The 3 Biggest Predictions About the Economy That Never Came True

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Last week, I wrote that "most of what was expected to shape the past 30 years never happened, and what did shape the past 30 years was never expected." We live in an unpredictable world, but this doesn't stop experts from making divine forecasts. Predictably, their collective track records stink. As Philip Tetlock, a U.C. Berkeley professor who studies expert predictions, put it, most experts could be beaten by a "dart-throwing chimp." Yet we listen to them. Intently. With confidence.

At least one reader disagreed. In an email, he challenged me to elaborate on three mainstream (not fringe) predictions that never came true.

One could write volumes of books on this topic, and a few have. But challenge accepted. Here are three predictions about the economy that never came to pass.

1980s: Japan will take over the globe
In 1986, Gore Vidal wrote that in the face of Japan's climb to economic dominance, "There is only one way out. The time has come for the United States to make common cause with the Soviet Union." His advice on the Soviets was provocative, but the idea that Japan owned the future was nearly ubiquitous.

In 1991, former MIT dean Lester Thurow, wrote that, "If one looks at the last 20 years, Japan would have to be considered the betting favorite to win the economy honors of owning the 21st century."

In 1988, former Reagan official Clyde Prestowitz said, "The American century is over. The big development in the latter part of the century is the emergence of Japan as a major superpower."

In his book Trading Places, Prestowitz elaborated: "The power behind the Japanese juggernaut is much greater than most Americans suspect, and the juggernaut cannot stop of its own volition, for Japan has created a kind of automatic wealth machine, perhaps the first since King Midas."

Michael Crichton -- not exactly an economic analyst, but widely read nonetheless -- wrote in 1992 that "Sooner or later, Americans must come to grips with the fact that Japan has become the leading industrial nation in the world. The Japanese have the longest lifespan. They have the highest employment, the highest literacy, the smallest gap between rich and poor. Their manufactured goods have the highest quality. They have the best food. The fact is that a country the size of Montana, with half our population, will soon have an economy equal to ours."

It never did. These predictions weren't just wrong. They were the sheer opposite of what happened. Japan's stock market and real estate market collapsed in the 1990s. Its economy has been in an unmitigated slump ever since, spending the better part of two decades fighting deflation. It is now the most indebted industrialized nation in the world.

What went wrong? In the most simplistic terms, bulls focused obsessively on Japanese managerial techniques. The nation did have some great managers, particularly in comparison to American businesses like General Motors (NYS: GM) , which were failing hand over fist. But what went mostly ignored was that Japan's boom was based on debt and overinvestment, not productivity. That created a bubble of epic proportions. When that bubble burst, the chickens came home to roost. Twenty years later, they're still roosting.

Every decade for almost a century: The world will soon run out of oil
In 1914, the U.S. Bureau of Mines predicted American oil reserves would be depleted in 10 years. In 1939, the official prediction was 12 more years before the wells ran dry. In 1951, the Department of Interior warned that we only had 13 years left. In 1977, President Jimmy Carter warned that the early 1980s would mark a point of no return, where oil prices could only go one way: up.

Over and over again, experts have predicted the end of the oil. Over and over again, they've been wrong. By the late 1990s, oil was so cheap that several major exporting nations sat on the brink of bankruptcy.

Oil is finite, of course. But those predicting that the end is near routinely overlook two key points. One, higher oil prices give oil companies incentive to find more supply and invent new extraction techniques. In 1970, global oil reserves were 550 billion barrels. By 1990, it was 900 billion. By 2009, 1.3 trillion barrels -- and that doesn't include many forms of heavy oil. Companies such as ExxonMobil (NYS: XOM) and Chevron (NYS: CVX) have become some of the most skillful engineers in the world. When the price is right, they have every incentive to be.

Two, demand can't just be extrapolated into the future. Price changes behavior. High oil prices of the 1970s sparked demand for fuel-efficient compact cars. When oil prices spiked in 2008, demand for trucks and SUVs plunged, public transportation usage surged, and a newfound urgency in hybrids and electric vehicles was born. Despite a much larger economy, American oil consumption in 2009 was lower than it was in 1978. The cure for high prices is higher prices, as the saying goes.

Calling for the end of oil underestimates the same phenomenon Thomas Malthus did when he predicted more than 200 years ago that the world was destined for mass starvation: Humans have an incredible ability to adapt. In Malthus' case, the world didn't starve because agricultural technology flourished. In oil's case, high prices cause consumption to fall and exploration to rise. Things adjust, and the world keeps chugging along.          

2001: The national debt will be repaid within a decade
In his first State of the Union address in 2001, President George W. Bush set a goal: "I hope you will join me to pay down $2 trillion in debt during the next 10 years," he said. "At the end of those 10 years, we will have paid down all the debt that is available to retire. That is more debt repaid more quickly than has ever been repaid by any nation at any time in history."

Others were even more optimistic. The nonpartisan Congressional Budget Office projected that the nation would effectively be debt-free by 2009.

The Economist fretted about the problems this would cause. "What happens to monetary policy and to the markets as government debt disappears? And what happens to the budget surplus after the debt is paid off?" it wrote in 2001.

There was plenty to worry about, but not for the reasons exp ected. In 2001, the CBO forecast a cumulative 10-year surplus of $5.6 trillion. In reality, it was a cumulative deficit of $6.5 trillion. That $12.1 trillion miss might be the largest forecasting fumble in the history of mankind.

What happened? First, 2001 estimates were based on projections that the dot-com boom would continue indefinitely. It didn't, of course. Second, several rounds of tax cuts, a 2002 recession, two wars, and an unfunded Medicare expansion pushed the budget into the red. Later, the 2008 financial crisis, a stimulus package, and more tax cuts sent it over the edge.

The cause of this oversight is similar to the Japanese forecasting slip: Forecasters took recent trends, drew a straight line into the future, and declared victory. The 2001 forecast essentially predicted a decade of no recessions, no wars, and no political myopia -- this in a country whose history is littered with all three.

Skeptics, unite!
This isn't meant to point fingers. It's to accept that the experts whose predictions we rely so heavily on are fallible people operating in an unpredictable world. The appeal of predictions is natural -- who doesn't want to know what the future holds? -- but the collective track record of expert judgment speaks for itself. Experts have been wrong in the past. They'll be wrong in the future.

Just as certain: We'll still listen to them. Intently. With confidence.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributorMorgan Houselowns shares of Exxon and Chevron. Follow him on Twitter @TMFHouselMotley Fool newsletter services have recommended buying shares of Chevron and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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