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What value are economists to our society?

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Saturday, 5 September 2009 14:23 by Ad astra

Clearly, banks, large companies, government instrumentalities and forecasting firms believe the employment of an economist on staff is valuable, despite the high cost of top professionals.  But what value are economists to the man in the street?

According to the US Bureau of Labor Statistics “Economists study how society distributes resources, such as land, labour, raw materials, and machinery, to produce goods and services. They may conduct research, collect and analyse data, monitor economic trends, or develop forecasts. Economists research a wide variety of issues including energy costs, inflation, interest rates, exchange rates, business cycles, taxes, and employment levels, among others.”   A variety of specialist economists are described: microeconomists, industrial economists or organizational economists, macroeconomists, monetary economists or financial economists, international economists, labour economists or demographic economists, public finance economists and econometricians. 

They apply their efforts to government, finance, banking, business, health, education, agriculture, urban and regional economics, law, history, energy, the environment and so on.  Economists obtain the data, use mathematical modelling to develop forecasts, and analyse and interpret the meaning of data.  That they continue to be employed attests to their value to their employers.  A brief but informative article on Economists in the Occupational Outlook Handbook, 2008-09 Edition of the US Bureau of Statistics is worth a read if you wish to go further.  

Some economists perform economic analysis for the media, or make their analyses available to the media.  It is about these that this piece focuses.  It addresses the question of what they contribute to an understanding of economics among the general population, and concludes ‘not much’.

I’m sure every reader must have smiled wryly about, or become frustrated by the conflicting and ever changing opinions and forecasts offered by a bevy of economists regularly engaged by the media for their expert opinions, and even more so at the so-called ‘economics correspondents’ of newspapers and online outlets.  While a high level of expertise in the field of economics can be expected from those occupying the professional position of economist, the same is not exhibited by some of the latter.  One is left wondering whether they have had formal training in economics.  Unless they fully understand what they’re writing about, it’s unlikely anyone else will.  Take David Uren’s post on The Australian Current Account Blog yesterday: Did the cash hit make a difference? and see if you can work out what the piece is driving at.  Uren usually writes well, but this piece left one wondering whether his point was that the consumption curve did not show the blip the disposable income curve did.  Judging from the comments that followed, bringing in the Friedman versus Keynes hypotheses served only to muddy the waters.  Economics is hard enough without enveloping it in fog.

What about the scramble among media commentators to predict the next interest rate movement, the next unemployment rate or the next GDP figure?  The commentators play a game to see who hits the bullseye, or gets closest, no doubt to get a high five at the drinking hole that night.  Some will be right, some wrong, but what does it matter?  What difference does it make whether their predictions are right or wrong?  What decisions are made based on their predictions?  Maybe some players in the stock market might gamble on their predictions, but what a gamble it is.  To take interest rates as an example, for the man in the street, predictions are useless; only the actual movement counts.  So why on earth do they bother making predictions?  Is it just a media game with which they go along for a fee?  Waiting for the actual figure seems eminently more sensible than scaring people that the rate may rise, or disappointing them when the predicted fall does not occur.  But rest assured this silly game will go on, on TV, radio, online and in the papers because it's media fodder.

The recent GDP figures were a subject of great debate with most estimates varying from around 0.2 to 0.4%, until some further data emerged that had economists running to their spreadsheets to insert the new data and come up with a new GDP figure, then revised down to maybe even negative, reviving the talk of ‘technical recession’.  Then, to everyone’s astonishment, it came out at 0.6%, and so the rush was on to explain how that figure came about.  The next day Tim Colebatch in The Age in The GDP numbers don't add up was disputing the ABS’s sums and confidently predicting the figure would be markedly revised down in the next quarter’s figures, maybe even to negative.  He’s been quoted by others but no one I have read has confirmed his analysis.  Maybe he’s right, but if he’s not, he’s created concern among those who want to see a steadily improving economy. 

My point is that economists seem to have such wildly varying opinions about the same data set that the public is left wondering who’s right, and how the economists can vary so grossly in their explanations and predictions.

One of my longstanding gripes has been about the influence on economics writers of their preferred economic model.  Ergas’ reference in the Current Account Blog to his beloved Friedman in response to the upbeat GDP that just about everyone else attributed to the stimulus packages, is a case in point.  I wrote about this in on TPS in The problem with economists back in February.  Referring to the contemporary debate about when and how the stimulus should be withdrawn now that the economy seems to be recovering,  Crikey’s Bernard Keane said on Thursday “There are no - no - economists or business groups who think it is time for the stimulus to be wound back, except for those on the far right or Liberal shills such as Henry Ergas, who opposed the stimulus package in the first place.”

Another grumble is the way journalists allow their political leanings to influence what ought to be an objective analysis of the undeniable facts.  Michael Stutchbury of The Australian is an example.  Quoting again from Bernard Keane in Wednesday's Crikey: “After the March quarter figures, anti-Labor commentators like Michael Stutchbury tried to argue that the modest growth was a consequence of exports only, ignoring the fact that the stimulus packages had prevented domestic demand from collapsing the same way it had in the US, the UK and other developed economies. Today’s figures blow the Stutchbury argument clean out of the water, with exports a trivial contributor to the overall growth figure – although like the Coalition, Stutchbury has now switched to urging that the stimulus has been too successful and needs to be wound back.”

With commentators of the likes of Ergas and Stutchbury, what can us readers who lack a profound knowledge of economics, really believe?  As Keane put it in a piece on Crikey, Nothing more stimulating than press gallery groupthink: “The ‘debate’ over whether the Government should pull back on the stimulus package is a classic case of a press gallery trying to frame a real-world issue into a narrow, political framework that suits its own reporting purposes. It is a collective illusion being foisted on the mainstream media’s ever-smaller audiences by journalists and commentators unable or unwilling to see outside the gallery prism of winners and losers and political personalities.”

What is it that convinces economics correspondents that their view of the world is one that politicians ought to take seriously; what persuades them that they know better than the elected government with its Treasury staffed with experts in many fields and accomplished economists, well-resourced departments that can provide it with information, modelling and advice?  For a lone journalist to confidently direct trenchant criticism at the government over economic policy and assertively give gratuitous advice to it about how to proceed, seems the height of impertinence.  Yet they do it every day, presuming the Government is too simple to understand the situation and is waiting breathlessly for their advice.  Today Peter Hartcher, a good journalist, in what is a well-written piece in the SMH, PM's next challenge: holding the reins of a soaring economy, referring to Kevin Rudd's original conversation with Ken Henry about the looming GFC on board a plane, says: "Now is the moment for Rudd to get Ken Henry back onto the plane. Rudd needs to ask him the same question, but for the other side of the cycle: now that Australia is recovering solidly, what is the plan for the best-case scenario?"  I’m glad Hartcher mentioned that; otherwise Rudd might never have thought of it.  He goes on: “Paradoxically, the implications of a strong recovery will be even scarier for Rudd than the threat of a recession. And the work of responding wisely will be infinitely harder. Why?  Because the Government's pre-emptive strike against recession was a vast bomb-drop of taxpayers' money. It worked.  Now the right response to an unexpectedly strong recovery is to withdraw planned spending, to go about the landscape taking money back from voters.”  More gratuitous advice. 

Why do good journalists write in this condescending way?  Is it really to bring Rudd and the Government up to speed?  Surely not.  Is it to impress readers with the writer’s insight, erudition and wisdom?  More likely.  The problem is that so often the journalists get it wrong, and have to backtrack hoping nobody notices.  They would do their professional image less damage if they argued the pros and cons of each issue and each option, quoting a variety of opinions from diverse reliable sources, and then if they feel persuaded by one argument over another, to draw a reasoned conclusion.  This would go down much better with thinking readers than the adamant, resolute opinion and advice they so often offer.  Two example of what I mean are Mike Steketee’s sensible piece in today’s Weekend Australian: All things still being unequal, and Shaun Carney’s sound article Shock Tactics in today’s Age.

The thrust of this piece is threefold:

First, those who make predictions on TV, radio and in the press about interest rates, unemployment figures, the quarterly GDP, or any other periodic economic data sets, would be best engaged doing something more useful.  If we never heard another prediction, many of which are wrong, but just waited patiently for the actual figures, we would all be better off.

Next, we would all benefit immeasurably if those who are paid to write/speak for the media on economic matters were to stick to the facts, present them accurately in full and unembellished, and if interpretation is called for, put aside the bias of preferred economic models, and their political leanings, and call it the way an experienced unbiased economist would.  For journalists writing for some of our papers this would be a tall order.  But why should we be burdened by lack of expertise, conceptual bias and political distortion?  The subject matter is too important for each of us and for our economy for anything less than exemplary comment.

Finally, we would all benefit from well-reasoned articles based on the widest variety of facts and opinions, rather than the dogmatic, assertive self-opinionated offerings, so often lacking real substance, with which we are too often assailed.

What do you think?

 

Comments (7) -

September 5. 2009 03:24 PM

Bushfire Bill

" I’m glad Hartcher mentioned that; otherwise Rudd might never have thought of it."

Exactly my thoughts when I read those words! I also inwardly groaned when I saw that coping with the withdrawl of the stimulus would be "Rudd's biggest test".

How many "tests" have we seen put in front of Rudd? It's as if he is seen as needing training wheels, a bumbling amateur requiring guidance from the permanent cognescenti, the 4th Estate public services, who are here only to provide stability and sound advice to the occasional occupants of the government benches.

We have seen that even the declared economists can't get it right, certainly as a bloc of opinion leaders, so how in the hell could your common or garden political journalists have a clue about what goes on, economy-wize?

The answer is: they don't. They speak to the resident economic writer down the hall, or at the water cooler, colour it with a few of their own slants and prejudices and then write it up as if they were experts. The idea seems to be that they will get something right eventually, and then they'll look like heroes.

Last night on Lateline Leigh Sales spent five minutes of a 14 minute interview banging on about the signs outside schools. She made a big thing of them costing - in total - $3.4 million. A lot to you or me, but in fact only 0.007% - seven thousands of one per cent - of the total stimulus package. The stick-on decals would presumably be an even smaller percentage of this, yet Sales persisted in trying to pin Swan down on this idiocy.

The interview was conducted with Swan while he was in London, mixing with an admiring crowd of fellow G20 finance ministers, all presumably clamoring to know how Australia managed their great performance. Yet he was forced, in tiresome fashion, to bat away inane questions about a few signs erected outside schools. As I wrote in a recent posts here: there is no issue too important that it cannot be trivialized by Australian political journalists. There is no economic desert blooming against the odds of the GFC. There is only criticism of the squeaky parish pump, even as it brings life where before there was none. I guess it's lucky for Swan that he didn't shout at an air hostess on the way over, or else we'd have seen that hit the bill as the number one national issue of the day.

Just yesterday we saw Dennis shanahan revert to form in The Australian. All the old shibboleths came out: a rort here, an underestimation there turned into a "spending fiasco" by the end of the first paragraph of Shanahan's article. Dutifully Leigh Sales continued this analysis last night, as if the project had not been an almost unqualified success as a whole (and most details, too). Swan was at first patient with her and then feisty. He seemed on the verge of telling her to grow up, or get a life, look at the daisies instead of the dirt, or similar. In the end she resorted to simply talking over him, as if trying to bring life to the one-woman campaign she is running on the Lateline web site to "get them to answer the questions". Well, Leigh, ask sensible questions and you might get some sensible answers back.

Finally we had the gotcha: was Swan perfectly happy with the performance of the NSW state government? To which he replied that he worked with what he was given to work with, whether that be Liberal or Labor state governments. No, no, was he perfectly happy with NSW, persisted Leigh. What a waste of the viewers' time! Swan looked shocked that someone like Sales in a supposedly professional position could be so trivial.

It's probably only so that the next Newspoll (due Tuesday) might get a boost, but annoying just the same. Do they want people to watch their show or do they want to turn away the few viewers thay have left?

Bushfire Bill

September 5. 2009 05:57 PM

Ad astra reply

BB
I felt exactly as you did about the Sales interview of Swan.  I thought he was extraordinarily patient in the face of relentless senseless questioning, which was rude to boot when she commented, in reference to the school signs, "Well, the argument that everyone else is doing it, so I should be allowed to do it is one that I couldn't get away with it when I was 10 years old. Is it really an argument that adults in the Federal Government should be making?" www.abc.net.au/lateline/content/2008/s2677371.htm

Who do these interviewers they think they are?  Do they believe they can treat senior parliamentarians like school children?  I was shocked and very annoyed by her last night.  She is normally more moderate; she certainly treated Joe Hockey better a couple of nights ago.  I wonder did someone stir her up to be more aggressive, or is she, as you suggest, running her own 'I'll get them to answer the questions or else' campaign.

I'm heading back home from FNQ early tomorrow so I'll be off the air for a couple of days.

Cheers

Ad astra reply

September 5. 2009 06:45 PM

fred

What value are economists to are society?

Thats an interesting question because it uses a term, 'value', that has a vastly different meaning in different contexts to different people and yet if one gives a quick answer the definition is usually governed by that version used by conservative economists [is there any other kind?].

I watch "Antique Roadshow" on TV occasionally.
People bring in objects that grandama gave them or they bought in a shop somewhere, experts tell them all about it and then 'value' it, usually in British pounds, conveniently subtitled and changed to Australian dollars.
Its a [minor] feature of this show that these experts understand something that economists, at least the ones who seem to dictate public commentary and policy for eg via TV before the weather, appear not to comprehend.
Frequently you see the response on "Roadshow", by expert and owner, that no matter what the monetary 'value', high or low, an object has, the owner would never part with it and the expert endorses that. Its not worth $2000 whatever it has a 'priceless' sentimental value. Other times you can see people suddenly wonder if the thing they have could be flogged off for its 'value' which has suddenly turned out to be, thanks to the expert, more than they previously valued it.
David Suzuki makes the point that if you ask people what is the first and only thing they can save if they rush in and out of their burning house the usual answer is a treasured family heirloom/photo that has probably got minimal, if any at all, financial 'value'.

You make the comment that "My point is that economists seem to have such wildly varying opinions about the same data set". I presume you know the old joke [is it a joke?] about the 12 economists who gave 13 different answers to a question about the economy. One of them changed his [her?] mind.
Apparently, so I have read, the GFC was not predicted by the huge bulk of practicing gurus. Seems like Treasury [Henry and mates] and the RBA and all other 'experts' were caught on the hop.
Of what value are they then?
I have read one US fella gave dire warnings pre GFC but he based his analysis on faulty logic and was rejected by his peers at the time, but lucked into getting the right answer.

There must be some value received by companies etc that pay big dollars for the services of these gurus but outside their narrow fields I cannot see much they have much value to the broader community [and maybe the GFC has shown us inside their fields also].

Perhaps the best way to measure their value would be to compare their comparative worth to others in the community.
Lets propose a hypothetical where you can have one extra worker magically generated in your society. Who will you choose, in order, as a result of your value/values?
Teacher, nurse, ecologist, garbo, car salesperson, journo, carpenter ......?
Or an economist?

fred

September 5. 2009 07:42 PM

Bushfire Bill

I'm not so sure that the meltdown wasn't predictable, and that it wasn't predicted (for the right reasons).

The opening paragraph in Hatcher's column recounted a scenario where Rudd asked Henry in February 2008 what plans were in place in case a meltdown occurred. This was months before the actual start of the crisis phase of the crisis (if I can put it that way).

What wasn't fully realised by your average mug was the extent of the pollution of, on the surface, secure instruments, derivatives, by toxic assets. As I see it, one day someone called in a loan, a call that rippled all the way to the top. The loan (or package of loans) was baed on property that was worthless, as the mortgage coulsn't be paid off and the rush started. To me this was a pretty easy scenario to envisage, and I think a lot of people did just that. It's just that no-one wanted to be the first to say "The Emperor has no clothes".

But it's the business of a responsible politician and a responsible Treasury head to wargame the worst case, which is what Rudd and Henry did, just in the nick of time, it seems.

However, commercial economists have to deliver sage advice on a daily basis. They have to be able to predict what will happen in the future. To a certain extent this explains AA's question about why they bother to preempt interest rates, sometimes even up to the morning of the announcement. We hear a lot about how rates are "factored in", that is, how the clients of the commercial economists bet that rates will go either up or down and by how much. The client makes a few cents per unit of investment if the advice from the economist is correct, if they can beat their opposition to the punch by even minutes. Multiply those units by millions, and the daily prognostications by hundreds and you have a bunch of people who think they can "ride the noise" - selling just before a daily plunge and buying just before a daily rise. We see this behavior too with the often fanciful explanations of stock market gurus for the rise and fall of shares on a day by day basis.

Ultimately we see it when a big firm does slightly less or slightly better than expected at some formal performance or reporting point. Their shares go up or down by much more than they should, simply because the herd thinks the other members of the herd will get there - selling or buying - before them. The firm doesn't have less money in the bank, or fewer employees, or (on the actual day) poorer profit results. It's just that the herd follows the leader (that is, the one behind follows the bum in front) and votes the share price up or down. Commercial economists purport to be able to judge these nuanced moves better than others.

It's no good giving a "maybe" to the client. The economists have to sound confident, even arrogant about their prediction. That's why we see so much "black and white" in economists' predictions. Hesitation is commercial death.

But economists also like follow the bum in front of them. It might be swaddled in pinstriped trousers, but it's still a bum, and they're still a herd. Enter group-think. If enough economists meet down the pub and agree to agree on a direction of the market, this becomes accepted wisdom. This accepted wisdom becomes policy, strategy even. It'll take a lot of levering with a crow bar to get them to change that group generated opinion. Which is why we saw so many "experts" take so long to express confidence in our economy, even in the face of solid results that flew in the face of their predictions. Simply put: their jobs depended on things going belly-up. Their clients had taken their market positions based on a bear market. There are still one or two who are pessimistic about things (Tim Colebatch at The Age is a case in point) but most have come around to thinking the worst has passed us. But is this group-think in itself? Probably. We need to remember, however, that group-think isn't always wrong. It even has the properties of self-fulfilling prophecy at times. Confidence can be contagious, as can lack of confidence.

Y'know, wouldn't be Kevin Rudd for quids. He is now faced with demands to stop the stimulus package. Some are even saying that there was no recession, likening it to Y2K Syndrome: an allegedly straw man situation designed to line the pockets of (then) computer programmers and (in today's economic manifestation) modern day investment bankers and pork-barrelling politicians.

It seems to me that nobody really knows what's happening. This is simply because no market is rational, and the current market is particularly irrational. It's quite possible that someone will again make a pointed comment about what they reckon is an obviously naked Emperor, and that this will spook the markets yet again (rational or not, markets are still easily frightened). End result? The stimpac has to stay, until we know for sure that confidence is once again the accepted norm, rather than just another possible scenario. Confidence is king (or perhaps Emperor).

Rudd and Swan, in being sober, measured and rational, in refusing to panic either way, are our best bet for getting out of the mess we're in, or at least carving out some breathing space so we can fill our fiscal lungs with at least one gulp of clean air. They have a plan, to borrow today against tomorrow's supposed prosperity. If we give up now on the potential for future prosperity, we may as well all put a gun to our heads immediately and solve the population problem, once and for all.

The Liberals? Their position is that a little discipline, a month or six of unemployment is good for the soul. Don't take any notice of them. They're fooling themselves that you do, but they're wrong.

As for the economists, they still have to arrive at work on Monday morning and make bold, confident predictions. We'll see many more of them before the GFC game is up. In the meantime the ordinary mug thinks things aren't as bad as they might have been, and that a lot of this is down to the government's prompt reaction to last year's crisis. Signs outside schools don't matter (as if they ever did!), what Joe Hockey says doesn't matter (ditto) and the naysayers kibbitzing on the sidelines don't matter... because the public wants to believe. As long as that situation is maintained, there's a way forward. Let's just hope that economists' group-think follows the same path as the rest of the common herd.  

Bushfire Bill

September 5. 2009 09:28 PM

Ad astra reply

fred and BB
Thank you both for your thoughtful and comprehensive comments.  They make fascinating and informative reading.  I'm sure other visitors to TPS will feel likewise.

I'm signing off now for a couple of days while I track back home.

Ad astra reply

September 7. 2009 03:31 PM

Rewi

Ad Astra, another fine post and Bushfire Bill's comments are, as always, a great read.

I don't have a lot to add to these, or Fred's, comments other than to suggest that the very ambiguity of analysis that pervades economic commentary exists within Treasuries (State and Federal) as well as those economists practicing commercially and in the media. Governments are required to make concrete decisions based on relatively abstact advice. Which of the 'ifs' or 'buts' should they follow?

That journalists and other expert commentators seem to cover the field with their criticism of government decisions may be as simple as attempting a kind of prospective 'gotcha' journalism.

Like Bushfire Bill, I wonder how much of this commentary does anything to change public opinion. Perhaps the apparent guaranteed year-on-year growth in the surplus of journalistic opinion is approaching 'glut' status and in danger of causing a major devaluation.

Rewi

September 7. 2009 08:04 PM

Ad astra reply

Rewi
Welcome to The Political Sword and thank you for your kind remarks.

Apropos your remarks, I noticed in today’s Crikey that Bernard Keane has this to say about the stimulus and the experts’ projections:  There are two economic debates - or more accurately, debates about economics - going on right now.  One is the real world debate about the need to prop up demand and employment in the global economy, and to reform the global financial system so that what happened last year cannot happen again. That’s the debate that will shape Australia’s economic fortunes, China or no China, for the next few years. We can only go for so long relying on domestic stimulus and the growth of a single large economy.

The other debate is about whether the stimulus - or 'so-called stimulus' as Malcolm Turnbull called it yesterday - worked at all, or contrarily worked so well that it now needs to be withdrawn (positions that in an impressive act of doublethink seem to be held by the same people) or whether it will drive up interest rates. That’s the debate the Opposition and much of Australia’s parochial and wilfully ignorant media - and even now the Greens - are mired in.

This is, we should not forget, the same mob responsible for such brilliant analyses as that tax cuts would be spent more than cash handouts, that we were facing a new Depression, or that we needed to wait and see or keep some 'ammunition in reserve' rather than try to respond to the oncoming impact of global recession.

Or that the Government’s Budget forecasts were far too optimistic.  Remember the complaints about how Treasury had been too optimistic in May?  Boy, didn’t Wayne Swan and Treasury cop it after the Budget for projecting a return to economic growth in the out-years.  Now they’re getting bagged for being too pessimistic. This joint’s full of puffed-up pundits and second-rate second-guessers who can’t even get it right with hindsight.


We’re not alone in our views about economists and their analyses.

Ad astra reply

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