Investors: Avoid Fretting over 10-Year Projections

Posted Dec 27th 2009 1:20PM by Joseph Lazzaro
Filed under: Analyst Reports, Forecasts, Columns, Personal Finance

There's a baseball play-by-play announcer with a pretty good team, whose made a small fortune uttering phrases like, "I tell you what you can do with that prediction: You can take that prediction and throw it in the East River. That's how much that prediction is worth."

In general, the same can be said about economic/budget projections. A little advice regarding economic and budget projections: don't work yourself up in to a lather over them.

The reason? As any social scientist, economic modeler, or statistician knows, a change in only one variable can lead to a considerable change in a projection 3, 5 and 10 years out. Now imagine if two or three variables change in a 20- or 25-variable economic model? Indeed, one could be left with a very different view of the future.

Hence, regarding the 2009 U.S. health care reform bill, critics who say the legislation won't cut the U.S. budget deficit by $132 billion over 10 years are correct: it could cut the U.S. budget deficit by much more than that -- by $200 billion or $500 billion. The projection is dependent on so many factors that can vary widely -- not the least of which concerns the ability of Americans to choose healthier diets and exercise regularly.

Fiscal/Economic Analysis: Another key variable concerns the ability of public health care officials to eliminate waste and redundancies, particularly in Medicare and Medicaid. What the nation may find is that small changes can result in tens of billions of dollars saved annually, with no reduction in health outcomes -- saving the nation hundreds of billions of dollars over a 10-year span.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

Tags: budget deficit, forecasts, health care reform, predictions, projections