Economic Models Prove Both Bane, Blood of Forecasts

Article excerpt

LOS ANGELES _ When Clinton number-crunchers are asked how the government is supposed to pay for the proposed health care makeover, they take out their models that project $441 billion in savings and new revenue.

When those same crunchers are asked how employment would be affected by the North American Free Trade Agreement, they take out their models that project 200,000 new American jobs.

Both figures might turn out to be correct. Then again, I might find $100,000 on my way to work. Anything is possible, but anyone who depends on it happening has been juggling spreadsheets too long.

Models _ they're the lifeblood of public policy and financial decision-making. We need them, we want them _ and yet, they're almost never right.

This is not to knock White House forecasting methods in particular. All sides do models and all models are usually wrong. Too bad by the time they're proven wrong it's been many models later.

This matter of modeling has become extremely important because the economy is ready to turn, and the debates are dominated not by the merits of a particular plan _ everyone favors the idea of universal health care and free trade _ but by the cost and likelihood of success.

Since none of this has ever been tried, we're only left with suppositions _ cold comfort in tough times.

NAFTA is the classic tale of wildly divergent numbers in search of a true bottom line. The political question, of course, is how many U.S. jobs will be gained or lost as a result of the trade deal. No one can possibly answer this, but that hasn't stopped legislators from relying on a dozen models that presume to have the answers.

And they all say different things.

One projects 44,500 new jobs. Another expects 550,000 lost jobs. Another has 130,000 new jobs. Another has 400,000 to 900,000 lost jobs. Another has 250,000 new jobs.

This is mainly bad news for NAFTA supporters because people tend to grab onto negative numbers and a few hundred thousand job loss sounds like a major deal. (It really isn't _ and besides, there might end up being job gains. Economists generally believe the issue is not jobs won or lost, but productivity gained.)

Models are really just a set of equations in which current facts and figures are clumped with certain assumptions about the future. …