Ausbuy

Economic Reality?

June 16th, 2008

The above heading may seem a contradiction in terms and an old joke springs to mind. If you have a meeting of two economists what do you get? Answer: three different opinions. That is a somewhat harsh judgement, but in the area where economics meets politics you can understand why the public has this view. Widely differing policies are proposed and justified by economic models supported by differing assumption. The starting position is often arrived at by dubious measurements which oversimplify complex situations. If this is wrong it does not matter how good the mathematics is. There is also a tendency to ignore the behavioural changes as a reaction to external events. Among the areas that cause concern are:

• Inflation. This is measured on the price movements for a pre-selected cross section of family expenditure. It can include daily expenditure, such as milk, and occasional expenditure, such as whitegoods. The regularity of such expenditure and the amounts involved is given a weighting in arriving at the index figure. The problem is that we need a static weighting to arrive at trends yet significant changes can have taken place. An example of this is the recent shortage and increase in the price of bananas which was reflected in an increase in the inflation rate. This was, of course, nonsense as people stopped buying bananas and bought other fruit.
• Unemployment Rate. Among the employed are part timers working less than 15 hours, people on government schemes and volunteers. We also do not include as unemployed people who have become dispirited with failure and stopped looking. There are various assumptions as to the true unemployment rate. The only certain fact is that the official figures are wrong.
• Wages. As these are based on the taxed income, they do not accurately reflect the black economy which, in spite of the GST, is alive and well. They also do not reflect people using companies or superannuation schemes as tax shelters.
• Consumer Sentiment. This is the most ridiculous of all the data which is used. Consider the following scenarios:
  •  Ian is questioned on an evening when he has a win on the 2:30 at Flemington. Guess what his answer is?
  • Mary is questioned after her boyfriend of 1 year standing has broken off their relationship. We know how she feels.

As you can see there are so many factors in play that this index is meaningless.

• Interest Rates. There is a belief that a ¼% interest rate increase causes companies to cancel investment decisions. This is not confirmed by Ausbuy’s experience. The effects are achieved by “doom and gloom” stories in the media impacting on the public. Eventually the cumulative impact of interest rate increases may reduce inflation by tipping Australia into recession.

Most economists will detail the assumptions underpinning their economic model, but these will usually be omitted when the politicians use the model to justify a policy. Perhaps it would be better if people realised that economics is a blend of statistics, mathematics and behavioural sciences and it is difficult to get accurate source data. In fact, it can be considered as much art as science, and gifted practitioners can have very good track records. Unfortunately, if they are wrong, the damage is done before we find out. Our Reserve Bank does not write on tablets of stone.

Copyright © - This document cannot be used without our express permission

These are Hot press! 1 comment.(View comments) Tell a friend

1 Comment »

1. Economic debate has to be seen in context. Despite Margaret Thatcher’s laughable declaration that there’s ‘no such thing as society’, the reality is that economic activity takes place in society and that society is more than the sum of its economic parts.

   Economists who take this broader view tend to come up with less extreme positions than those who view economics in narrow isolation. In Australia, the narrow economic rationalist position has seen profitable Government enterprises sold off to private (and in many cases foreign) interests because everyone ‘knows’ that Government can’t run a business. These were OUR assets, but I don’t recall being asked if to vote on their sale.

   The reality of how privatised business operates is - predictably - not all it’s cracked up to be. South Australia’s electricity, Melbourne’s trains, Modbury hospital. All failures. And the private health insurance sector has had to be propped up time and again with coercive Government policy.

   Happily, the 1980’s are over and Gordon Gecko/libertarian economics are increasingly being seen as short-sighted and inadequate.

   Economic decisions must be taken with their social and environmental consequences in mind. And just because something makes economic sense, doesn’t make it a good decision.

   Another old joke to finish..

   Q. How many libertarians does it take to change a lightbulb?

   A. None. Thet’re waiting for the invisible hand of the market to do it for them.

   .

   Comment by jingelic — August 20, 2008 @ 8:22 am

RSS feed for comments on this post. TrackBack URL