Very few economists recognized the magnified ripple effects that would result from a collapse in residential house prices.

Historically, housing downturns only occured after a jump in interest rates or unemployment (or both). This house price bubble just collapsed under it's own weight.

To be clear, there were plenty of economists who believed that house prices would decline, but they didn't anticipate the severity of the decline or the magnified ripple effects that were (largely) the result of poor underwriting and reduced downpayment requirements.

Tom is a very astute observer, and a good economist, but he missed this one just like most of his peers.

Hate to say it but the Governor's Council of Economic Advisors is largely composed of people that agree with Ted K's politics. Bill Connerly, one of the sharpest economic minds in the state; was booted some time ago because he wasn't on the same page as many of the others.

psst, don't tell anybody: state economic forecasts of this type are near the mark less than 3% of the time.

unfortunately, 97% of policy is based on it.

and don't worry...economists at all levels will rush to tell you that any bad forecasts are "anomalies" based on "unforeseen circumstances".

duh.

I'm pretty sure I remember reading an interview with Potiowsky from several months back that asked him if his forecast at the time wasn't a little too rosy and he said something on the order of how he didn't want to say something like that because it would bum people out (not his exact words). Which seemed at the time as if it was not really an economic forecast but more of a wish list.

Every Monday morning quarterback saw it coming.

Every Monday morning quarterback saw it coming.

Darrel pointed out something crucial, I think--economists issuing pronouncements about the economy, claiming it's a result of thoughtful social science--all while in a stage whisper saying "I didn't want to bum anybody out, so I fudged".

which is common at all levels. economists with vested interests often do little more than generate propoganda disguised as "science".

but hey, who wants to hear that the emperor (this absurd system of wealth redistribution) has always been naked?

Conerly is still on the Council.

The real abomination is that Joe "Cluster" Cortright is the CHAIR and he does not even have an economics degree.

(Trivia: Yes-man Cortright was added to the Council when Allen Alley--a Gov. K's hatchetman--forced venture capitalist Ralph Shaw to resign.)

Connerly had it right many months before the state's economist-look at his quotes in past issues of Brainstorm. I believe that the state's economics office is in large part a political machine.

Bummer that we didn't get any state rainy-day funds until a couple of years ago, but then the GOP was invested in bribing voters with kicker checks just before Xmas.

Astonishing that the state has a council of seers: it is insane to hope for insights from a panel of government appointees picked for their acceptability to elected officials. By definition, such a committee can only forecast things that don't need much insight to forecast.

We should replace this panel of naked emperors with something useful and make up for some lost revenue at the same time.

That is, whenever Oregon government wants to use unknowns for planning planning purposes (i.e., when it needs forecasts) it should open a betting line on the Intertubes -- a futures market, like the Iowa candidates futures market. Let people register and bet real money on each particular variable that we need forecast. Rake off 10% and pay the winners off from the rest -- while also getting a much more reliable forecast system.

The linked article to seems to have buried the lead. It doesn't matter if you are right on top of things or a few months behind if you have to make predictions two years in advance.

Rake off 10% and pay the winners off from the rest -- while also getting a much more reliable forecast system.

Sorry GAS, that's far too logical, straightforward and wouldn't create enough of a bureaucracy.

Let's not forget that economic forcasts are subject to the Heisenberg Principle. If you have enough forecasters predicting the collapse of the market then it can contribute along with media headlines to a self fulfilling profecy. I wish that the economists and media had spoken up more for optimism rather than less.

@Dean: That's why an online futures market works: it incorporates awareness of people trying to steer into the mix. If you want accurate predictions, an futures market is far more reliable than a council of anointed seers. If you're concerned that someone will try to short the state and force things down to cover the bets, a limit (like the Iowa candidates futures market of $500) will help stop that. Plus, if people are actually willing to bet money on shorts, there have to be the same number of people willing to take that bet on the other side --- so the steering is neutralized.

@CC: having worked in state governments, I don't share your cynicism. Most people in state governments are not the malignant empire-builders your comment suggests. Rather, they are ordinary people trying to do the best they can in very difficult circumstances, working for a public who has been trained since Reagan to think that they can have an infinite series of free lunches and that anyone who says otherwise is "part of the problem." Working for this public is an even more whimsical set of legislators, people whose primary skill is in appearing pleasing to others and whose attention span makes the most caffeine-addled six-year old seem like someone capable of writing War and Peace. It is true that there is a real dearth of creativity among the ranks -- but that's to be expected when you look at how punitive the public and their servants in the legislature are to anyone from the bureaucracy who attempts to act unbureacratically.

But, perhaps the utter failure of the council of seers, combined with Oregon's extreme vulnerability to bad forecasting might permit a better approach to be considered. I suggest a two-year trial: an online futures market vs. the council of seers; whenever the council of seers is asked to make a prediction, the same questions are put onto the online futures market. After two years we can decide which group performs better.

Forget about the economists, so much of what they do is starting resemble alchemy these days.

We needed spending control in Salem rather than reliance on rosy outlooks.

How much better off would we be if we had passed the Measure 48 spending limit in 2006?

It would have allowed a modest 8% growth in the state budget this last biennium (rather than 21% pushed through by the unions) and would have set aside more than a billion $$ for the next biennium.

Oh but we sure did have fun contorting ourselves in outrage over some rich donor putting it on the ballot.

Hope it was worth it.

Every Monday morning quarterback saw it coming.

Maybe so, but it didn't take all that much sense to see the way the wind was blowing even years ago. I can remember sitting down with the libertarian, "Reason"-reading guy I started working with in the late fall of 2005 for our first lunch and having him express surprise that I thought the economy was in shaky shape.

I'm an independent programming contractor, and I've seen a steady decline in projects and budgets for several years. My wife works in the real estate industry, tracking apartment rents and it was incredibly obvious years ago that the market for high-end apartments was glutted, and that the demand for condo developments was unsustainable.

Companies like Freightliner and Intel were laying off hundreds of people at least as far back as 2006 and 2007. New jobs at the same pay levels weren't moving into the area in any kind of similar numbers. All you had to do was read the Business pages, and unless you were just completely unable to string the numbers together, it wasn't hard to see which way things were going.

Some economists have been saying it was happening for at least two years, and there were any number of refutations by the Bush administration that we weren't, even as late as last year. Well duh, the economists were right and the Bush people were wrong, and by ignoring the problem -- like every other problem they encountered -- they let it fester and punted it down the road for someone else to deal with. It's not like I expect the Obama team to be able to pull it off, either. They seem to be stuck in a "don't shake up the bankers" mode that doesn't address any of the rationale of how the system got so screwed up.

I hope people don't try and pull a Condi with the economic mess. You know: "No one could have imagined...."

The fringe websites I look at had the economic mess dialed in a long time ago.

And you should see what they're saying now.

The thing that always got me during the terrific boom of the Wizard W, was the fact that every time the sun set we owed a billion dollars more.

And that's when things were going well.

When we look back at this from Reagan on, it will appear with words like "fleecing" in the title. The wealthy were quick to squeal "Class warfare" whenever it was pointed out - for the communist connotations.

But the rich really did suck the wealth from America, and the future as well.
As with all great crimes, sooner or later the criminals slip up. Too bad we have to bail them out and listen to the AIG guy cop an attitude when he screwed up the world.

Economic forecasting is tricky, but it's not like you have to go back to the Dutch tulips to find another bubble. We just had one with the dot.coms. The suits should have been on their toes.

You didn't need to go to fringe websites, Bill. Even old singer/songwriters had the economic landscape pegged a couple of years ago.

Ray Davies, from "One More Time", on a CD released in mid-2007 in the UK:

"Those economic vultures Stole our dreams and told us tales Then they towed away our culture To their depot in south Wales

"Corporations get the tax breaks
While the city gets the crime
The profit's going somewhere
But it isn't yours or mine

"Still we blindly trust in the divine
Let's sing for the old country
Come on, one more time"

http://www.youtube.com/watch?v=Lll2LCLIdaQ

You'd think that if the guy who wrote "Lola" could figure it out that it shouldn't be so hard for someone with an economics degree.