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Predicting the future is both really important and really hard.  It’s supposed to be science–we build a model, validate it, and use it to make projections.  But in reality, building the model inevitably involves choosing from a severely limited set of data points, and predictions become dependent on unvalidated assumptions.  To a considerable extent, assumptions cannot be validated, since they are assumptions about the future.  When a company predicts its next year’s revenue, it assumes that within the next year, aliens will not invade Earth and enslave all humans.  This assumption is hard to validate; the best we can do is model its likelihood based on a historical absence of extra-terrestrial invasions, and a lack of flying saucers in the sky.  I don’t object to making this assumption, but we should be aware of its possibility.  There are a vast number of low-likelihood, high-impact events that could occur and drastically disrupt our predictions.  The longer the time-frame of prediction, the more implicit future assumptions we make, and the less reliable our prediction.

Of course, long time-frame future gazing is important.  When young choose which careers to prepare themselves for, they make assumptions about what careers will be available to them.  When politicians design budgets, they make assumptions about productivity growth over a long time-frame.  Both these sets of assumptions are highly dubious, as can be attested by auto-factory workers, young lawyers, and governments scrambling to deal with the aftermath of the financial crisis.

It’s with this skepticism I evaluate Paul Ryan’s budget proposal, which operates over a  forty-year time frame.  The analysis Ryan cites is obviously wrong.  But I’m also skeptical of this critical analysis, since it assumes zero economic growth.  There’s a lot of good discussion on this topic, such as here and here, but overall I’d like to see more robust analysis of the proposal, with more flexible assumptions about future events.

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2 Comments

  1. A 40-year time frame isn’t that hard to work with when you’re talking about as big as the federal budget. We have known that Social Security and Medicare were going to be a problem for at least 28 years:

    http://www.ssa.gov/history/reports/gspan.html

  2. Joe,

    The report you link to is old, but it’s not that forward-looking. It’s mostly aimed at addressing short-run concerns and doesn’t, for instance, try to predict government revenue 40 years out, or the unemployment rate 10 years out.

    Some predictions can be made fairly reliably over a long-term time-frame, such as demographics. It would have been reasonable during the baby boom to predict that 60-70 years later there would be a lot of people retiring, barring a major loss of life.

    But with economics variables like employment, GDP or tax revenue, when you try to predict 10 or 40 years out, you’re just taking a shot in the dark. The economy could grow at 2% annually or 6% annually; over 40 years, that’s a five-fold difference in GDP and tax revenue.


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