1-in-3 chance of going over fiscal cliff, expert says

The chief economist at UBS makes a gloomy prediction. But investors should take these forecasts with a healthy degree of skepticism.

By Jonathan Berr Dec 6, 2012 2:14PM
Image: Crystal ball (Randy Allbritton/Getty Images)The alarm bells are being rung -- rightly so --  about the fiscal cliff, a calamitous series of tax hikes and government spending cuts that experts agree would send the U.S. economy teetering into a recession if Congress fails to act by the end of the year.

"The risks are quite high indeed," said UBS chief economist Larry Hatheway in an interview Thursday on CNBC. He placed the odds of a fiscal cliff at "greater than a 1-in-3 chance," adding that "I don't think the markets have any concept of that."

Hatheway's prognostication is far gloomier than the views espoused by economists surveyed by the Wall Street Journal, who placed the odds of the fiscal cliff happening at 17% in October. In July, UBS put the odds of the fiscal cliff having its "full theoretical impact" at less than 5%, according to Business Insider.
 
People should be worried about the fiscal cliff, but let's put this in some perspective by examining the odds of other things. Cardiff University pegs the odds of catching a cold in winter at greater than 1 in 4. According to "The Book of Odds," the chances that a driver will get stopped by the police are 1 in 11.48. Conversely, the odds of man dating a supermodel are about 1 in 178,100.

Can anyone say that the odds of Congress failing to avert an unprecedented fiscal calamity -- which may never occur again -- are as much or greater than these events which have happened numerous times in the past and will no doubt reoccur in the future? I am not so sure.

The difference between these predictions and those regarding the fiscal cliff are data.  Scientists can make reasonable assumptions about the future based on data of what has happened in the past. They can't "predict the future" because nobody can. People get lots of colds and traffic citations, and a few hearty souls date super models. Even forecasting the weather has gotten better in recent years. None of this applies to the fiscal cliff, which, thank God, is unprecedented. It's close to impossible to calculate the odds of something happening which has never happened before and probably won't happen again.

Perhaps these soothsayers have sophisticated computer models that input every kind of potential variable to examine all the potential outcomes. But even those sophisticated tools have their limits. Take the Gallup Poll, for instance, wrongly predicted that Mitt Romney would win the presidential election. In fact, Nate Silver of The New York Times' FiveThirtyEight blog noted that the firm has had "three poor elections in a row."

Let me reiterate that the fiscal cliff is a bad thing and that Congress must do everything in its power to avert it. But anyone who thinks they can accurately calculate the odds of it happening is full of themselves. Investors shouldn't take these forecasts with a grain of salt. It's more like a truckload.

--Follow Jonathan Berr on Twitter @jdberr


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