Truth in advertising?

June 15, 2009 in Economics

I find this graph very interesting, not just because of any implied political statements, but for how it highlights the absurdity of economic forecasting and the potentially misguided trust we place in such numbers.

The blue lines were circulated by Obama's economic team when they were pitching the stimulus bill in order to illustrate its beneficial impact on national unemployment. The red line is the realized unemployment rate to date.

There are two ways to read it, depending on your objective:

  1. Obama's economic team was overly optimistic, underestimated the severity of the crisis, and the stimulus plan has failed to help as advertised.
  2. Obama's economic team was overly optimistic, underestimated the severity of the crisis, but things would have been much worse without the stimulus.

Ultimately, the question is whether the level or the shape of the graph is more important. Personally, I find it surprising that (as with the bank stress tests), a situation which was markedly better than a worst case scenario was used to demonstrate the effects of the stimulus. Nonetheless, the fact that this graph was used for demonstration purposes makes it difficult to fault simply because it was plotted 1% too low.

Perhaps it never should have been circulated in the first place. This raises a very touchy point in forecasting: an expectation is almost never perfectly realized. Unless an audience comprehends that fact, then putting a forecast out there can only lead to critique. In a simple example, if I calculate a distribution of outcomes and know it to be the correct distribution with high certainty, then my forecast will be the mean or expected value. But what are the chances that the mean is actually the realized outcome? To be sure, higher than any other single observation, but relatively small nonetheless. This speaks to the importance of confidence intervals and margins of error; my guess, however, is that the margins of error on this graph (however that might be measured) would have included the "improvement" line, making the difference not statistically significant.

More pointedly, however, the stimulus was supposed to "save or create" 4mm jobs. This means that the area between the two curves equals 4mm, but the implied difference here seems much larger to me.

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