One reason I enjoyed FOMC meetings so much during my 14 years as a member was that I could always count on learning something new from Alan Greenspan, usually some quirky insight or a creative new take on familiar information.  I miss that, but fortunately I have his book.  I bought it the morning it came out, but I didn't get around to reading it front to back until a book club recently invited me to discuss it.

Under the category of quirky information, which he is famous for, is his revelation, on page 50, that the pop top on beer cans was invented in 1963, which made the transition from steel to aluminum beer cans possible.  I didn't know that.

Unfortunately for the reputation of economists with the general public is that they think the job of economists is forecasting.  That's unfortunate because economists can't forecast very well.  It just can't be done.  Economists know that, and most will admit it, but they are stuck with it, especially if they wish to be employed as an economist outside academia.

Even so, monetary policy, of necessity, has to be based in large part on economic forecasts. The Fed staff can forecast as well as anybody and better than most, but that is faint praise.  They use large sophisticated econometric models, and the chairman, who does higher mathematics for relaxation, enjoyed looking under the hood of those models. Yet, he understood their limitations, mainly that their equations are of necessity based on past relationships which change in unexpected ways since they involve human nature.

Chairman's Greenspan's finest hours, or years, at the Fed, in my opinion, was when he didn't take model's projections of imminent inflation at face value in the second half of the 1990s.  It takes courage for an economist or policymaker to say things are different this time because they usually aren't.  But the sharp rise in productivity growth beginning around 1995 did change everything.  Compared to the forecasts of all the models, including the Fed's, output and employment growth was faster while inflation and the unemployment rate was lower. Business could give wage increases without experiencing increases in unit labor costs. The Fed could allow the economy to run hotter without serious inflationary consequences.  Had the Chairman followed the models, the economy would have missed the benefits of faster real growth for several years.

I said that economists cannot forecast well.  That applied doubly to me since I was not as "quantitative" as most and had to depend on my eyes and ears to figure out what was going on and then — dare I say it — extrapolate into the future.  Most of us are closet extrapolators, although most won't admit it.  Of course, you refine your extrapolation with "straws in the wind" indicating a future slowing or speedup.

I've always been amazed at economists who presumed not only to see around a corner, but to see around more than one corner, as in "the economy will pick up through year-end, then slow for several months, and then take off again stronger than ever."  To me that sounds as silly as what they would say to the waiter after sniffing a wine cork.

There is one exception, I believe, to the inability of forecasters to see around corners.  That is, forecasts based on demographics, such as the long-run forecasts made by Harry Dent.  He has shown convincingly that demographics is destiny.  The way I think of it is you can, with demographic data, see more than one pig going through the python.

The first time I heard Harry Dent speak was some time during the boom times of the late nineties, when I was known, pejoratively in most minds, as a cheerleader for the new paradigm, or new economy.  What thrilled me was that Harry's conclusions on the economy at the time were very similar to my own, but that he reached them in an entirely different way.  I thought that, even if my analysis was wrong, my conclusions could still be right because of demographics.

All this is background for a simple Greenspan insight about forecasting that I just ran across.  On page 48 of his book, he says, "Forecasting is simply a projection of how current imbalances will ultimately resolve."  Somehow, that definition makes forecasting sound easier and more practical.  It made me think of the Herb Stein quote according to which "If something is inevitable, it will happen."  That quote in turn made me think of the huge current account deficit and how it has been inevitable for many years that it would cause the dollar to decline.  Stein's quote probably should be amended to include "sooner or later."

Greenspan's book ends with a forecast that the economy is likely to slow in the next several years from the pace we've been used to in recent years.  That conclusion seems more credible to me because it was based largely on demographics.

You can think of economic growth as growth in the labor force (hours worked) times growth in labor productivity (output per hour worked).  The first factor, labor force growth, is based almost entirely on demographics.  Productivity growth may also have a demographic component, but Greenspan places more emphasis on the limits of our intelligence.  He basically says we aren't smart enough to sustain productivity growth over 2.8 percent over an extended period of time. 

As I pointed out in another posting — The FOMC's Enhanced Transparency Reveals Old Paradigm Pessimism — the FOMC members have a similar negative expectation of growth in the next few years.  Their projections for 2010 growth published last October ranged from 2.2 to 2.7 percent, with a central tendency of 2.5 to 2.6.  As I said before, given that 2010 gives them long enough to get policy right, that's a mighty puny forecast.

It's fortunate, then, that economists really can't forecast.