Posts filed under “Finance”

The Danger of Dogma

There is an enormous intellectual danger in reaching a conclusion, and then working backwards from that point to justify that point. To wit, Professor Michael J. Boskin, an economist at Stanford, who claimed to have discovered a future cash horde of 12 trillion dollars that the government had somehow “overlooked.”

Once the retiring Baby Boomers, “who spent decades making tax-free contributions to their I.R.A.’s and 401(k) plans” began paying taxes on those accounts, the windfall would save the government’s future shortfall in Social Security and Medicare.

Or so Professor Boskin thought. But alas, his financial alchemy failed to turn dross into gold. It seems his assumptions for the returns were way too optimistic (sound familiar?). He also double-counted tax assets already on the Federal Government’s books. And, he failed to consider that by the time the withdrawals would occur, the recipients would be in a much lower tax bracket. (Duh)

You must give credit to Professor Michael J. Boskin for identifying the error and making what must have been an unpleasant and embarrassing mea culpa. Also, credit the system of peer review, which almost instantly challenged his faulty assumptions, analysis and conclusions.

But recognize what was the underlying cause of the gaffe: Lack of objectivity; Biased research turns out not really to be research after all; It is a process of rationalization, as opposed to original thinking. This does not lend itself to finding scientific truths.

How difficult is economic forecasting? Its called the “Dismal Science” when its practiced by competent statisticians who operate without bias. That intellectually honest adherents working on behalf of large investment pools — i.e., people with a good incentive to get it right regardless of the outcome — find it exceedingly difficult to make accurate predictions. Call it the “folly of forecasting.”

For those who slavishly adhere to a dogmatic yet faulty belief system, there’s a different word for them and their mystical incantations: Propagandists.

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