Headwinds

In tornado alley, the difference between accurately and inaccurately forecasting the trajectory of likely tornadic activity is profound. With a moment’s notice, an entire town can be swept off the map, devastating entire regions. The photos shown in the aftermath—like the recent images from Henryville, Indiana, and West Liberty, Kentucky— are heartbreaking but the devastation among those who have lost everything lingers on long afterwards.

tornado-midwest

Radar image near Henryville, Indiana. Image courtesy of Fox 41.

 

Although those outside of tornado alley are often sympathetic when the photos are shown on the evening news, they soon forget about the people and towns decimated and move on with their lives. But the next time storm clouds threaten, local folks heed the warnings both from the meteorologists and using their own common sense—they look up at the sky and make a judgment about the likelihood of bad weather.

You see for those who grow up in tornado alley, there is a certain look to the sky just before a twister drops out of the heavens and torments those on earth. Yes, radar helps to predict the locations and timing of tornadoes but it is an imperfect science. There are frequently “radar-indicated” tornadoes which never touch down—these are analogous to the boy who cried, “Wolf!” and lessen the chances that people will take shelter the next time bad weather strikes. Human experience—learning to interpret the forecast and “read” the sky—goes a long way in figuring out when to go underground or not.

In the same way that meteorological forecasts—coupled with experience and a bit of common sense—are helpful in escaping the brute force of Mother Nature, economic forecasts—preferably also coupled economic experience and with common sense—provide useful indications to the marketplace. In either case, however, inaccurate forecasts—and lack of experience or lack of common sense—can have serious implications.

When economic forecasts turn out to be wrong, economists are apt to say “this time was different.” They proceed then to cite the different variables at play, claiming an inaccurate prediction through no fault of their own. Their forecasts, thus, turn out to be largely academic exercises outside the “laboratory of human experience.” But economic headwinds, like those spawned by tornadic activity, have profound and permanent effects.

A recent Wall Street Journal article by Benn Steil provocatively titled, “Why We Can’t Believe the Fed,” provides damning evidence that our nation’s leading public economists are often wrong. In fact, the Fed itself said, “its historical forecast errors are large in economic terms.”

Coupled with the experience of the last one hundred years under the rule of the Federal Reserve, economic participants would do well to consider the evidence and evaluate risks according to experience and common sense. Time will tell whether economic actors will take heed or, whether as Mr. Steil predicts, they will take shelter, casting doubt over “official Fed targets and expectations.”