The Future Is Not What It Used to Be

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Irwin Kellner

Sept. 15, 2009, 9:15 a.m. EDT · Recommend · Post:

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By Irwin Kellner, MarketWatch

PORT WASHINGTON, N.Y. (MarketWatch) -- When everyone is certain something is going to happen 10 years from now, you can be sure of one thing: It won't.

A good example is the long-range outlook for Social Security.

Every year, the system's actuaries project that the Old Age Survivors and Disability fund, otherwise known as Social Security, will eventually run out of money. In 2000, they thought the assets of this fund would be exhausted by 2032. Two years later, it was revised to 2037.

Last year, the projected exhaustion date was moved to 2041. This year's report moved it up again -- projecting that the system will run dry in 2037.

For what it's worth, I don't think that Social Security will ever run out of money. If you don't believe me, check the actuaries' low-cost projection (or see my column of April 8, 2008.)

Long-term projections for other items are not even worth the paper they are printed on.

Remember a few years ago, as the housing bubble was inflating, projections were for home prices to rise indefinitely? After all, the logic went, they had risen almost every year in the past.

This belief led people to borrow against their homes, take out exotic mortgages, and buy more home than they could afford, to name just three risky decisions.

Then there is oil. When it reached $147 a barrel back in July 2008, projections of $200, $300 or even more over the next few years were not uncommon.

It closed Monday at just under $70 a barrel, after having fallen to $30 toward the end of last year.

The latest item to join the projection party is the long-range outlook for the federal budget. As you know, it is racking up record deficits now, and these are expected to total some $9 trillion over the next 10 years.

These projections have lots of folks worried, as one might imagine. For example, how will these deficits be funded? What will they do to interest rates and the dollar? And, most important, will the Federal Reserve be forced to monetize these deficits, thus leading to a new round of inflation?

To address this issue, economists inside the Beltway are already looking for ways to raise taxes and cut spending -- even though the economy is still struggling. But a look at past projections suggests that these policy moves might not be needed.

Ten years ago, the federal budget was in surplus. Projections then were for black ink as far ahead as the eye could see. The Fed, for one, was so worried that these surpluses would cause all outstanding Treasurys to be redeemed, thus hampering the central bank's ability to conduct monetary policy, that it considered using securities issued by Fannie Mae and other federal agencies.

Twenty years ago, the deficit was the concern du jour. The Congress passed, and the president signed into law, the Gramm-Rudman-Hollings Act, which called for automatic spending cuts to reduce the deficit if the president and Congress failed to reach established targets. In hindsight, this turned out to be unnecessary.

Somehow or other, unexpected developments have a way of changing what seems to be a certainty. In today's case, it could be such developments as stronger growth, greater productivity, innovation and technology.

As the old expression goes: "Forecasting is very difficult, especially if it's about the future."

Irwin Kellner is chief economist for MarketWatch, and is Distinguished Scholar of Economics at Dowling College in Oakdale, N.Y.

An unlimited supply of energy can solve just about any problem. If you want a predictable forecast go long on anything that produces energy or supports it. Petro, Solar, wind, or bio. Even science fiction stuff like clean coal, clean nuclear, and hydrogen fuel cell can make money in the next ten years."

- Oldrichandwhite | 1:02am Today1:02am 9/15/09

A year after the Lehman Bros. collapse and subsequent credit crisis comes new confirmation that America is falling behind.

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