Policy makers have made some famously bad predictions over the past eight years. Given how this undermines public trust, it's worth considering how they could do better.
Here are a few of the bigger mistakes that come to mind:
In March 2007, Federal Reserve Chairman Ben Bernanke testified in Congress: "The impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained.”
In November 2009, most members of the policy-making Federal Open Market Committee (of which I was a member) said that they expected the U.S. economy to grow at a rate of between 3.1 percent and 4.3 percent over next three years. (In reality, growth averaged less than 2 percent per year.)
In January 2009, the chair-designate of President Barack Obama's Council of Economic Advisers estimated that the government's stimulus program would bring the unemployment rate down to about 7 percent by the end of 2010. (It actually remained well above 9 percent.)
These errors have had an adverse impact on public confidence -- in the Fed's ability to foresee crises and achieve its goals, in the power of fiscal stimulus to mitigate recessions. This loss of faith matters. It contributes to the kind of uncertainty that can be a drag on the economy. And it contributes to the lack of trust in government that lies behind the success of non-establishment presidential candidates, such as Bernie Sanders and Donald Trump.
So how can policy makers improve? Two changes would help.
First, when offering forecasts, they should also give a sense of the associated uncertainty. All forecasts have risks about which the public should be aware, and the field of statistics has well-established ways to express them. The Bank of England, for example, regularly publishes charts showing both its economic projections and the margin of error surrounding them.
Second, and more challenging: Policy makers must recognize that the public views their forecasts as statements of goals, not mere academic prognostications. When the Chair of the Federal Reserve says that the subprime crisis is well-contained, he is implicitly telling Congress that the Fed has the wherewithal to protect the public. When Fed officials predict growth of 3 to 4 percent, they are implying that they have the tools and will to make that outcome happen. When the Council of Economic Advisors announces that the unemployment rate will fall to 7 percent, it is saying that the president and Congress will do what is necessary to hit that target.
Here’s my prediction: If policy makers followed this advice, they would make fewer forecasts and would provide a lot less certainty around those forecasts. And saying less would allow them to do more, because the public would be much more likely to believe them.