, Rand Paul has revived the flat tax concept from a 20-year slumber that was last seen on its death bed after being proclaimed by presidential candidate Steve Forbes; you remember him don’t you? Mr Paul’s one-more-time-with-feeling flat tax includes eliminating the federal corporate income tax (hats off to corporate lobbyists) and replacing it with what’s commonly called a value-added tax (VAT), although Mr Paul pointedly calls his proposed 14.5% tax a “business activity tax.” His tax scheme is a combination of a 14.5% personal income tax together with the 14.5% VAT, which is a type of sales tax that virtually every person and every organization would have to pay directly or indirectly. What’s the likelihood of such a regressive, federal VAT replacing the dearly-unloved corporate income tax? Slim to none, once you multiply the chance that Mr Paul will be elected president (currently he’s given an 8% likelihood of capturing the nomination at fivethirtyeight.com) by the even smaller chance that Congress – even a Republican one – would actually produce such a fundamental change in tax policy.

A more interesting economic policy objective was proclaimed by Jeb Bush last week. Namely, that if elected president he would usher in increased real (inflation-adjusted) economic growth of at least 4% per year for a decade.

The US has indeed carried on without historically-strong macroeconomic growth for some time. Our GDP growth this year is expected to be a miserly 1.9%. Since 1975, the average yearly GDP growth has been 2.8%, which is nearly 2% less than it was from 1945 to 1975. As our economy has grown and developed, if for no other reason than its impressive size, it has become more challenging to sustain previously-attained annual growth rates. As they say, quickly turning a very large ship, like the Titanic (or the US economy), is next to impossible.

The US nominal GDP is now $17,665 billion. Four percent of our GDP is thus $706.6 billion, which is the about same size as the Philippines’ GDP (PPP), the world’s 30th largest economy. That’s a lot of economic activity (and money) to add each year. The figure below shows the annual economic growth attained by each of our 5 most recent presidents. The average growth rate attained by the 3 Republicans is 20% less than that achieved by Presidents Clinton and Obama. Other economic studies have also shown that growth under Democratic presidents since Truman has been greater than under Republicans.

Even though accelerating economic growth is a worthy goal that has many benefits, it’s highly unlikely Mr Bush could achieve 4% real annual growth. Although his statement provided a good media soundbite, it’s more fantasy than eventual fact.

Increasing economic growth requires changes in several factors. First, a noteworthy increase in the working-age population is needed, as well as in the proportion of this demographic group who are actually employed. Second, a substantial change in federal fiscal policy has to occur (e.g., policies that promote investment and spending); third, productivity must be amplified; and last, macroeconomic growth rarely increases suddenly, it takes time.

Given that Republicans generally want to lock the US’s borders to all immigrants (and deport all 11 million “illegals”), it’s hard to imagine our working-age population increasing – especially when the US fertility rate now is 1.9 births per woman, less than the 2.1 births per woman “replacement” rate needed to keep the population stable. In addition, the labor-force participation rate, measuring the percentage of the work force who’s actually working or looking for a job, is as low as it’s been since 1978 – not a good sign for increased growth. Federal spending on research and development (R&D) has declined over 30% between 1995 and 2015. Finally, due to Republican intransience, Congress has rebuffed its responsibilities to complement the Federal Reserve’s efforts in improving our economic performance by passing fiscal policies that promote private investment, R&D and other growth-oriented spending like on infrastructure. Thus, Republican candidates like Mr Bush call for increased growth, but have refused to create policies that can produce it.

The Republican candidates are instead espousing policies that pander to the insular, right-wing Republican base that demands smaller government and ever-lower taxes. This base includes many older citizens whose economic and financial literacy is chillingly deficient. Here’s a sad indicator of this basic lack of understanding. A decade ago, the University of Michigan added 3 questions to its Health and Retirement Study, a biennial survey of Americans over 50:

■ If $100 earns 2% per year, in five years will you have more than $102, less than $102 or $102?

■ If the interest rate on your savings is 1% per year and annual inflation 2%, could you buy more, less or the same with your money in a year’s time?

■ Is it true or false that buying a single company stock usually provides a safer return than the stock of a mutual fund?

Woefully, only about 33% of all respondents answered all 3 questions correctly. Here[1] are the answers.

My bet is that the two-thirds of respondents who answered incorrectly have little or no sense of how to assess the future for themselves or the nation. In economic terms, they maintain an infinite discount rate. For a variety of reasons, they’re only concerned about the present moment. Such typical older households have only $110,000 saved for their retirement.

This broad-based financial illiteracy provides a basis for the fantasy that Republican members of Congress are willing to create policies that stimulate longer-term macroeconomic growth, something they haven't done in over 6 years, and despite pronouncements by their presidential hopefuls.

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[1] Answer to Question 1: more than $102. Q2: you would be able to buy less. Q3: it’s false.