SYNOPSIS: The fuzzy math of growth projections and people who forget to count

In the 1970's and 1980's one often read about remote mountain villages where people stayed healthy and vigorous into their 90's, with some individuals reaching extraordinary ages. How did people in these simple, traditional societies achieve such longevity?

The answer, it turned out, was that people in simple, traditional societies aren't very good at counting. There were some quite old people in those villages, but they weren't as old as they thought they were. Of course, one reason people were vague about their ages was that in their societies nothing important hinged on getting the numbers right. In one respect, the story of our vaunted "new economy" is similar. In the last few years of the 1990's the data just kept getting better, culminating in an estimated 5 percent growth rate for real G.D.P. in 2000 -- not an unusual growth rate for a poor country playing catch-up, or for an economy recovering from a recession, but amazing for an advanced economy late in an economic expansion. How did we do it?

The answer, it seems, is that we weren't very good at counting. Last month's revision by government statisticians marked down U.S. growth rates in each of the last three years, with the biggest markdown for 2000. At 4.1 percent growth was good, but not as good as we thought it was.

But there's one difference between us and the villagers: In our society numbers matter a great deal, and fuzzy math can have nasty consequences.

It's clear in retrospect that we shouldn't have taken the original estimates of economic growth too seriously. Anyone who has looked at how economic statistics are constructed knows that they are based as much on educated guesswork as on hard facts. And the guesswork gets more speculative as the economy's center of gravity shifts away from solid, physical products to more ethereal stuff; the biggest item in last month's revision involved a reduction in estimates of business investment in software.

Nonetheless, people who should have known better treated the estimated growth rates as solid data, and in particular took to heart their apparent message that the best was yet to come. According to the figures, the U.S. economy wasn't just growing fast, it was growing at an accelerating pace. And if that continued, all of our worries about the long run -- about the burdens of providing pensions and health care to an aging population -- would simply melt away in the face of a red-hot economy.

Chief among the what-me-worriers was none other than Alan Greenspan. His crucial January testimony in favor of big tax cuts began with a paean of praise for the productivity revolution, "the key factor driving the cumulative upward revisions in the budget picture," and cited with approval long-term projections of an "on-budget surplus under baseline assumptions well past 2030." Seven months later the productivity estimates had been revised downward, and the on-budget surplus was gone.

Mr. Greenspan is still optimistic about long-run growth, as are many other people; they argue that a productivity revolution driven by information technology has decades to run. I would respectfully submit, however, that these optimists have no idea what they are talking about. I don't mean that they're necessarily wrong; I mean that history has repeatedly made fools of people who try to predict future technological developments, let alone the implications of those developments for long-term economic growth.

And most of the mistakes have been in the same direction. Since the 1960's, futurists have consistently overestimated the future rate of technological progress and economic growth. (Rent "2001: A Space Odyssey" or read Herman Kahn's "The Year 2000" if you don't believe me.) The only major upside surprise was the productivity surge from 1995 to 2000 -- and that, it turns out, was partly a figment of our statistical imagination.

So how should our society conduct itself now that the recent past is not what it used to be? Any villager could tell you the answer: Hope for good news but don't count on it. That is, don't commit yourself to tax cuts and spending promises you may not be able to afford.

But of course we have already made those commitments. So the question becomes, will our leaders ever admit that they made a mistake, that we may not be able to afford the full tax cut after all? And the answer is obvious: We should live so long.

Originally published in The New York Times, 9.5.01