Navigating the economic forecasting mess

The ordinary observer could be forgiven for being very confused about the current economic outlook as forecasts and forecasters go up and down like yo-yo's. An example is this story from the Australian.

I discussed a little of this in an Armidale Express column, Belshaw's World - the economic version of the weather man. There are two issues on my mind.

The first is the misuse of forecasts and forecasting. The second is a very practical one: how does the ordinary business or individual navigate through all this mess?

In my Express column, I said in part:

Economic forecasting is a process whose role, is or should be, different from the actual numbers at any point. What is relevant is not the numbers themselves, but the way in which results diverge from the projections as they must.

Government and business have to make judgments about the future, about the likely impact of economic changes on their activities. Their needs are very different from those of market players betting on what might happen in the short term. Yet economic forecasts that are actually linked to and driven by the needs of market players have come to dominate the forecasting process.

Most prominent business economists work for financial institutions. Their primary internal role is to provide advice on what might happen in financial markets. The economic reporting that follows from their public utterances is also markets focused.

You see the problem.

I'm thinking of trying my hand at some practical advice here, in my new ABSM column or perhaps both, on navigation through this forecasting and reporting mess. You see, my feeling is that much of the forecasting and reporting should actually be ignored. 

Australia Day, columns and externalities

I woke early this morning with a very bad cold and a fogged head. It's raining, and there are again floods in South East Queensland and Northern New South Wales.

I wonder where summer went this year? Our pool is clear and would be inviting if only it were warm.

Today is Australia Day. The hash tag #australianfacts started running early. The thread began with a suggestion by kedgie: "We should so troll the rest of the world with stereotypes about Australia tomorrow with #australianfacts." 

A few random examples for you:

• The drop bear was introduced into Australia as a measure to stop the rampant pest The Cane Toad
• Australian schools begin at 9am and close at 3pm to prevent children from walking to school during koala feeding times
• Australian Rules Football was invented as a way for ladies of the CWA to exchange scone recipes by semaphor
• When Australians feel they are about to vomit, they reach for a Murray-Darling basin
• Phar Lap was actually a shetland pony from New Zealand
• slip slop slap is the national child raising policy
• the first draft of Advance Australia Fair read "Our land abounds in nature strips"

Today is also India Day. Last year we went to a lunch at an Indian friend's house that kind of combined them both.

Over at his place, our Indian blogging friend Ramana has been fulminating against Indian corruption. This cartoon comes from one of his posts.  I did laugh. 

In Queensland, Premier Anna Bligh has announced a state election for 24 March. On all indications, the Labor Government is likely to be heavily defeated, continuing the Party's national decline. This election has a number of interesting features, so I will do a round-up at some point for the benefit of international readers.

  In my last post, I referred to Winton Bates'  review of Robert Frank's new book. Now Winton has followed up with a second post, Should wasteful competition for positional goods be taken into account in tax policy?

I recognise that some of this can be pretty eye-glazing stuff for a non-economist. In any event, my thinking triggered by Winton's first post has been continuing in a different direction.

I wrote in my last post:

I found this (a quote from Winton) a useful point in clarifying my own thinking, the sometimes confusion I feel between my support for market forces as the best way of achieving results and the negative results flowing from relativist competition. This is another aspect linked to the continuing pernicious influence of Social Darwinism.

In an apparent digression, my first column has now appeared in  Australian Business Solutions Magazine.  It's quite pretty!

The column is on the impact of the ratings agencies. I will re-run it in another blog, for our Indonesian blogging friend Niar kindly wanted to actually read it!

The challenge I face in writing on the economy for a business audience is similar to the one I face in extending my response to Winton: how do I simplify so that my ideas are clear to a non-specialist?

This is especially difficult when my own thinking is just so clouded.

I see the negative aspects of the things that I am talking about every day.

I see it in the real reductions of choice in our supermarkets. I see it in real declines in public service efficiency. I see it in businesses that fail to meet customer needs to the point that very survival is threatened. I see it in the collapse of once great brands. I see it in once great universities that have become little more than degree shops. I see it in the ever increasing instability of our institutions. And I see it in the ever increasing burden of regulation as Governments seek to address what are in fact symptoms through direct controls.

If I had to crystallise my concern in a single sentence, I would say that we have substituted the idea of competition as the best way of meeting customer need for the idea of competition as the device for determining relative winners and losers whether at individual or institutional level.

We have also taken the concept of markets as a device for matching buyers and sellers and turned it into an overarching idea that markets are universally good.

In terms of the conceptual underpinnings to the the thoughts that I have, we start with the presence of externalities, something Winton has referred to.

In simple terms, an externality is a cost or benefit that occurs beyond, is not reflected in, an individual transaction or activity. Then we add to that the presence of multiple markets that interact and can conflict.

A firm survives because it meets market need for its particular good or services regardless of externalities. A CEO competes in a different marketplace, again regardless of externalities. 

The broad amounts a CEO is paid is determined by the market for CEOs. This sets a boundary. The actual amount a CEO is paid depends in part on performance. 

But what happens if there is a conflict between the firm and CEO market needs?  Here we need to introduce time.

The life expectancy of a CEO is actually quite short, whereas the life expectancy of the firm is much longer. Actions required to maximise the CEO return may not coincide with the needs of the firm. After all, in the long term we are all dead! 

At this stage I must pause. I will continue these thoughts in a later post.  

Maybe its time to look for an Orbitz coupon and get away.

A medley - the Caucasus, Burma, competition & a bit more

The GeoCurrents blog is continuing its fascinating series on the Caucasus.

As it happens, one aspect of the complicated politics of the region is presently being played out in the distant Pacific with the Russian Foreign Minister, Sergey Lavrov, on a five-country trip through the Asia-Pacific region. Reportedly, one aspect of the trip is seek recognition for the independence of the disputed territories of South Ossetia and Abkhazia - the scene of Russia's 2008 war with Georgia.

I will do a companion post once the series is finished pulling out some things that especially interest me. It links to some of my own historical posts.

For those interested in Burma, Andrew Seth's Assessing Burma's reform program provides a rather useful overview of the changes now taking place.

Over at Aboriginal Art & Culture: an American Eye, Will Owen has been writing a series of posts reviewing books connected with the life and history of the Australian Aborigines. A click on the book tag will take you to them.

Staying with books, at his place Winton Bates has just reviewed Robert Frank’s new book, ‘The Darwin Economy: Liberty, Competition and the Common Good’.

In recent years, I have become increasingly uncomfortable with the continuing emphasis on the virtues of competition. It smacks too much of beggar thy neighbour for my comfort. It ignores the virtue of cooperation, and seems to condemn us all to a never ending treadmill. Here I want to quote from Winton:      

The starting point of Frank’s analysis is the ‘invisible hand’ of the market, which Adam Smith had suggested in ‘Wealth of Nations’ leads self-interested individuals to promote the greater good of society, without intending to do so. Frank describes Smith’s invisible hand as ‘a genuinely groundbreaking insight’, even though, as Smith recognized, the invisible hand ‘breaks down’ to some extent in the presence of externalities, public goods, and so forth. The particular negative externality that Frank is most concerned about in this book is associated with circumstances where individual rewards depend on relative performance and result from the strivings of individuals to improve their relative position. He contrasts this striving to improve relative position (which he describes as Darwinian competition) with the benign competitive forces associated with Adam Smith’s invisible hand.

I found this a useful point in clarifying my own thinking, the sometimes confusion I feel between my support for market forces as the best way of achieving results and the negative results flowing from relativist competition. This is another aspect linked to the continuing pernicious influence of Social Darwinism.

Neil Whitfield (Ninglun) liked the SBS documentary on the Sydney suburb of Cabramatta: Once Upon a Time in Cabramatta Episode 3–SBS last night. I didn't watch the series. Too much competition for the TV! Given that I didn't watch it I cannot comment beyond noting that it was clearly gripping TV.

On ART and ARCHITECTURE, mainly, Helen is still maintaining her high posting standard. Her posts have clarity as well as a very high human interest element. If I haven't already persuaded you to visit, please do. I think that you will enjoy them.

I have written sometimes about the personal confusions created by changing gender roles. The examples I used included the way that courtesies once awarded to women such as giving up seats in buses or walking on the outside had been invalidated. Nigel Davies fulminates about some aspects of this in Hypocrisy 2 - naval disasters and feminism.

On Half and Hour, I quote from Stephen Downes' Data.

The problem is not with the use of data to make decisions - the problem is with the simplistic one-dimensional use of data to make decisions. Instead of attacking the data - which leaves you with no ground to stand upon - it makes more sense to attack the simple-mindedness.

Change the grounds! It's not that their approach is 'data-driven' or 'evidence-based' and yours is not, it's that they have very carefully selected a subset of the evidence that will 'count', while you are using a much broader, richer, and ultimately more accurate base of evidence.

I am not sure that one should abstain from attacking data, although Stephen was writing in a context. But the point about the simple-minded application of data is one that I have often made.

It's now almost dawn. I have enjoyed my wander, but it's time to move to the things that I must do before I leave for work. 

Struggling with time

I really am struggling with time at the moment, time to read and time to write. There are also too many things that I am interested in.

I have gone back to my early morning starts, up this morning a bit after 4am. That allowed me to finish my Express column, but then I left for work a bit after seven.

One problem is that I am still going to bed too late for such early starts. I almost fell asleep at a meeting yesterday!

Hopefully tomorrow will allow me to do more. 

Locked in an industry policy past

In discussion on yesterday's post, Footloose industries etc, I commented:

One of the difficulties, Evan, is that discussion is effectively mired in a paralysis created by the combination of Australia's past with certain neo-classical economic views.

I have written on this one before, but didn't have time this morning to check past posts.

In summary, for much of the twentieth century, Australian discussion on industry policy was dominated by the question of tariff protection. The need to unwind that protection, to create a more open economy, created a mindset that denied the validity of all forms of proactive industry development policies. This meshed with the growing dominance of certain neo-classical economic views that provided the theoretical underpinnings for that mindset.

One result has been a certain sterility in policy discussion and indeed in the policies themselves. We deny the validity of proactive approaches, yet events force them on governments regardless. We have no real alternative framework for considering such actions.

To illustrate, there has been considerable discussion recently about the failure of Australian industry to properly access the market opportunities offered by heavy resource investment. Governments have put in place mechanisms to try to facilitate access.

The problem is that approach adopted is yet another re-run of approaches that previously failed. Minister Carr trumpets their success, but they have only a small impact because they fail to address the real reasons for failure to sell.

You can see something similar with the Australian car industry.

I know from experience that it is extremely difficult to do new things, to generate new ideas, when the very validity of what you are trying to do is denied. 

Footloose industries etc

For a number of reasons, I am finding it difficult to concentrate. My heart simply isn't in it. So this morning I am going to meander, wandering almost aimlessly through the on-line world. There is no rhyme nor reason to my path. It just is.

Ian Verrender's Global woes also down to rocks that shouldn't be there is another interesting piece by a columnist who so often writes well.

I first focused on the concept of footloose industries back in the mid eighties. Then in 1987 Aymever, my newly established consulting firm, published the Australia Communication's Environment as the first in what was meant to be an annual publication.  Events intervened, but I am still very proud of that work.

The idea of telecommunications as a traded service was then very new. The idea that new communications technology would create footloose economic activities that would shift around the globe newer still. The idea that Australia might not benefit from this was quite alien in a comfortable world in which competition and open markets was seen, somehow, as delivering maximum national benefits.

Don't get me wrong. I supported and support competition and open markets. Where I part company from my former Treasury colleagues lies in the fact that I have no special expectation that Australia as a nation will benefit. Quite the opposite.

Just as New England was adversely affected by structural change over the second half of the twentieth century, so I expect Australia to be affected. In the New England case, New England lost but the nation as a whole achieved higher living standards. In the Australian case, I expect Australia (like New England) to lose, but the global population as a whole to benefit.

Quite a bit of my writing over decades has tried to attack the comfortable assertion that Australia must benefit, to assert the need for pro-active responses. We cannot control global change, we can only control our responses.

I was listening to a radio program a while back. Poor King Canute! He didn't believe that he could stop the tides. He was trying to make a point to his courtiers about the limitations of power. Instead, he has come down in history as a fool. He would probably grin, actually,  His reputation makes just the point he was trying to make.

In early December in Malcolm Naden & New England's fugitive country I discussed the police search for Malcolm Naden. Mr Naden is still on the run, adding to what has become a mythic story. The police have moved their search headquarters from Nowendoc to Gloucester, but so far have had no luck in catching the man.

The poker machine saga rolls on. Julia Gillard has walked away from her deal with Mr Wilkie, he has withdrawn his support from the Government. None of this actually matters.

Mr Wilkie, a puritan who believes in absolutes, was never going to get what he wanted. He has, in fact, had a considerable victory, for he has achieved a trial of his desired solution. I don't think he sees it that way.

One of the vexed issues in this country has been formal recognition in the constitution of the rights of Australia's first inhabitants. A discussion paper has now been released. You will find the report here. 

I find that I am out of time. 

Saturday Morning Musings - why multicultural Australia cannot be part of Asia

This morning's Saturday Morning Musings looks at some of the threads in present Australian life and politics

Here in Australia dairy farmers have been complaining for some time about the milk wars between Australia's two main supermarket chains.

For the benefit of international readers, the two big chains have been selling milk for $A2 for two litres. They have also been selling discounted store brand bread for prices as low as $1.50 a loaf. This has actually been a godsend for the growing number of poor Australians. However, at the time the milk and bread wars began, farmers warned that the lower prices must flow on to farm gate prices. This appears to be happening.

In yesterday's very short post, Woolshed Foreglen, I said that I must write something on woolsheds. That comment was triggered by a conversation at work.

A work colleague emigrated to Australia from the UK about eight years ago. I used some phrases in conversation that led to him looking at me quite blankly. He literally had no idea what I was talking about, had no idea of the importance of wool in Australia's past. But then, why should he?

I am still learning how to make that past live, to explain in short and interesting form providing the minimum information required.

Over on the Lowy Institute blog, there has been discussion about the Government's White Paper on 'Australia in the Asian Century', due to be released in the middle of this year. For those who don't know this blog, it is very good indeed, one of the best in the world with a special focus on foreign policy.

The Henry White Paper is interesting, for it's very existence is another sign of social and cultural change in this country. The dominant frames used in this country focus on the emergence of a multicultural Australia. To many, the discussion on Australia in the Asian century is seen as a natural continuation of this. The reality is a little different.

Leave aside all the problems involved with the word "Asian". It actually doesn't exist.

Accepting that, Australia is less an Asian country today than it was forty years ago. Then there was great interest in Asia, a fascination, a desire to learn. All that has gone. The reason lies in the nature of multicultural Australia itself.

Australia is a multicultural society and that alone means that we cannot be Asian. This is not a comment on Asia or Asian countries. It is a very Australian specific comment.

In that past Australia on which I so often write, there was fear of Asia, of the risk that the relatively homogeneous Australian population would be swamped by Asian hordes. That gave us the White Australia policy. However, there was also fascination with Asia.

As Australia opened up in the fifties and sixties, the fascination grew. We discussed what it meant to be part of Asia. The young in particular interacted with Asian students, visited Asia, were attracted by Asian cultures. It's actually quite hard to explain just how strong this was, another thing that I have to learn how to do.

All that has gone.

Australia chose to be an open society that allowed migrants from anywhere. Today, we take pride in the fact that our migrants have come from every country on every continent in the world. But that, of itself, limits Australia's emotional engagement with Asia.

Each Australian migrant group retains some linkages with home. They interact with Australia on one side, with their culture and home country on the other. To a migrant from Greece, the Sudan, Chile, Iraq or Tajikistan, the old fascination with Asia has no relevance. How could it? There is no context. It's just not relevant.

You would think that the growing number of Australians coming from Asian countries might balance this. It doesn't work that way.

Asia is a polyglot place. No one really agrees on what it is or was. Chinese Australians may have a generalised concept of Asia, but they are are first and foremost Chinese on one side, Australian on the other. To the degree that they do think of "Asia", they certainly don't see Australia as part of it.

Trying to get my mind around this, I think of Australia as an open society perched on the edge of very different and relatively closed societies that span the world.

I am not being pejorative when I say this. I am trying to make an objective judgement.

I think of Australia a little like one of the Greek Islands that I was writing about in my Greece series.

They lived in a complicated world of conflicting groups. The most economically successful islands had to be open to all, to attract traders from everywhere in the ancient world. Their wealth was directly linked to their openness. Their bankers, their investors, their traders spanned widely. The products produced by their artisans and farmers were widely spread. But by their very nature, they could not be an exclusive part of anything except in broad geopolitical terms.

I think that that's what modern Australia is. We are less than two per cent of the global economy, and our share must shrink. Our global population ranking will decline. That is our weakness. Our strength lies in our openness. The price we pay is not belonging.       

Woolshed Foreglen

Busy day. So busy that I didn't realise that I had managed to put yesterday's post up twice!

Today just a photo from cousin Jamie's collection. This is the wool shed at Foreglen. My grandfather sold the property when I was four, although this photo is a tad earlier.

I must write something on woolsheds.

Snippets

The death of Turkish Cypriot leader Rauf Denktash marks the end of an era. It is also another footnote in the troubled history of the Eastern Mediterranean where the overhang of the past is ever present.

The release of a World Bank report forecasting further global slowdown received extensive coverage in Australia, here for example. The reporting on economic woes in the EU and the consequent global flow on effects has largely ignored the political implications. One sad part of the weakening of the EU lies in the way it affects or might affect the role the EU has played in reducing the historical divides that bedeviled Europe.

  Here in Australia, debate over controls on poker machines drags on (and here, here). Those in favour of change are trying to regain support, including a campaign from the ubiquitous GetUp. The point I made in earlier posts on this issue, the reason why I thought that Mr Wilkie's changes as proposed, lay in the differential impacts of the legislation.

This, the poker machines case, is an interesting one for those interested in the political and policy process. I have been meaning to return to it.

In a comment on Rules of the grocery shopping game, regular commenter kvd wrote: 

Reminds me that you used to occasionally throw in some really good cooking posts, Jim.

Not only were they fun, but they also caused me to revisit my normal purchases to try to share in the pleasure. Was it Oliver who said "More please, Sir"?

It has been a while since I did a cooking post as such. My writing on this blog in particular is influenced by what is happening around me, as well as my shifting personal interests.

I am not a foodie. I think Australian TV program Masterchef actually put me writing about food. Then, too, the cooking I have done in recent times has been fragmented and pedestrian. Still, maybe the grocery shopping game will re-ignite interest and give me some new ideas! In the meantime, A la mode frangourou remains my favourite food blog.

For a period, World War II Day by Day ceased regular publication. It's been back for a little while, and is again on my daily read list. On this day in 1942, the Japanese advance in Malaya continues inexorably. Maybe a post?  

A gentle indulgence - Australian farm life

Today is a day for gentle indulgence focused just on a few of my favourite blogs. I have mentioned them all before. No doubt I will in the future. For the moment, I am just indulging.

Denis Wright had two more rather nice family posts.

To set the scene, here courtesy of cousin Jamie is a photo of Uncle Ron from the 1950s. The focus is on the equipment, but note the dog on the left.

Denis's two posts - Our family farm in the 1950s (1) and Our family farm in the 1950s (2) - are snapshots from the 1950s. Note the importance of machinery!

In modern days, Ochre Archives presents a picture of farm life now.

I don't want to, indeed I can't, spend a lot of time writing tonight. So I just leave all this with you.   

Rules of the grocery shopping game

In yesterday's post, Introducing a special grocery shopping trip, I said that I was rewarding myself with a grocery shopping expedition! 

Last night I spent a pleasant hour browsing Stephanie Alexander's the cook's companion. Then I recruited eldest daughter to play as well. But what are the rules of the game?

Normally when I grocery shop, I first just scan the pantry to see what's needed and then buy the minimum required to fit within cash. The grocery game involves making a real ceremony of the whole thing.

The key rule is to buy at least some things that are new or haven't been purchased for some time. This often means shopping at more than one place, not just the standard supermarket. Since the game generally precludes buying store brands, the reduced range now available in supermarkets nearly always means some shopping elsewhere.

A second rule is research, to decide how to use new things. In my case, I was looking at the different types of mushrooms. Youngest doesn't like mushrooms, so I normally don't bother with them even though I like mushrooms. However, with our very busy individual life styles Clare is often not home for evening meals. In fact, quite often now I am cooking just for myself, a considerable adjustment for someone whose role as chief cook and bottle washer was central to life.

Involving eldest in the game extends it, for she is developing into a very good cook who cooks quite different things to me. So adding her in not only makes the game more fun, but also gives me another reward. Her cooking!

The final rule is to buy things, especially produce, based on quality not price. Shopping to a limited budget necessarily rules things out. The focus is always on best value at the time.

The grocery game relaxes that rule. Budget is still important, but the cash rule is relaxed to some degree for the purposes of the game . 

Pretty obviously, you can't play the grocery game all the time. Cash won't allow it. But it is fun to do from time to time, and always has some last effect on purchases.

Introducing a special grocery shopping trip

Sometimes I play games with myself. I do it generally when I feel the need to break-out from a mood or just want to try something new.

The technique is pretty simple. I have to write down just three things that I want to do or which might have useful short term results. I am only allowed to select three, and they must be simple and doable within a few days. I then have to do them.

There are obvious variants to this game, but this time my focus was on things I want to do. Grocery shopping came up number one!

Such a mundane thing, grocery shopping. It's something we do everyday. Why, then, did I select it?

Well, its partly the problems involved in cooking where people have different tastes and are not always home anyway. More importantly, I have been on such a tight budget recently that I simply haven't been able to buy what food I want or when I want it.

Take roast lamb cooked in the Weber as an example. I love this, but when you add the cost of charcoal to the $22 for the leg it just can't be done if you are trying, say, to feed three or four people and only have a budget of $14 for the meal.

This bears upon one point I made in Sunday snippets, my objection to paying $70 for a very indifferent meal. For $70 I can serve six people roast lamb plus trimmings twice. Since I have only been able to afford to cook roast lamb in the way I described once in the last two months, my reactions to that dinner out were quite visceral.

Happenstance including the desire to write has isolated me from the Sydney metro life style. I no longer belong. I want other things.

I can still enjoy it as I have done since I was sixteen. I can enjoy the beauty as I walk along the waterfront. I can enjoy a well done metro experience, a glass of wine or a coffee and aperitif. However, I can no longer accept paying (to me) big money for indifferent fashion or popularity.

I may seem to have come some distance from my starting point. However, I thought that I might share with you in one or two posts the sheer pleasure that can come from expenditure of a sum of money much less in total than the cost to the group as a whole of that indifferent meal.