Mario Pianta And Alessandro Bramucci — Why Do Economic Forecasters Get It Wrong?

What can we learn from these numbers? The crisis has shown how wrong the assumptions and relationships at the core of mainstream economics were. They were at the root of economic policies that have proven to be disastrous. But the same assumptions and relationships are incorporated in the models used by the international organizations to make their estimates on the future.

The lesson from this evidence is that ideology blinds forecasters as well as politicians. The most dramatic case is the failure of mainstream approaches to underestand the negative effects austerity measures have had since 2011 on demand and income in the Eurozone. At the ECB and the European Commission, at the Bundesbank and OECD it was expected that spending cuts in 2011 and 2012 in the “periphery” of Europe would only have modest effects. This is not what actually happened and the recession in 2012 hit the whole of the Eurozone. The evidence has been provided by IMF studies – such as What Determines Government Spending Multipliers? by Giancarlo Corsetti, Andre Meier and Gernot Müller – and the analysis of the World Economic Outlook issued in October 2012 that showed how cuts in public budgets have a much bigger negative effect on income than expected by mainstream models. At the start of 2013 a reassessment of the issue has been published by Olivier Blanchard and Daniel Leigh in the study Growth Forecast Errors and Fiscal Multipliers (IMF WP/13/1).

Outside the ECB, the OECD and governments practicing budget cuts, however, there are thousands of economists who have never believed in the virtues of austerity and have long argued for a change of perspective. Criticisms of austerity policies from Paul Krugman (End this depression now! Norton, 2012) or Nouriel Roubini are well known. We have now additional arguments for alternative policies from the Independent Annual Growth Survey (see alsoAndrew Watt) and from the Euromemorandum 2013 (www.euromemo.eu), launched last week with the support of 350 European economists.

Social Europe Journal
Why Do Economic Forecasters Get It Wrong?
Mario Pianta And Alessandro Bramucci
(h/t John Zelnicker via email)