Economists Seek to Revolutionize Forecasting

By Hendrick, Bill | THE JOURNAL RECORD, May 1, 1990 | Go to article overview

Economists Seek to Revolutionize Forecasting


Hendrick, Bill, THE JOURNAL RECORD


Cox News Service SANTA FE, N.M. - In the tiny cubicles of a former convent where nuns once touched rosaries for divine guidance, young geniuses in ponytails now tap computer keys for revelations about the economy.

So far, they've ``discovered'' that most economic forecasts don't have much more than a prayer of panning out.

That insight may seem less than earthshaking to a public bombarded daily by economic epistles, interpretations and forecasts that often contradict the previous day's batch.

But the physicists and economists at the Santa Fe Institute, a fledgling research organization, think they're hot on the trail of ways to revolutionize economic forecasting. If successful, their work could alter the way individuals, companies and government bodies decide when and how to spend money.

Institute scientists claim that making long-term economic forecasts is as futile as trying to predict today how fast the wind will blow at next year's Macy's Thanksgiving parade.

But with modern computers that can process ``experimental'' mathematical techniques, they claim they can improve short-term forecasting - perhaps dramatically.

According to Dr. George A. Cowan, the 70-year-old president of the institute, its goal is to ``provide better estimates of the possibilities and probabilities,'' not to turn economic forecasting into magic. The effort is supported financially by the likes of Citicorp, IBM, the National Science Foundation and the U.S. Department of Energy.

Nowadays, people make spending decisions based on what they read, hear and expect about the future. Essentially, the methods being developed at the institute would give decision-makers a set of odds with which to place their bets.

``That may be good enough,'' said Cowan, who founded the institute after a 40-year career at the Los Alamos National Laboratory, 40 miles to the north. ``You don't have to hit home runs in economics.''

Knowing even a little more about how the economy works might be enough to help policy-makers avoid boners, such as the Federal Reserve's disastrous decision to clamp down on credit after the stock market crashed in 1929. That decision to pull money out of the system after the crash is generally cited as a cause of the Great Depression.

By relying too heavily on economic data that is imprecise and old, Fed policy-makers are currently walking a dangerous tightrope, according to scholars like Dr. Michele Boldrin, a Northwestern University economist conducting research at the Santa Fe Institute.

``The real world is so damn different from the theoretical abstract models (economists) play with,'' said Boldrin, and therefore, ``fiddling with the economy'' as the Fed now does is ``dangerous. …

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