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Forecasting versus Extrapolating

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

One year on from the Rudd 2020 policy summit, we have further evidence of how poor we are at forecasting and what can go wrong when governments start thinking they can foretell the future.

A year ago, Prime Minister Kevin Rudd assembled 1000 Australians who he labelled our best and brightest to consider policy options for the country's future at the Australia 2020 Summit.

Taken at his word, the Summit would be a critical element in the country's longer term policy development.

A year later, what did our best and brightest contribute? Arguably, by missing entirely the biggest issue to confront the world in decades, they contributed nothing much at all.

Not only has the decision making environment changed dramatically but decisions are now being taken, almost weekly, involving tens of billions of dollars with scant regard to the ideas they contributed.

Of course, the reason for their redundant effort is a global credit crisis and ensuing global recession. Some might consider it a tad unfair for Rudd's 1000 to be judged on their failure to anticipate our current economic woes but they were, after all, supposed to be the best policy minds at our disposal and few qualified their recommendations by saying that their suggestions might prove wholly impractical. They put themselves in the firing line.

With the benefit of some hindsight we can see that there were probably too many single issue participants and too few capable of looking at the bigger picture.

Our current policy emphasis is on solving an immediate predicament. Little emphasis is being placed on what might happen a decade from now. The working assumption is that any future policy difficulties will be far less daunting than those we are confronting currently .

This is wholly at odds with the implicit rationale for the Summit, namely, that today's decisions always need to have an eye to the future.

Rudd's Summit fell into the basic trap faced by all forecasters of putting too much emphasis on conditions in the immediate past when thinking about the future. They missed the important distinction between forecasting and extrapolating.

Rudd's 1000 implicitly extrapolated the most recent set of conditions. In doing that near the top of an economic cycle, they assumed away many of the constraints that would otherwise apply to their proposals, rendering them unrealistic propositions for the world in which their ideas would be implemented.

The events of the past year highlight starkly how quickly ideas can become redundant. The idea of limiting the role of government in economic decision-making which had prevailed for more than two decades has given way to a view that government should actually play a pivotal role in allocating capital.

The provision of telecommunications infrastructure is a topical example of this changed mood. Driven by the 1990s privatization fad, the Labor government began to sell Australia's hitherto publicly owned telecommunications infrastructure, a task completed with some zeal by its Liberal Party successor in government.

There were some minority dissenters but widespread support for the government to quit telecommunications infrastructure ownership. Government ownership was risky.

Technology was changing at a revolutionary pace. There were many views about how the technology would be used. Governments could not react speedily enough. But even at their quickest, most doubted governments could consistently make the right choices. Nor, with pressing claims on their finances, could governments commit to fund an efficient and technologically leading edge telecommunications system.

These views were formed largely in reaction to the circumstances of the time. Today, the circumstances of the time, extrapolated indefinitely, dictate a reversal of what not so long ago had seemed such eminently sensible ideas.

Today, it seems that the private sector has turned off the investment tap. Its capacity to innovate has been sapped. Funding for infrastructure has slowed to a trickle. Governments must step in.

This is a reasonable conclusion if future conditions are simply going to be an extrapolation of the present. But this is unlikely. We will probably return to a time in which technology shifts will be prevalent and risk taking more widespread. Simultaneously, governments will again be under pressure to cut their debt.

In this situation, governments will once again be judged too slow to react and there will be urgent entreaties for them to get out of the way as they potentially lock the nation into costly and obsolescent technologies that inadequately cater to specialist needs.


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