The 3 Biggest Predictions About the Economy That Never Came True

Last week, I wrote that "most of what was expected to shape the past 30 years never happened, and what did shape the past 30 years was never expected." We live in an unpredictable world, but this doesn't stop experts from making divine forecasts. Predictably, their collective track records stink. As Philip Tetlock, a U.C. Berkeley professor who studies expert predictions, put it, most experts could be beaten by a "dart-throwing chimp." Yet we listen to them. Intently. With confidence.

At least one reader disagreed. In an email, he challenged me to elaborate on three mainstream (not fringe) predictions that never came true.

One could write volumes of books on this topic, and a few have. But challenge accepted. Here are three predictions about the economy that never came to pass.

1980s: Japan will take over the globe
In 1986, Gore Vidal wrote that in the face of Japan's climb to economic dominance, "There is only one way out. The time has come for the United States to make common cause with the Soviet Union." His advice on the Soviets was provocative, but the idea that Japan owned the future was nearly ubiquitous.

In 1991, former MIT dean Lester Thurow, wrote that, "If one looks at the last 20 years, Japan would have to be considered the betting favorite to win the economy honors of owning the 21st century."

In 1988, former Reagan official Clyde Prestowitz said, "The American century is over. The big development in the latter part of the century is the emergence of Japan as a major superpower."

In his book Trading Places, Prestowitz elaborated: "The power behind the Japanese juggernaut is much greater than most Americans suspect, and the juggernaut cannot stop of its own volition, for Japan has created a kind of automatic wealth machine, perhaps the first since King Midas."

Michael Crichton -- not exactly an economic analyst, but widely read nonetheless -- wrote in 1992 that "Sooner or later, Americans must come to grips with the fact that Japan has become the leading industrial nation in the world. The Japanese have the longest lifespan. They have the highest employment, the highest literacy, the smallest gap between rich and poor. Their manufactured goods have the highest quality. They have the best food. The fact is that a country the size of Montana, with half our population, will soon have an economy equal to ours."

It never did. These predictions weren't just wrong. They were the sheer opposite of what happened. Japan's stock market and real estate market collapsed in the 1990s. Its economy has been in an unmitigated slump ever since, spending the better part of two decades fighting deflation. It is now the most indebted industrialized nation in the world.

What went wrong? In the most simplistic terms, bulls focused obsessively on Japanese managerial techniques. The nation did have some great managers, particularly in comparison to American businesses like General Motors (NYSE: GM  ) , which were failing hand over fist. But what went mostly ignored was that Japan's boom was based on debt and overinvestment, not productivity. That created a bubble of epic proportions. When that bubble burst, the chickens came home to roost. Twenty years later, they're still roosting.

Every decade for almost a century: The world will soon run out of oil
In 1914, the U.S. Bureau of Mines predicted American oil reserves would be depleted in 10 years. In 1939, the official prediction was 12 more years before the wells ran dry. In 1951, the Department of Interior warned that we only had 13 years left. In 1977, President Jimmy Carter warned that the early 1980s would mark a point of no return, where oil prices could only go one way: up.

Over and over again, experts have predicted the end of the oil. Over and over again, they've been wrong. By the late 1990s, oil was so cheap that several major exporting nations sat on the brink of bankruptcy.

Oil is finite, of course. But those predicting that the end is near routinely overlook two key points. One, higher oil prices give oil companies incentive to find more supply and invent new extraction techniques. In 1970, global oil reserves were 550 billion barrels. By 1990, it was 900 billion. By 2009, 1.3 trillion barrels -- and that doesn't include many forms of heavy oil. Companies such as ExxonMobil (NYSE: XOM  ) and Chevron (NYSE: CVX  ) have become some of the most skillful engineers in the world. When the price is right, they have every incentive to be.

Two, demand can't just be extrapolated into the future. Price changes behavior. High oil prices of the 1970s sparked demand for fuel-efficient compact cars. When oil prices spiked in 2008, demand for trucks and SUVs plunged, public transportation usage surged, and a newfound urgency in hybrids and electric vehicles was born. Despite a much larger economy, American oil consumption in 2009 was lower than it was in 1978. The cure for high prices is higher prices, as the saying goes.

Calling for the end of oil underestimates the same phenomenon Thomas Malthus did when he predicted more than 200 years ago that the world was destined for mass starvation: Humans have an incredible ability to adapt. In Malthus' case, the world didn't starve because agricultural technology flourished. In oil's case, high prices cause consumption to fall and exploration to rise. Things adjust, and the world keeps chugging along.          

2001: The national debt will be repaid within a decade
In his first State of the Union address in 2001, President George W. Bush set a goal: "I hope you will join me to pay down $2 trillion in debt during the next 10 years," he said. "At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt repaid more quickly than has ever been repaid by any nation at any time in history."

Others were even more optimistic. The nonpartisan Congressional Budget Office projected that the nation would effectively be debt-free by 2009.

The Economist fretted about the problems this would cause. "What happens to monetary policy and to the markets as government debt disappears? And what happens to the budget surplus after the debt is paid off?" it wrote in 2001.

There was plenty to worry about, but not for the reasons expected. In 2001, the CBO forecast a cumulative 10-year surplus of $5.6 trillion. In reality, it was a cumulative deficit of $6.5 trillion. That $12.1 trillion miss might be the largest forecasting fumble in the history of mankind.

What happened? First, 2001 estimates were based on projections that the dot-com boom would continue indefinitely. It didn't, of course. Second, several rounds of tax cuts, a 2002 recession, two wars, and an unfunded Medicare expansion pushed the budget into the red. Later, the 2008 financial crisis, a stimulus package, and more tax cuts sent it over the edge.

The cause of this oversight is similar to the Japanese forecasting slip: Forecasters took recent trends, drew a straight line into the future, and declared victory. The 2001 forecast essentially predicted a decade of no recessions, no wars, and no political myopia -- this in a country whose history is littered with all three.

Skeptics, unite!
This isn't meant to point fingers. It's to accept that the experts whose predictions we rely so heavily on are fallible people operating in an unpredictable world. The appeal of predictions is natural -- who doesn't want to know what the future holds? -- but the collective track record of expert judgment speaks for itself. Experts have been wrong in the past. They'll be wrong in the future.

Just as certain: We'll still listen to them. Intently. With confidence.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Exxon and Chevron. Follow him on Twitter @TMFHouselMotley Fool newsletter services have recommended buying shares of Chevron and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (26) | Recommend This Article (88)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 13, 2011, at 7:42 PM, TMFDukenewkirk wrote:

    Thanks Morgan, really been enjoying your articles lately. Someone recently posted a classic quote on a board I was on, and it seems appropriate here.

    "Prediction is very hard, especially about the future" - Yogi Berra

    No matter how you slice it...

    "The future ain't what it used to be" - Yogi Berra

    Cause Yogi quotes are so good, you can't have just one.

  • Report this Comment On September 13, 2011, at 8:38 PM, TrumanTrout wrote:

    I add my thanks, Morgan, for another enjoyable article. The end of oil discussion reminded me of another classic:

    "Give a man a fish, and he'll eat for a day.

    Teach a man to fish, and he'll eat for a lifetime.

    Teach a man to create an artificial shortage of fish, and he'll eat steak."

    Truman Trout

  • Report this Comment On September 13, 2011, at 9:54 PM, TruffelPig wrote:

    I will however make a prediction right now: we have probably seen peak oil or will see it soon. I agree that this is not a world ending event, but the transition will cost time and money, things we right now do not have. It is going to be difficult but I am certainly not in an Armageddon mood. Overall I do agree with the opinion on experts - it is difficult to predict the future. Most experts therefore prefer to explain the past and than make some sort of future reference. They also always say "might", "perhaps", "not unlikely", "possible, possibly", blablabla

  • Report this Comment On September 13, 2011, at 10:07 PM, Darwood11 wrote:

    Good article!

    As for "experts predicting the future" I've concluded that the most likely scenario is moderation! True, there will be events which some say are predictable or not, as in the "black swan." However, the entire premise of diversified investing is an assumption that there will be volatility,some things will do better (as in, "be in favor, and provide a better return") than others, and ultimately, moderation is the best path.

    We can argue that, and some do. So perhaps I should purchase an old missile silo in Montana and stock it with perishable goods?

    I prefer to ignore the economists, who have, as a group, largely failed as predictors. By the way, did anyone see the article in the WSJ on "economists" developing the formulas to determine success or failure of teachers? We do live in very strange times!

    Frankly, I tired long ago of the lemmings who, while being swept along by circumstances which they cannot control, continue to insist that "believe me" and you will prosper! That's the flip side of prediction; "follow me" or "use my winning formula" because I have predicted the future!

  • Report this Comment On September 14, 2011, at 12:03 AM, TMFTomGardner wrote:

    Success + Hubris leads to Leverage.

    And then we know what happens.

    Again, and again, and again.

  • Report this Comment On September 14, 2011, at 12:25 AM, MaxTheTerrible wrote:

    Excellent piece, Morgan!

    As a scientist by training I may add that economics is not the only field littered with spectacularly failed predictions. Every time someone comes up with a great discovery in natural sciences, there are scores of experts predicting how it will change the future. Still waiting for those lossless superconducting transmission lines...

  • Report this Comment On September 14, 2011, at 12:26 AM, decebalvs wrote:

    A good article.

    Maybe 20-25 years from now, we will look back to this article, and say: there was this expert, who, based on previous failures to predict, he extrapolated that all his contemporary predictions were also false...

    There is no escape from it: the brain itself is nothing else than a model-prediction machine.

    The point on oil is well taken, and something many people have taken into calculation.

    However, consider this: aren't you relying on exactly the same kind of extrapolations that you are bashing? That exploration techniques will continue to improve. That we can become an ever more energy efficient economy...It may or may not happen. What if it doesn't ?

  • Report this Comment On September 14, 2011, at 12:30 AM, CaptainNeigh wrote:

    "There was plenty to worry about, but not for the reasons expected. In 2001, the CBO forecast a cumulative 10-year surplus of $5.6 trillion. In reality, it was a cumulative deficit of $6.5 trillion. That $12.1 trillion miss might be the largest forecasting fumble in the history of mankind."

    Do you know the paper value of the word forecast. When CBO uses word forecast it does not mean a prediction or analytical tool. It is simply a most simple extrapolation of current defecit continuation without regards to anything else. A chart to chart year to year increase. NOTHING ELSE.

    Thank you

  • Report this Comment On September 14, 2011, at 8:00 AM, Baalsitch wrote:

    Ummmm Mr.T,

    where I live it's:

    " Give a man a fish, and he'll eat for a day.

    Teach a man to fish, and you've ruined a perfectly good market."

  • Report this Comment On September 14, 2011, at 9:01 AM, ihtfp92 wrote:

    I was in Europe last month and I paid $8.50/gal for gasoline. There were plenty of cars on the road. What this tells me is that the cost of extracting & refining petroleum could almost triple and people would still be willing to pay for it (at least here).

    The US has huge researves of coal and natural gas that can be converted into gasoline at prices under $10/gal. When combined with a very efficient vehicle it's possible to keep the per mile fuel cost under 20 cents.

    In short - neither cars nor gasoline will be going away anytime soon. That's why I bought XOM.

  • Report this Comment On September 14, 2011, at 9:21 AM, applegate888 wrote:

    Brazil the new oil power in our backyard.pbr is a steal .

  • Report this Comment On September 14, 2011, at 10:02 AM, whereaminow wrote:

    Morgan,

    You've warmed the cockels of my heart :)

    *I don't know what that means

    David in Qatar

  • Report this Comment On September 14, 2011, at 10:29 AM, NEMnyWtch wrote:

    Thank You again, Mr. Housel! Another excellent article, with which I definately agree.

    Two professions one can goof up consistently and still get paid: Meteorology, and Economic Analysis, as they are both ever changing. :)

  • Report this Comment On September 14, 2011, at 11:14 AM, Tygered wrote:

    Very good article as always.

  • Report this Comment On September 14, 2011, at 12:18 PM, XMFScott wrote:

    Well done. It'll be interesting to see if the Japan miss is an analog for China. Currently China is forecast to be the #1 economy by the early 2020's.

  • Report this Comment On September 14, 2011, at 2:45 PM, YiLan wrote:

    Give a man a fish, and he'll eat for a day.

    Teach a man to fish, and he'll sit in a boat and drink beer all day.

  • Report this Comment On September 14, 2011, at 6:05 PM, siriuslyrick wrote:

    I note that Morgan conveniently omits the data which do show oil production peaks and declines, particularly for the U.S. Production in the U.S. peaked in 1972, just as predicted by Hubbert, and has been in decline ever since. No amount of adjustment or adaptation can change that fact. Similar peaks and declines have happened already in various countries throughout the world, and global reserves have apparently been overestimated for decades, particularly in the Middle East, for political reasons.

    That being said, I too predict that experts will continue to make predictions, and that they will continue to make many wrong predictions, just like this author's implicit prediction that we don't have to worry about the supply of oil. Oil production per capita peaked decades ago, and is declining. A global economy founded on the assumption of growth and based upon relatively cheap energy cannot adapt to survive even modest spikes in energy prices, and that is unfolding right now.

    And this is really how that one goes:

    Give a man a fish, and he'll eat for a day, until the global fish stocks collapse and no amount of fishing will be successful. Oh, gosh, I guess that's already happening.

  • Report this Comment On September 15, 2011, at 8:28 AM, skypilot2005 wrote:

    +1 rec

  • Report this Comment On September 15, 2011, at 3:44 PM, idanp wrote:

    Great article!

    and for my prediction : I predict readers after me, will also write positive comments :-)

  • Report this Comment On September 15, 2011, at 6:10 PM, DJDynamicNC wrote:

    I don't want to leave idanp hanging, so I'll join in and point out that it's a well-done article (though I share concerns about peak oil, I suppose we'll see how it goes - I'm no engineer).

  • Report this Comment On September 15, 2011, at 8:55 PM, siriuslyrick wrote:

    I predict that idanp will be wrong. I'm quite positive about that, so maybe he's right instead. No, wrong. No, right! No,...I'm so confused about predictions now.

  • Report this Comment On September 15, 2011, at 8:58 PM, siriuslyrick wrote:

    ...and I am quite positive that ocean fish stocks are collapsing, and that oil production has peaked in the US and is declining, and that global Peak Oil is near or here. There. How's that for positive?

  • Report this Comment On September 16, 2011, at 4:47 AM, skater9 wrote:

    ...I agree .. Ocean fish stock are in a sorry state, Global Peak oil is here, global warming (regardless of how much man made or larger natural cycle) is real, over population of much of the third world is has moved beyond unsustainable, The US debt - problem has been real all my life time...and since the 70's has been dealt with by pumping consumerism..oh, and Govt spending. I raised my hat to BL on 9-11-01 and though that the USA had a chance for redemption...instead we chose to napalm Iraq and Afghanistan...and bang our trash can lids in defiance of world outrage at US Hypocracy. Go team ... change the game.

  • Report this Comment On September 16, 2011, at 8:41 PM, critter88 wrote:

    It's too bad our education system does not do a better job of teaching the science of the earth cycles. Most of us know the common cycles, such as 24-hour cycle (i.e., morning, noon, night) and the annual cycle (the four seasons) but very few know that the earth has a third (and maybe fourth) cycle that spans hundreds and maybe thousands of years. This would lead to more constructive discussion around global warming. For instance, based on the width of the rings on very old growth trees, the earth has not been this warm since, I believe, the 17th century.

  • Report this Comment On September 20, 2011, at 8:35 AM, DAVE335i wrote:

    Good comment critter88. Most dont seem to understand (or just dont want to) that the earths temperature changes. Yes maybe we did help push the average temperature a whole tenth of a degree but in the 70s weren't they perdicting an ice age.

    And yes eventually oil will run out, obviuosly, its a natural resources that was created over millions of years. When I dont know.

    But I am going to go ahead and make my own perdiction:

    The US can not sustain the debt we are creating, if politician dont do something about the spending; the US will collapse. Every country comes to end. Isnt that right Rome, Greece, Egypt.

  • Report this Comment On September 20, 2011, at 11:39 AM, dba74 wrote:

    We can't reduce the national debt only by spending cuts. Revenue increases must occur, the sooner the better, and it's absurd to think otherwise.

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