We read predictions of the direction of the economy in the next quarter, next year, even next decade and we wonder: how do they do it? It’s an important question because public policy is based on it, the national mood is influenced by it, and to large extent, it can even be a self-fulfilling prophecy by determining corporate plans. After all, aren’t the predictions supposed to be based on corporations’ plans rather than the other way around?
Economists make their predictions after feeding a lot of data into their macroeconomic models, add a few fudge factors to account for lack of precise knowledge, make a few totally subjective assumptions and voilá! We can predict with a great degree that the economy will shrink, will stagnate, will muddle along, or will grow at a torrid pace –all depending on the fudge factors and assumption that were employed. This type of analysis is top down –it feeds into the model aggregate numbers of employment, industrial production, and so on. What is wrong with this type of analysis is that tends to extrapolate from the past; it makes the tacit assumption that past is prologue; past performance predicts future performance. This is the reason why in the 90’s we were caught by surprise by the technological revolution, and then- once the new data were fed into the models we were surprised again by the collapse of the technology bubble at the end of that decade. In the same vein, these models failed to predict the end of the real estate bubble. And, I contend, the models predicting where healthcare is going to fail. In other words, top-down analyses fail to predict inflection points.
One might argue that inflection points, by their very nature are impossible to predict. And when you look at the records of self-appointed ‘futurists’, it confirms the view that the future cannot be predicted with any degree of certainty.
One of my favorite political analysts is Nate Silver, who in his “Five Thirty-Eight” column in the New York Times ignores the rhetoric and bluster and looks at only one thing: the numbers. My sort of “just the facts ma’am” guy. In the August `18 2012 NYT titled “Does a Bullish Stock Market Predict a Faster Recovery?” The essence of the article is in this quote:
“In my database, I looked up the instances where economists predicted that G.D.P. growth would be 2.5 percent or lower — a bearish forecast — but the stock market had grown by 10 percent or more over the prior six months.
On average in these cases, G.D.P. growth turned out to be 3.6 percent — nearly twice the 2.0 percent rate predicted by the economists.
Nor was the discrepancy caused by one or two outlying cases. In 14 of the 15 instances where this condition occurred, G.D.P. growth beat the economists’ forecasts.”
The reason for the superior predictive power of the stock market over the economists’ models is quite simple: when it comes to investing, investors check their assumptions, political opinions, and “fudge factors” at the door, because they are putting their own money where their collective mouth is. They, by and large, listen to what the CEOs of Caterpillar or Wal Mart have to say about how their businesses are doing and what the outlook is. These are “close to the ground” reports, unlike the predictions made from 30,000 ft. This is bottom-up analysis.
The future of healthcare
If you think that the stock market is irrelevant for you because you are not an investor –think again. If Obama loses the Republican administration will gleefully dismantle the Affordable Care Act “on day one”.
Based on the historical relationship between G.D.P. growth and jobs growth, a 2 percent G.D.P. growth rate would be associated with the creation of about 110,000 jobs per month. But a G.D.P. growth rate of 3 percent would be associated with 165,000 jobs per month instead.
The stock market went up by about 19% year over year, which implies a G.D.P. growth of 2.5 percent to 3 percent over the next two quarters, rather than 2 percent as from the economists’ forecasts. At 2% Obama’s chances of getting reelected are pretty iffy; at 3% the election is his to lose. The stock market predicts a Democratic win; ACA will survive.
Where is health care going?
The same kind of top-down analysis applied to healthcare suffers from the same weaknesses as the economic analyses. Budgeteers extrapolate and therefore fail to predict inflection points. They fail to take into account what’s happening on the ground, and underground.
There is ferment going on in healthcare. New models of better and more cost-effective healthcare delivery systems are sprouting like mushrooms after the rain. Kaiser Permanente and the Mayo clinic are delivering better care at a fraction of the cost. Small companies like We Care open clinics at the workplace with well-compensated nurses and primary care physicians at tremendous savings to the employers, nice profits for the company, and excellent healthcare for the employees. Urgent care clinics are opening in shopping malls and are changing the basic relationship between patient and doctor. Prevention, once viewed as academics’ naïve pipe dream, is coming into its own. Accountability has become the lodestar: the model of physician compensation will, sooner or later, transition from fee-for-service to pay-for-performance.
The revolution is happening not only in the delivery of care but in the care itself. Cost estimates of healthcare factored- in a huge increase in the cost of type 2 diabetes and Alzheimer’s, but could not possibly predict the huge strides being made in the development of drugs to treat these diseases. The genomic revolution is happening in front of our eyes, promising to change medicine as we know it. Young entrepreneurs are creating new devices, new apps, new approaches –all designed to make healthcare better, faster, cheaper. How do you feed this bubbling ferment into spreadsheets? None of it is in the models of the CBO. On the ground, things look a lot better than from 30,000 ft. up.