January 20, 2000  New centuries are a natural time for people to reflect on the past and look ahead to the future.  Recent history often gives us a glimpse of what lies ahead, because events and activities develop an inertia.  Some evolve to become commonplace and routine.  For the past several months, many writers and scholars have taken the time and given thought to identify the most significant events of the past century and how these might shape the course of world affairs in the 21st century.

Among the most intriguing prognostications for the new millennium are the following:  The US economy will sustain its record breaking economic recovery for the remainder of the year 2000;  however, it's conceivable that the United States' domination of global affairs will diminish and dissipate over the course of the new century.  China's authoritarian political system may gradually and unsystematically give way to an uneven form of participatory democracy that will create even more uncertainty regarding the nation's economic and foreign policies.  The European Union's efforts to establish a monetary union and circulate a common currency (the euro) in the year 2002 will succeed; German marks, French francs, Italian lira, and Dutch guilders will be rendered historical relics and collectibles.  The global economy will recover in the immediate future from its recent recession; globalization in commerce and trade will continue to move forward, but it will face more determined and effective resistance by the opposing forces of protectionism, nationalism, and environmentalism.

The major environmental issue of the 21st century is likely to be water quantity, quality, and control.  There's a very good chance that the world's population will stabilize sometime during the new century;  birth rates are likely to fall dramatically around the globe.  Modern medical science is expected to advance more rapidly than ever before; a cure for cancer would be a welcome development, and it's a good bet that relief for more mundane maladies such as baldness and the common cold are well within the realm of possibility.  Educational institutions will be dramatically transformed into multimedia training and information centers; computers and computer technology will play an increasingly larger role in all disciplines from art to biology, economics, and even philosophy and the humanities.  On-line courses will be the fastest growth division of universities, and an increasingly larger percentage of students will graduate from colleges without ever setting foot on a campus.

There will also be many surprises.  New and totally unforeseen events and developments will astonish and baffle even the most insightful pundits, because it's impossible to know the future course of events to a certainty.  If we pause to think about it, it's doubtful that people, although intrigued by the mystery, would really want to know what's definitely going to happen over the course of their lifetimes, because then they would have no power to change it and life would be a bore.  While we cannot know for certain what will occur in the future, we do have some influence over the course that it takes.  That's partly what makes life so exciting.

"Futurists do not claim to know what will happen in the future," states Edward Cornish, President of The Futurist magazine, "Because the future depends so much on what we humans do.  If we could predict the future with certainty, it would mean that the future could not be changed.  We could not consciously create it.  Yet this is the main purpose of studying the future: to look at what may happen if present trends continue, decide if this is what is desirable, and, if it's not, work to change it.  Knowing the trends empowers us for effective action."

There is a fairly common set of economic, environmental, and social variables that futurists frequently analyze and forecast.  The table below summarizes these.  Annual projections for national GDP, inflation rates, and employment trends are common place.  Specific economic variables such as interest rates and foreign exchange rates are continually being monitored and predicted.  People also contemplate tomorrow's weather, what their government is going to do, and when and where the next war will break out.

Variables Commonly Predicted by Forecasters
Macro Economic
Specific Economic
Other Social
GDP by country
interest rates
GDP by sector
stock prices
natural disaster
inflation - food/energy
exchange rates
air/water quality
social values
inflation - other goods
commodity prices
animal life
government policy
unemployment rate
plant life
employment trends/careers

crime rates


The Nature and Methods of Economic Forecasting

Economists are often called upon to make predictions about the future course of economic events.  For some economists, this is the essence of their job description.  Yet, economic forecasting is often misunderstood by non economists.  Economists are pretty good at explaining how the economy works and what caused a recent sequence of events to occur.  They are less effective at being able to perceive what is currently happening, and they are least effective at predicting the future.  Most economists know this, and that is why good economists rarely (if ever) say that this or that will happen when making their predictions.  Economists do not make predictions in the same way that fortune tellers, astrologers and palm readers do.  Instead, economists' forecasts are constrained by a series of  if-then propositions and enveloped in a set of probabilities.  For example, an economist might make a simple technical forecast for a nation's GDP by stating, "If the present trend continues, then the GDP will increase by approximately 4% next year and there's a good chance that this will happen because there's nothing in the most recent data to suggest otherwise."

Economist have a number of advantages over other people when it comes to thinking critically and analytically about the cause-effect relationships between economic variables and the direction a specifically defined variable might go in the future.  For one, they are familiar with the variables in question, their measurement, and the institutions that shape their course.  Second, they spend a lot of time analyzing the interdependent variables and become experienced at recognizing which ones are the most closely related and significant.  In the process, they develop a sixth sense or intuition.  Third, they have a good set of theories that have proven over time to be reasonably reliable to work with.  Fundamental economic forecasting involves examining the forces that shape the economy's course and not merely extrapolating or extending the past into the future.

One of the most useful models that economists use for predicting macro economic variables is that of Aggregate Demand and Aggregate Supply.  This model is so generally accepted and recognized by the economics profession that it would be difficult to find an introductory economics textbook that doesn't include it as the main topic for one or more of  its chapters.  Using this model to formulate an economic forecast is fairly easy as long as one understands that it represents a series of  if-then propositions.  The difficulty lies in knowing ahead of time which variables will, in fact, change to alter the economy's course.  For example, if Aggregate Demand (AD) decreases, then the economy will predictably contract, assuming Aggregate Supply (AS) is holding constant.  However, one cannot know to a certainty when or to what degree AD will decrease, nor whether or not AS will remain constant.

Alan Greenspan, Chairman of the Federal Reserve System's Board of Governors, reiterated in his speeches on more than one occasion throughout last year that the US economy had both strong AD and AS.  In his opinion, the US economy was able to sustain a relatively high rate of growth in its GDP without causing inflation, because the price increasing effects of high AD were being offset by equally powerful price decreasing effects on the supply side due primarily to recent increases in productivity.  He then surmised that if AD were to continue its course in the future at the same time AS slowed its rate of increase, then inflation would emerge.  That's why the central bank began to undertake restrictive (higher interest rates) monetary policy.  This demonstrates how predictions are used to determine policy which, in turn, alters the future course of the economy.  Because the central bank has undertaken a tighter monetary policy, forecasters are predicting a slower rate of growth for the US economy this year than last year.  Higher interest rates can slow down AD, because it becomes more difficult for households and businesses to borrow and spend money.

The pictorial below shows the playing field of The World Game of Economics with the model of Aggregate Demand (AD) and Aggregate Supply (AS) superimposed over it.  Chairman Greenspan surmised that the US economy was heading in the direction (left to right) from E0 to E2.  However, he was concerned about the possibility of the economy heading (diagonally up and to the right) from E0 to E1 in the future, so he began to undertake restrictive monetary policy actions to preempt the possibility of demand-pull inflation.

The model of Aggregate Demand (AD) and Aggregate Supply (AS) is used extensively by many economists both consciously and unconsciously to predict the future.  If AD and AS both increase in the US economy (from AD0 to AD1 and AS0 to AS1), then the rate of growth in GDP will increase (from E0 toward E2) and prices will remain relatively stable.  However, if only AD is increasing, then the US economy will move toward E1 in the future and prices will rise.  If a restrictive monetary policy is used in a timely manner to diminish AD, then the economy will remain at or return to E0.

Economic Forecasts for the Year 2000

The direction that the US economy takes has a profound influence on the rest of the world's economies.  That's because of the US economy's sheer size and the extent to which it is globally integrated with the others.  By the end of the 1990s, it became clear that the rest of the world had to a large degree become dependent on the strength of the US economy to offset the recessionary trends that were taking place within their own domestic economies.  The general consensus of economic forecasts for the year 2000 suggests that (in spite of higher interest rates) the US economy will remain strong throughout the year and, partly for this reason, the other economies around the world will begin to effectively recover from their 1997-1999 recessions.

One of the more typical economic forecasts for the US economy was released last month by the Enterprise Group of Funds.  Their forecasts for the year 2000 include the following:  GDP will increase by 3.23%; the rate of inflation (CPI) will be approximately 2.4%; and by year end the DOW Industrials will climb to 12,000 or higher, 30-year Treasury Bond Yields will be at 6.03%, and the Fed Funds Rate will be 5.6%.

The combination of a reasonably strong US economy combined with the fact that other economies around the world have already begun to embark on economic recovery suggests that the outlook for the global economy in the year 2000 is better than it has been for the past three years.  Already, the World Bank and other multinational institutions have upwardly revised their earlier forecasts for many economies in Europe, Asia, and Latin America.

Forecasts for the Remainder of the New 21st Century

When we move away from short-term (cyclical) forecasting on a year-to-year basis to long-term (secular) predictions over the span of decades or a complete century, the variables become less precise and more qualitative.  In many ways they are more interesting and imaginative.  They are also of greater consequence, because they are more encompassing and they will comprise a greater share of our lifetime.

Consider the following questions:  Will the extent of globalization that accelerated at the end of the 20th century intensify in the decades ahead, or will the world's economies retreat to greater degrees of isolationism and independence?  Will multi-national agencies play a larger or smaller role in economic activity in the years ahead?  Will we be able to put an end to hunger and abject poverty through more effective distribution mechanisms or will the rich just get richer and the poor just stay poor?  What new advances in technology will emerge and to what degree will they shape our values and behavior?  Will medical science cure some of our most dreaded diseases?  Will new and even more lethal and resistant human diseases emerge?  Will air and water quality erode even further, or will we undertake cooperative policies to preserve and improve the natural environment?  Which endangered species will literally disappear, if any?  Can we prevent this from happening, or is it too late?  None of these questions are easily quantifiable, but they are nevertheless important to our lives in the future.

Two of the more interesting and somewhat related hypotheticals to emerge from recent trends are the prospects that globalization will stall and the role of the United States economy will wane in the 21st Century.  "Whatever else they may have been, the '90s were the decade of globalization," writes MIT Economics Professor Paul Krugman in his new syndicated column released earlier this month.  "We are now living in the era of the Second Global Economy -- a world economy reconstructed, largely under American leadership, over the past half century."  Krugman notes that the world was in a similar state of trade liberalization earlier in the century, only to have it all fall apart -- beginning with WW1, followed by the Great Depression, and culminating with WW2.  He warns that even today "the global idea is very much a minority persuasion, all too easily portrayed as an ideology of and for a rootless cosmopolitan elite that is out of touch with ordinary people.  But though the facts may be on the side of the free traders, though global trade really ought to have mass public support, one can hardly deny that the opponents are winning the propaganda war . . . .  The big economic question for the next century, in other words, is really political: Can the Second Global Economy build a constituency that reaches beyond the sort of people who congregate at Davos?"

"It is hard to overstate U.S. pre-eminence," echoes Robert Samuelson in one of his recent Newsweek articles.  "Given this vast U.S. dominance, it may seem outlandish to suggest that the next century won't belong to America.  Yet this is the best bet."  According to Samuelson, it doesn't matter whether trade liberalization and democratization proceed further in the 21st century.  The power and influence of the United States is likely to diminish in any event.  Either other countries will form isolated coalitions of resistance against the United States in reaction to its recent dominance or they will continue to grow rapidly and prosper through globalization and thereby account for an increasingly larger share of world economic activity.  Either way, US influence on global affairs will wane in the new century according to this prognosis.

Future perspectives on global environmental issues were recently published by the United Nations Environment Program (UNEP).  The Scientific Committee on Problems of the Environment of the International Council for Science conducted a survey among 200 scientists in 50 countries.  According to this report, "Most of the responding scientists expect that the major environmental problems of the next century will stem from the continuation and aggravation of existing problems that currently do not receive enough policy attention."  The issues cited most frequently by the scientists were climate change, the quantity and quality of water resources, and deforestation.

On the socio-economic front The Futurist magazine proffers some fascinating predictions for the 21st century.  Among its "Top 10" forecasts for 2000 and beyond garnered from leading scientists, researchers and scholars and released in November of last year are the following:  "By 2010, bimonitoring devices that resemble wristwatches will provide wearers with up-to-the minute data about their health status.  The twenty-first century could see widespread infertility and falling birthrates.  Ninety percent of the world's 6,000 languages could go extinct by 2100.  Water scarcity could threaten 1 billion people by 2025.  Human population will level off by 2035, while pet populations will increase dramatically."

In a separate special report the magazine outlined ten thought provoking forecasts including the prospects that "Nanotechnology, the micromanipulation of materials at the molecular level, will soon bring forth fantastic new breakthroughs such as teeth as hard as diamonds, a baldness cure, and wrinkled skin made smooth again.  Information warfare -- attacks on complex information management systems and infrastructures -- will become a growing threat to world security and could severely disrupt flows of electric power, money, air traffic, etc.  Schools will be transformed by interactive multimedia and intelligent tutoring systems.  These new technologies will adjust their instruction to the needs and interests of each student to make learning more effective and more fun."

Professor N.D. Cator
20th Century                        21st Century
Before and After a Cure for Baldness

Professor N.D. Cator's classroom in the 21st Century will include around the clock access to television programs and the internet, a large flat screen high definition monitor, and a network of computer terminals for students in the class room.  Software programs will interactively tutor students in the basic principles and policies being taught by the professor.  Teleconferencing and on-line courses will be common place.  Textbooks will still be the principal tool for learning the subject matter, but many new computer based materials will be used by both teacher and students alike.

It's an overused cliché to remark at the end of an article on forecasting that only time will tell whether or not any or all of our visions of the future will actually transpire.  But there is more to it than the world turning on its axis and revolving around the sun.  One of the most significant beliefs to emerge from the 20th century is that man has more control over his destiny than previously thought.  UNEP's GEO-2000 report on environmental issues stated this modern credence most succinctly:  "Present day actions have consequences that reach far into the future.  Conversely the 'future' is playing an increasing role in the present.  The future impacts of today's decisions are becoming more and more prominent in current-day policy making."  What we do today to shape tomorrow based on our perception of what we think is likely to happen if we don't do anything will determine whether or not we regret our action or inaction.  We live the drama of  the script we write.  Good economic analysis and forecasting helps us make the world a better place.

Sources and Recommended Links:

The Futurist magazine: http://www.wfs.org

United Nations Environment Program: http://www.unep.org

http://www.stratfor.com (private global intelligence service company)

http://rfe.wustl.edu  (See links to resources for economics in consulting and forecasting)

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