Why does anyone support private macroeconomic forecasts?

This question has come up a few times lately in the blogosphere.  I've long found the market for such forecasts to be a puzzling practice.  Sometimes the forecasts are purchased and other times they are given away, but either way money is being spent. 

The first question is whether those forecasts are more accurate than naive "random walk" models.  On average probably not, although you could argue that in a recession mean-reversion gives an edge to structural models.  Still, the forecasts are paid for in both good times and bad.  Note also that those who predicted our last crisis were, for the most part, giving that knowledge away for free.

Second, there are many such forecasts.  Even if some forecasts are quite useful, what's the value of supporting a marginal or additional forecast?  Is the next forecast to come along so much better?  Forecasts would seem to be the classic example of a public good.

I would explore other models.  Under one possibility, outsiders pay for the forecast to join a more exclusive club of clients with other privileges.  It's a bit like how art galleries won't sell their best pictures to complete outsiders but instead ask that you "pay your dues" by being a loyal customer for years.  In other words, it's an arbitrary fee to enforce price discrimination, backed by some plausible pretext.

Under a related model, the firm pays for the forecast as a means of generating publicity, signaling its size, seriousness, and audience, and in general marketing itself to outside clients.  It is unclear who bears the final incidence of these expenditures, the firm or the clients, but still "forecasting isn't about knowledge," as Robin Hanson would have said to the oracle at Delphi.

Either way, I do not put much credence in what the forecasts say.  They do usually represent "standard macroeconomic knowledge" and in that sense they are not a complete fraud.  But the fact that they are being paid for does not, in my eyes, mean they are passing a market test in the traditional sense.

If anything, the persistence of the market in such forecasts should make you wonder about many of the other functions of these banks.


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