Talk about the economy is hotter than the coffee served at the truck stop in West Memphis, the third countertop we’ve visited in the last 12 hours.  It’s the graveyard shift, and the waitresses are filling the half-gallon thermoses as fast as truckers can place them on the counter.  The Java Cows in the kitchen are working overtime tonight.

Truckers have been called “the last American cowboys.”  But like their brothers and sisters who build automobiles, they can teach any economist who cares to listen a thing or two about forecasting.  At this truck stop, several miles from the Tennessee state line; at another, down the road in Galloway; and at yet another, further west toward Fort Smith, all of today’s conversations have revolved around commerce and the state of the economy.

The headlights from dozens of 18-wheelers, a caravan of trade, are reflected in the glass that separates us from the elements.  No government economist could centrally plan the commerce flowing through even one truck stop.  Nor could he explain—so simply yet eloquently, on a napkin yet—why independents are registering their rigs in neighboring Oklahoma: Registration fees are lower there than in Arkansas.  A few days later, at the office in Little Rock, a retired trucker conducts a similar exercise in tax policy on a sheet of paper.  Yes, many of Arkansas’ tax rates are higher than her neighbors’, causing businesses to flee and revenues to fall.

This commonsense logic incenses government economists.  One, derisive of those who “count the number of cars in parking lots” and rely on anecdotal information from places such as truck stops, recently told Arkansas legislators that the state’s record $142-million revenue shortfall was unforeseen because it relied on “scientific forecasts” that did not foresee a crisis.  The alleged science, in this instance, is econometrics, mathematical economics.  Soon after he spoke, another $172 million in cuts became necessary when revenues continued to fall.  In June, another $59-million shortfall was announced.

Arkansas is not alone.  Forty states project state budget shortfalls this year totaling $27 billion, according to the National Conference of State Legislatures.  “State revenues are falling faster than golf records in the Tiger Woods era,” NCSL Executive Director William Pond said.  Some conservatives argue that the culprit is state spending increases in the 1990’s, which (like those in Arkansas) exceeded inflation and growth in personal income.  Econometrics, however, has escaped scrutiny.

Yet economists have suffered a black eye in this recession.  A year ago, few predicted anything but continued economic expansion (the exception on Wall Street was Stephen Roach of Morgan Stanley), and you would not have found a government economist publicly predicting contraction.  Government economists have fooled themselves—and state legislators—into believing econometrics is a scientific exercise that can predict the future.  Econometrics relies on a process radically different from analyzing the observations on economic conditions of a truck driver, an autoworker, or—most importantly—an entrepreneur.  Instead, it creates mathematical models from economic variables and data series.  The problem is that, in the real world, these variables constantly change, making the models virtually worthless.  (The late economist Murray N. Rothbard once challenged the econometricians to put their money where their math was by using their models to play the stock market.)

Government econometricians see little relevance in a truck driver’s comments over coffee about shipments being down.  But they should, as should legislators, if those shipments contribute to a decline in the industrial production index (released monthly by the Federal Reserve).  There have been ten postwar recessions (according to the National Bureau of Economic Research), and every time industrial production has fallen for four consecutive months, a recession has occurred.

We should view autoworkers’ stories about layoffs with the same curiosity.  The U.S. Bureau of Labor Statistics maintains employment data on various levels of government and eight private-industry sectors, including manufacturing.  The BLS releases data every month on 95 separate categories.  After World War II, employment in only eight categories has peaked before, or in the same month, as a recession starts.  The largest category to act consistently in this manner is automotive employment.

To their credit, a few Federal Reserve officials have discussed the uses of anecdotal information.  “[It] improves upon our understanding of where the economy is and where it might be going, most notably by providing information ahead of formal data,” St. Louis Fed President William Poole explained (The Role of Anecdotal Information in Fed Policymaking, February 13).

The process of gathering the information puts us in direct contact with people actually making day-to-day economic decisions.  The information forces us to question the formal data and provides a view of the economy that formal methods simply miss.

The Fed makes extensive reference to anecdotes in its Beige Book releases.  It is also an open secret among Fed watchers that staff economists following key industries such as automotive are on 24-hour call before Federal Open Market Committee meetings, in case Chairman Alan Greenspan has questions about new data and anecdotes.

A well-known Arkansas trucking executive is said once to have asked, “If it weren’t for the high-school graduates, who’d hire all of the Ph.D.’s?”  Econometricians’ careers are invested in post-graduate studies, and they are loathe to acknowledge that theirs is not a hard science.  Instead, they are forever busy building a “better model.”  Not only do they discount the truck driver’s common sense, but many have also forgotten the timeless wisdom of the first forecaster: the farmer.

In eastern Arkansas’ Delta, grain elevators dominate the skyline of small agricultural towns such as Stuttgart, home of the state’s rice industry, and Dumas and McGehee, which grow cotton.  Along Route 65 on the way to Mississippi, there is a small truck stop that serves catfish, hush puppies, and slaw and tops it off with coffee and pecan pie.  The locals are guarded but sometimes friendly with advice.  “There is a natural order to things,” a Delta farmer observes.  “Everything in life is a cycle.”

Individuals who have faith in cycles understand human frailties and the thin line that holds together the social order.  (Man is fallen.)  Those who dispute the existence of a natural order tend to believe that all of human experience—including commerce and economic activity—can be reduced to a model.  In economics, this type of thinking, taken to its logical conclusion, leads to the mistaken belief that central planners can eliminate business cycles.  (Man is perfectible.)

It was March 2001 when we sipped coffee at the truck stop.  Eight months later, on November 26, the National Bureau of Economic Research declared March 2001 as the start of the tenth U.S. postwar recession.  Man, it seems, is not so perfect after all.