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Understanding Our Ignorance
by Bernard Wasow


October 27, 2004

October 28 marks the 75th anniversary of Wall Street's Black Tuesday -- the stock market crash that marked the beginning of the Great Depression. That infamous anniversary is worth noting as we consider the future of our Social Security system because Congress requires the Trustees annually to provide forecasts of the system's financial outlook over the next 75 years.

With change accelerating all the time, it would be foolish to think that the next 75 years will hold fewer surprises than the last 75 with respect to technology, politics, culture, and economic activity. How clearly could we have foreseen the world of October 2004 in October 1929? The answer, of course, is that virtually no one foresaw the Great Depression, World War II, the atomic bomb, The Civil Rights Movement, or any of the other most important developments of the 20th Century.

In 1929, the counterpart of the Internet was the radio. The counterpart of containerized shipping was refrigeration. These were the new technologies that excited the imagination of 1929. Indoor plumbing was a distant dream for much of the population in 1929. For the lucky few who had made killings on the ever-rising stock market, financial ruin lay just around the corner.

Not only is it preposterous to imagine that the wise men of 1929 could have predicted what would happen over the next 75 years, we don't even understand what happened over the last 75 years. As Benoit Mandelbrot and Richard Hudson wrote in the Financial Times of October 22, "After 75 years you might think that economists understand what happened. Think again...Mainstream economists are not much closer now to understanding volatility in markets than they were 75 years ago." According to standard financial theory, events like the big stock market declines of 1929, 1987, and 1998 are so improbable that any one of them would be almost impossible.

So if we don't understand our financial history, what about other aspects of the past 75 years? Perhaps the sages of 1929 would have made better predictions about demographic changes. Predicting the baby boom in 1929; not even close. Technical change? Nope. The shift of immigration from Europe to Latin America and Asia? Forget about it.

In fact, we are guessing if we make forecasts even one decade ahead. We just cannot foresee what our future holds. We can make sensible and prudent judgments, and we can try to protect ourselves against the slings and arrows of outrageous fortune. But the future is mysterious; it is hubris to think otherwise.

So as we contemplate Social Security on this 75th anniversary of the beginning of the Great Depression, let us be grateful for the small bright shaft of predictability that Social Security casts on our futures, and reject the foolishly confident forecasts of what will happen over the next 75 years. Let us also remember that if cast loose from the guarantees of Social Security, we could be in for some surprises.

Bernard Wasow
New York, NY - USA


Note: Bernard Wasow is a senior fellow and economist at The Century Foundation, a nonpartisan, not-for-profit policy research foundation.



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