Governments rely too much on Economics

Dr. John Hollins, past Chair CACOR Board of Directors, comments:

Economics is the most influential discipline in governmental thinking in most of the countries that are members of the Organisation for Economic Cooperation and Development.

Economics is sometimes referred to as a science.  To a limited degree, the basic scientific method is practiced: repeated iteration between observation and theory.  An example is price elasticity, the calculation of the change in demand with the price of a commodity.  A change in price does not often result in an exactly proportional change in demand in the other direction.

It is possible to calculate price elasticity by observation.  For airline travel in the United States, the elasticity is approximately -1.1 [1], so it is slightly more than proportional.  But for motor fuels in the short term, it is between -0.02 and -0.04, meaning that demand is essentially inelastic: price does not affect consumption in the USA.  In the very long term, studies, in Europe show elasticity of the order of -0.5: when the price is doubled, the demand drops to about a half, as consumers, for example, switch slowly to smaller and more fuel-efficient vehicles. Some governments in Canada do not appear to understand this.

GDP predictions

Other features of economics, however, do not apply the scientific method.  GDP predictions for a given calendar year, for example, a central feature of governmental thinking, are reliable only in the very short term: during the last six months of the year in question.  Even then, The Economist [2] reports many significant errors of the order of ±2% in predictions made in May of the year-end GDP

Forecasts of declines in GDP are much worse than forecasts during periods of steady growth.  A spectacular example was the failure of economists to forecast the downturn in the GDP of the United States in 2009.  In September of 2008, when the financial crisis was already well underway, the forecast was for a modest dip compared with the previous year.  The actual dip was not modest.

[1]  Source: United States Energy Information Administration

[2]  The Economist, 2018 December 15, p.85