One of the fall-outs of the economic crash of 2008 has been a boom in economic analysis. More specifically, a form of economist analysis that appeals to the ‘man in the street’. Our own David McWilliams was recently judged to be the strongest influencer on Twitter in Ireland with a stunning 121,000 followers for his sharply-honed narratives on a range of Irish and international economic issues while his books regularly feature in the non-fiction best-seller lists.
Across the pond in the UK, Tim Harford, occupies a similar space as a columnist at The Financial Times, broadcaster and best-selling author. His talent is to bring complex economic issues down to a level that the layperson can understand. Clearly another beneficiary of the recent cult of the Celebrity Economist, Harford accepts that the dismal science now attracts much greater attention from quarters that it did not. “Since the 2008 crisis, people have concluded that the economy does actually really matter so economics has become mainstream,” he tells Decision, after addressing the IMI’s Annual conference recently. “That doesn’t mean that economists have all the answers. I’m still surprised by newspaper stories with headlines saying ‘Economist predicts ...”.
Harford accepts that despite their popularity, paradoxically, economists have got a bad name for not being accurate with their predictions. Few, for example predicted the banking crisis. Prediction is a difficult business, he maintains, and one that few of the best academics researchers attempt. The majority of ‘predicting’ economists, he says, are those associated with financial institutions. One of the reasons they hold these positions is that they are expected to provide public economic commentary as a form of PR for their paymasters.
He prefers the analogy of dentist to soothsayer, acknowledging John Maynard Keynes, who remarked that, “If economists could manage to get themselves thought of as humble competent people on a level with dentists, that would be splendid”.
“You don’t expect your dentist to accurately forecast the pattern of your tooth decay but you do expect her to give you good practical advice on dental health and to intervene to fix problems when they occur. This is what we should demand from economists: useful advice about how to keep the economy working well and solutions when the economy malfunctions,” Harford says.
Macroeconomics is just damn hard to get right, he says. The economy is shaped by a complex blend of psychology, history, unforeseeable political and climate events, rapidly evolving technologies and even computer trades too quick for humans to perceive. It’s no wonder that we struggle.
Nonetheless, modern economists have not helped themselves either. Rather than embracing a much wider set of metrics to attempt to understand an increasingly complex world, they have stuck to a limited range of modelling techniques. While these are ‘elegant and logically sophisticated’ they suffer from a serious disconnect with reality, he argues.
They fail, for example to incorporate some hugely important factors. One of the most obvious is the banking industry. It was the cause of the Great Depression post 1929, he notes, which should have been a warning signal not to remove banking from macroeconomic models. Behavioural economics and complexity theory have similarly not been afforded the attention they are due.
Harford worries about the lacklustre state of the European economy and suggests that a ‘good dose of inflation’ might help as a way of tackling the mountain of debt that currently exists. The downside of this (he is an economist remember) is that wages would go up and ‘creditors would get screwed’.
Those with big mortgages would be winners, returning to the experience that their parents who enjoyed repaying their mortgages in a devalued currency as their wages inflated rapidly. “Low inflation means that a 30-year mortgage really is a 30-year mortgage rather than five years of hell followed by an extended payment holiday. The previous generation’s rules of thumb no longer apply,” he acknowledges.
What he is clear on is that structural reform is a necessity, including labour market flexibility. “It should be easier to hire and fire workers, for one. That’s a tough sell politically. You get immediate pain as the price for your long-term gain.”
This is not some right-wing ideology, however. He is hugely worried about the effects of long-term structural unemployment associated with deep recessions and the broader effect this has on society.
In his latest book The Undercover Economist Strikes Back he recounts how in 2012 a Lebanese PhD student Rand Ghayad from Northeastern University in Boston generated 4,800 CVs using a computer programme and mailed them off to try and secure one of 600 advertised vacancies in different industry sectors in the US. The CV were carefully generated to be consistent in most elements but varied in three ways: whether the candidate experience was in the relevant industry or not, whether they had hopped from job to job beforehand and whether the candidate had been unemployed for more than six months.
While it was no surprise that candidates with recent relevant job experience were at an advantage, the effects of long term unemployment were found to be very striking, Harford notes. “Applicants with experience from the wrong industry who had been unemployed for 14 weeks or less were more than three times as likely to get a call from an employer than applicants with experience in the right industry that had been unemployed for six months or more. Employers are apparently more interested in shunning the long-term unemployed than in looking for relevant experience.”
This, he adds, is a really depressing finding because it reveals that a recession and a few missed opportunities can quickly damage perfectly good workers, dragging them away from the job market, permanently in some cases.
Those fortunate to beat unemployment and to get jobs in recession, remain at a disadvantage. He points to research by Marco von Wachhter of the University of California who looked at the experience of those looking for jobs in tough labour markets – such as people who get laid off in a mass redundancy programme or who graduate during a downturn. Typically they accept jobs that are not in the fields that they really wished to enter and the evidence is that is that they suffer long term damage to their careers because they accumulate skills, contacts and experiences in the wrong sector. The negative consequences of this outlive the recession.
LIES, DAMNED LIES ...
Economists thrive on data and in an era where analytics and Big Data are driving economic decisions, this should be good for those in the prediction business. Harford again urges caution. He points to the example of Google Flu Trends an interesting experiment carried out by Google that used its own search data to estimate the prevalence of flu in the US population at any given time. Initially, it delivered extraordinarily accurate results when compared to official Centers for Disease Control and Prevention (CDC) data – doing so effectively in real-time, which the CDC couldn't do. It became a Poster Child for Big Data.
However, the estimates soon overshot reality by a factor of two. Quite simply, controls had not been put in place to adjust for others reasons why people may have sought out information on flu. It can be likened, he says, to the Literary Digest's famously incorrect prediction of landslide in the 1936 US presidential election for Alf Landon.
The prediction was based on a survey of two million Digest readers, automobile owners and households with telephones. However, the magazine had not factored in that that the type of households that could afford phones, cars and magazine subscriptions during The Great Depression were far removed from the average lot of US voters. It was George Gallup's opinion poll, with a much smaller but more balanced sample, that correctly called the election for Franklin Roosevelt.
Harford worries about inequalities in his native Britain which is becoming an increasing divided society where quality of life is declining, he says. A willingness to work hard is no longer enough to get you by - you also need to have appropriate skills for the market and fair measure of luck as well, if you are to thrive. Bismark’s design of the pension system – so that most died before they benefitted from it – has come full circle in an era where people aspire to live into their 90s. Working lives will continue to grow longer in the years ahead is one prediction he is happy to make.
Chillingly, he also predicts a future in which people may have no economic value at all and where “there will be nothing that they can do that a robot cannot do more quickly, safely, cheaply and reliably and ... all of the economic returns will go to the owners of capital.”