Economists need to explain: why should we keep listening?

By Terry Ryder, 4th February 2010

Many of the biggest names in the economic community, as well as our major newspapers, have some explaining to do. They need to tell us why we should continue to listen to them in the light of their misreading of the Reserve Bank’s decision on interest rates.

Economists were virtually unanimous that the Reserve Bank would lift interest rates at its 2 February meeting. Their predictions ranged from “a near certainty” to “it’s in the bag”. On the basis of these forecasts, newspapers took the opportunity to generate headlines like these:-

Inflation to push up interest rates in over-heated housing market

Rates to rise amid home boom

Mortgage trouble looms for 1 in 4

Inflation low but interest rates set to jump

No end in sight for interest rate rises

House prices tipped to fall

The Great Australian Dream has ended 

Imagine the angst those headlines would have caused to families with mortgages or renters hoping to become home-owners. All based on inaccurate speculation – not designed to inform but to generate publicity for computer-screen analysts.

All of the headlines, and the editorial content that followed, were based on the forecasts of people who have shown over the past 12-18 months that they have no right to be taken seriously – the new breed of chattering economists.

Economists as a group predicted recession. They predicted sharply rising unemployment. They forecast that house prices would fall – by more than 20%, according to some, and by 40%, according to one. Before each major release of data by the ABS, they published forecasts which were significantly worse than the subsequent results.

They were wrong about all of these things. Building approvals, retail spending, job advertisements, business investment – all have been stronger than the forecasts of economists.

Recently we had the usual avalanche of speculation, fed to us by economists via a gullible media, leading up to the Reserve Bank board meeting on the first Tuesday of the month. Why they think we’re interested in their forecasting skills is a mystery. We all know the RBA meets early each month and considers interest rates. What is the point of all the (usually inaccurate) speculation? Just tell us what the RBA decided at the meeting.

I don’t care what CommSec economist Craig James thinks will happen, particularly not on real estate issues, which is a subject he knows little about. James has predicted falling real estate prices on the basis of the interest rate rise he expected but which did not happen.

Nor do I care about the speculation of ICAP economist Adam Carr, who predicted a rate rise and spoke about “a national crisis” in housing. NAB senior economist David de Garis was adamant the RBA would lift rates. So was Prescott Securities chief economist Darryl Gobbet.

Westpac chief economist Bill Evans, one of the most quoted economists in the nation, said an interest rate rise was “in the bag”. ANZ economist Alex Joiner said a rates rise was virtually assured. BT Financial Group chief economist Chris Caton said the RBA would lift rates, no ifs or buts.

The Courier-Mail in Brisbane polled 16 economists before the RBA meeting and they all predicted a rate rise. Why would the Courier-Mail waste resources on such an exercise, when the actual outcome would be known the next day?

All that hot air, all those talking heads on TV news bulletins, all that newspaper space devoted to speculation and fear-mongering, served no purpose. No one was better informed, no one’s life was enriched, no one was given information on which decisions could be based.

A columnist in The Age, writing after the interest rate decision, said this: “Yes, it’s embarrassing to be so certain about a call that turns out to be wrong. And having so much company doesn’t make it any better. So how did the forecasting community and we pet shop galahs so misunderstand the Reserve Bank board?”

How, indeed? The reality is that economists have a poor record on getting it right. In the past 12-18 months they have been wrong constantly. The greatest mystery is why journalists keep giving credibility to people who so thoroughly lack it.

I assume they just don’t care: as long as the talking head is willing to say something sensational or inflammatory (such as “house prices will fall” or “mortgage stress will force families from their homes”), journalists don’t care whether they get it right or wrong.

At the same time next month they’ll do it all over again. They will seek comment from the same chattering economists who got it wrong this time, and give them the opportunity to get it wrong yet again. Almost certainly, they will oblige.

ENDS