What’s the point of economists?

Just had to reference this article from Economia – the magazine for Chartered Accountants.

It starts off by saying that economists only get things right about 4 times out of 10.  If I have read the grade boundaries issued by one of the exam boards correctly that would have been enough to get a grade F at GCSE economics units 11 and 12.  And if we use the lower mark “3 or 4 times” offered later in the article it is barely even enough for a grade G.

It then goes on to say economics is not a black and white science – but then what is?  Even the physics of light has to take account of colour.

The profession is likened to a sports coach who cannot guarantee a win even by putting out the best team possible.  Except that economists do not seem to get the sack for repeated poor performance.

Or economists should be likened to medics who would not be able to predict when you are going to get ill but should be able to advise you how to get better.  Except that economists do not seem to be able to agree on a course of treatment – should we spend our way out of recession or should we cut back on public expenditure to balance the books.  Or should we do a George Osborne and try a bit of both – cut back on public expenditure till it hurts and still borrow more.

And then the article talks about the benefit of hindsight giving us 20/20 vision.  But again I am not sure that it does, as economists don’t seem to be able to agree whether they should have been expected to predict the 2008 financial crisis.

But perhaps I am biased in my thinking that economics is not science if we follow the Oxford dictionaries definition:

The intellectual and practical activity encompassing the systematic study of the structure and behaviour of the physical and natural world through observation and experiment

It is included as a social science:

The scientific study of human society and social relationships

which attempts to use scientific methodology but is severely limited because it is not easy (or even legal) to experiment on human society and relationships – so that it is limited to observation without being able to test any theories about how economics works.

Noam Chomsky on Europe’s Refugee Crisis and the Endless Greek Debt Drama | GreekReporter.com

OK this is not just about the debt crisis but…

Professor Noam Chomsky talks about Europe’s refugee crisis and the Greek debt drama in an exclusive interview.

 

Europe is torn apart as there is no end to the arrival of ever greater number of refugees and migrants, while many European countries, especially in the south, continue facing severe economic problems such as unacceptable unemployment levels, high debt-to-GDP ratios, and increasing poverty and exclusion for their youths.

 

What does the world’s leading public intellectual, renowned MIT linguist, philosopher and social critic Noam Chomsky, author of over 100 books and thousands of articles, think about current developments in Europe?

Source: Noam Chomsky on Europe’s Refugee Crisis and the Endless Greek Debt Drama | GreekReporter.com

The fiction of forecasting

I realise that this article was written by an accountant (Richard Creepicture of Richard Cree is editor-in-chief of economia, which is the magazine for Chartered Accountants) and can therefore be rubbished by all practising economists, but I do like his suggestion that economic forecasts are about as useful as a 5-year weather forecast.

Here are some highlights

About Mark Carney:

A week ago, on what some in the media insisted on labelling “Super Thursday”, (because how can a day feel important without a hashtag-friendly label?) the Bank of England governor, Mark Carney, released a huge quantity of economic data. From the slew of numbers and insights he offered up, one headline jumped out. Contrary to his advice the last time he gave such “forward guidance”, way back in July when the economics clearly looked completely different and when he announced interest rates were on the verge of being hiked up, rates would now not be going up until 2017.

 

This week, as better than expected numbers on unemployment suggest the economy may be on the verge of over-heating, it now seems plausible that Carney’s next forward guidance may move that 2017 date forward again.

About George Osborne:

Meanwhile, across town in Westminster the chancellor, George Osborne, is planning his next mini-Budget (how long ago it seems since he pledged to scrap these in favour of a return to an annual Budget). At the heart of his Autumn Statement will be a set of economic forecasts from the Office for Budget Responsibility (OBR). Or rather, a set of revised forecasts. And they will be wrong, or more accurately they will only be a best guess of what might happen. Apologies to the doubtless very clever economists at the OBR if they’ve landed a couple, but most OBR forecasts have had to be revised. In fact, the recent record of most of those who make a living from reading the economic runes hasn’t been great. Only a handful of economists predicted the economic crash (and many of those are from the Cassandra school of economics, rather like the former business secretary Vince Cable, who was once accused of predicting “nine out of the last three recessions”). Today you can find an economist prepared to collect together a bunch of financial and economic indicators that point to either the start of the next recession, the beginning of a golden recovery or anything in between. Can someone please just admit we haven’t really got a clue, that the models, if they were ever fit for purpose are broken?

If you want to read the whole article go to The fiction of forecasting

Macroeconomics — totally messed-up

Until a few years ago, economists of all persuasions confidently proclaimed that the Great Depression would never recur. In a way, they were right. After the financial crisis of 2008 erupted, we got the Great Recession instead. Governments managed to limit the damage by pumping huge amounts of money into the global economy and slashing interest rates to near zero. But, having cut off the downward slide of 2008-2009, they ran out of intellectual and political ammunition.

For more click on the link below

macroeconomics totally messed up

It was the cartoon that really got me!

Cartoon - I want to be an economist

PIGS coming home to roost

A while ago economists were worried about weak European economies in Portugal, Ireland, Greece and Spain.

Recently it has just been Greece, but now the Telegraph tells us that Portugal is looking for a way out of its debt problems and the austerity recommended by other countries in Europe.

Defiant Portugal shatters the eurozone’s political complacency

In the words of a Greek economist

I found this article in the weekly online magazine for chartered accountants.

Put simply lending money to help a country out of debt is like hosing someone down to dry them off.  In the end you will have to switch the hose off and get out a towel

The damage of deferring Greek debt restructuring

29 July 2015 

The point of restructuring debt is to reduce the volume of new loans needed to salvage an insolvent entity. Creditors offer debt relief to get more value back and to extend as little new finance to the insolvent entity as possible

Remarkably, Greece’s creditors seem unable to appreciate this sound financial principle. Where Greek debt is concerned, a clear pattern has emerged over the past five years. It remains unbroken to this day.

….

For full article go to http://economia.icaew.com/opinion/july-2015/the-damage-of-deferring-greek-debt-restructuring?utm_source=economianews&utm_medium=articles&utm_content=headlines&utm_campaign=july31

Different ideas about housing

I talked about change last week and how it is difficult because we cannot imagine what it would look like.  This week I need to talk about one type of debt which needs to be replaced with something else but I cannot imagine what.

I have thought about and come up with ideas of what might replace most kinds of debt in my white paper, but I am stuck with this one – borrowing to buy houses.

And then I began to think about what I said last week.  And maybe we do not need an alternative to debt; maybe we need a completely different way of thinking about it.  I am British and we like to live in our own homes – statistics say anything from 60% to 70% are owner-occupiers – we own the homes we live in.

Not every country is the same – but when I tried to find real numbers, it seems that most of Europe goes for owner-occupation (see European Housing statistics).  So we are all in a similar situation and there is no obvious model to follow for changing anything.  Even comparing houses financed by borrowing, a lot of north European countries (which are generally the wealthier countries) seem to go for this whereas eastern Europe have more properties owned outright.

So whatever answer we could come up with is going to look very different from what we have at present.

Perhaps there is part of the answer in my idea of phasing in changes.  If we set ourselves to change the world over 50 years, all of the current house loans would have been repaid by then, so we would end up with people owning properties outright, rather than property being financed by debt.

Would housing become more affordable?  The answer is almost certainly yes since the housing market (in the UK) depends upon available borrowing to keep values high which in turn encourage lenders to provide funds to buy houses.  If the underpinning of borrowing is taken away, then house prices will be lower.

Would affordable housing be a problem for existing home owners?  This is a more difficult question since we cannot be sure how people would react to the withdrawal of finance for house purchases.  There might be a house price freeze so that property becomes relatively more affordable as a result of inflation but there might also be a fall in house prices (perhaps to below the level of the amounts borrowed) – particularly if (as seems possible if not likely) inflation is closely related to growing debt.

Whilst this sounds like a disaster for existing home owners; it is not necessarily a problem.  Lenders want their money paid back – they only care about the underlying security if and when repayments stop being made.  So for most home-owners who pay off their mortgages, there is no problem.  If personal circumstances change (losing a job through illness or redundancy for example) then there is a problem – but there would be anyway when the main source of income stops.  In these situations state aid may be needed; or alternatively mortgage lenders could end up absorbing the drop in value in the same way they do on mortgage defaults in the current system.