The contest to see who can produce the worst economic forecast is on for young and old. Today the Coalition criticised Treasury for politically-inspired manipulation of forecasts so that they were 0.5% above those of the RBA — a comment that earned a rebuke within the Coalition party room. Last week the Opposition suggested that Treasury was too optimistic because it was 0.2% above the IMF.

Next week another forecast will doubtless emerge to suggest things are even worse than we thought.

The whole debate requires a willing suspension of disbelief regarding our predictive powers in relation to the economy. Economic forecasting is hardly an exact science. In fact, it’s not really science of any kind. It’s an exercise in crunching numbers through a set of assumptions. The assumptions requires predictions — guesses, actually — about what will happen in the future. Modelling is only a couple of steps above the Roman practice of hiring priests to use the movement of birds to predict the future. It’s not bad for guesstimating what will happen if you change an assumption, but rather less perfect for predicting what will actually happen. And complaining about the augurs… sorry, Treasury officials, about their accuracy isn’t going to change anything.

The bigger problem is that the more we obsess over just how bad things are, the more likely we are to behave in a way that will ensure they really are that bad and worse.

Peter Fray

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