Clifford Winston, 1993, Economic deregulation: Days of reckoning for
microeconomists, Journal of Economic Literature, 31, 1263-1289.
I have often wondered why academic forecasters are not more closely involved with
forecasting the outcomes of social and economic legislation. However, I was asked
to comment on forecasting procedure concerning the impact of Clintons health plan
for the US. Because this plan adds regulation to an industry that is already subject to
much regulation, an obvious first step is to examine the outcomes of previous efforts to
regulate or deregulate industries. This led me to the fascinating study by Winston. He
examined the impact of deregulation by finding studies that had predicted the effects of
deregulation in various industries, and then comparing these forecasts with the actual
outcomes. His study has some important messages for forecasters.
- Scholarly research does affect policy. In 1887, when the US government was moving
towards a national policy favoring regulation, scholarly writings were in support of such
a change. Of course, this research typically lacked an empirical basis. The empirical
research over the past half century has concluded that economic regulation has negative
effects for society. This research has apparently contributed to extensive changes. From
1977 to 1987, the percent of the US GNP that was regulated fell from 17% to less than 7%.
- Subjective evaluations often provide poor criteria. The public often perceives
that deregulation is harmful to them. This is because many people start with the
impression that deregulation will be harmful. Their unaided observation then leads them to
retrieve evidence that confirms their beliefs (Wason, 1968). Winston reports on a
Business Week survey in 1988 showing that only 32% of the respondents thought the
airline deregulation of 1987 was a good idea. Thus, in evaluating the impact of
deregulation, Winston relied on objective measures of the outcomes. As it turned out, the
use of objective measures led to the conclusion that deregulation is beneficial. The
deregulation of airlines, railroads, trucking, telecommunications, cable TV, and banking
led to gains of at least 8% in the parts of the GNP affected by the reforms. This
represents a gain of over $40 billion (1990 dollars) .
- Forecasts can provide good benchmarks for the evaluation of experiments.
Before and after experimental designs are often deficient because other things
change. Evaluations that use ex ante forecasts offer advantages in that they take account
of the other things that are expected to change. Winston conducted what seems to be a
thorough search for studies with ex ante forecasts (although he does not tell how the
search was conducted). He found almost 30 studies that had predicted the effects of
deregulation. He then compared the ex ante predictions with the outcomes. The ex post
analysis is informal. For example, none of the forecasters of the effects of banking
deregulation had examined the impact of the governments policy of insuring the
investments made by savings and loan institutions.
- The use of complex methods led to no obvious gains in forecast accuracy.
- The use of complex theories seems to have been associated with less accurate
prediction. The simple economic prediction that regulation is harmful to consumers
proved to be robust. Also, wages typically went down, as predicted. Employment predictions
varied depending upon the impacts of improved efficiency (which would reduce employment)
and increased consumer demand (due to improvements in price and service).
- The biggest errors in the economists predictions came about when they failed to
consider important causal factors. In particular, the omitted factors usually involved
technological change. My speculation is that this is likely to occur when factors that
have been constant in the past change significantly over the forecast horizon. While these
factors cannot be identified by formal analyses of historical data, they can sometimes be
anticipated by asking a number of experts to brainstorm the factors that might possibly
change in the future. When one looks at the problem retrospectively, it seems surprising
that certain factors were overlooked. Surely someone would suggest that the
governments policy of insuring against loss in investments by savings and loan
institutions might have an influence on the S&Ls investment policies, or that
the failure to develop an efficient pricing scheme for airports would create service
Winstons paper deals with an important subject. The design, which compares
actuals against forecasted results, represents a marked improvement over the commonly used
before-after studies in economics. Finally, the writing is a model of clarity.
Watson, P.C., 1986, Reasoning about a rule, Quarterly Journal of Experimental
Psychology, 20, 273-281.