Wednesday, 17 October 2012

Learning to live with failure

I was living in a top-floor flat on Camberwell Road when the Great Storm of 1987 hit town. Not being one for breakfast television or the radio, I didn't realise what had happened until I got to work at Marble Arch. The litter-strewn streets and trashed bus shelters didn't look very different, while the trees denuded of leaves were sufficiently autumnal not to tickle my fuzzy synapses. I may have had a hangover. The 25th anniversary of Michael Fish's failure to correctly forecast the storm has coincided with a couple of high-profile admissions of forecasting error, first by the IMF in respect of the impact of austerity (which they under-estimated) and then by the OBR in respect of economic growth (which they over-estimated).

It's obviously unfair on Fishy that he has always taken sole blame for this, given that the actual forecast was the work of others, but without it he wouldn't command the sort of after-dinner speaking fees he collects today. In truth, we have always known the weatherman was innocent, but we vicariously enjoyed his discomfort at having been proved wrong. Partly this is just schadenfreude at others making mistakes, but partly it reflects the collective distaste for hubris, the over-confidence of the predictor. Fish's real crime was the condescending dismissal of the "woman who rang the BBC" asking if it were true that a hurricane was on the way.

A prediction is not just a best-guess at a future outcome, like a football score or a horse racing result, but a reflection of a particular worldview. This is rationalised as "form", though it is often little more than wish-fulfillment or lazy prejudice. Perhaps the the finest example of this, which is also cynically accurate in the success of its predictions, is the principle known as "yesterday's weather". What this means is that you are statistically more likely to be right than wrong if you assume that tomorrow's weather will be the same as today's. This may not be as accurate as a meteorological forecast, but it beats seaweed or groundhogs hands down.

The failure of the IMF to predict the extent that fiscal austerity would impact on growth reflects two features of its history. Though originally formed after WW2 to provide short-term assistance for individual countries facing financial crises, it morphed during the 70s and 80s into a cheerleader for neoliberalism, insisting on privatisation, open capital markets and deregulation in return for its help. It became a lever for globalisation, which meant it developed an ideological aversion to public spending and government debt.

But the second, perhaps more profound, feature was that it focused largely on isolated crises in the developed world (famously the UK in the late 70s) and regional crises in the developing world (Mexico, South East Asia and Russia in the 90s). This meant it tended to underplay the systemic impact of the policies it advocated, notably the effect on trade and global growth. It is now blindingly obvious to all that if austerity is pursued simultaneously across the majority of EU nations, at a time when other parts of the global economy are struggling to achieve growth (the US and Japan) or seeing a decline in growth rates (China), then the result will be an aggregate fall in demand. No amount of public spending cuts will stimulate a private sector boom in such conditions.

Unlike the IMF, the newly-minted OBR does not have a long track record or any institutional memory to explain its forecast bias. It's brief is to provide an independent technical analysis of the government's fiscal programme, though it remains ultimately under political control. An early failure in its forecasting will not necessarily be fatal to its credibility, as we all recognise, like Michael Fish, that some forecasts are bound to be wrong, but there will be an erosion of trust if the bias of the forecasting is obviously supportive of the government's worldview and if that worldview is shown by events to be wilfully misguided. Unfortunately, as I've previously noted in respect of the OBR's forecasts for health costs, the results in some cases may not be in for years, by which time the damage of wrong-headed policy will be done.

The IMF admission has gone a little way to restore the credibility of that organisation, though a more cynical interpretation is that under Christine Lagarde it is simply reflecting the growing "austerity with a human face" approach of Francois Hollande. The OBR's credibility is a little damaged, though their culpability is limited. Their brief means they can only analyse the government's actual plans, so they cannot be drawn on the relative merits of any plan B. With the Tories making it clear that they aren't going to consider any alternative, the OBR's next report may simply be more cautious, i.e. pessimistic. For Michael Fish, it's all too late. Hauling Bill Giles in front of a truth and reconciliation committee will not alter that miscarriage of justice.

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