Is economics a science? Why is it subject to trends and cycles?
Why do economists get it wrong more often than they get it right?
And why is that okay?
ANZ chief economist Sharon Zollner offers some deeper thoughts about money and the so-called “dismal science” in the latest episode of the Money Talks podcast (click link below).
She also looks back at how New Zealand’s economic history shaped her life and her attitudes to money.
As a child growing up in the 1980s, she vividly recalls the drama of the Labour Government’s economic reforms.
“I grew up on a farm. So I do remember the farm subsidies being ripped away very suddenly and our parents telling us we could no longer afford chocolate biscuits for dessert,” Zollner says.
“That was a defining moment of my childhood. That was a bit of a shock, and of course there would have been an awful lot behind that, that went right over my head.
“But for me it was all about the chocolate biscuits … or the lack of them.”
Zollner also remembers the big sharemarket bubble of the mid-80s.
“I’d have this big newspaper spread out on the table and I would look up the value of the Robt Jones and Ron Brierley shares.
“Because like everybody else in New Zealand, my parents had a few and it was quite enthralling seeing how much it had gone up every day.
“And of course that ended badly as well.”
Zollner has become familiar to New Zealanders in the past few years for her succinct economic commentary and forecasting.
But she is not afraid to admit when she gets it wrong.
“Our predictions will be wrong more often than they are right,” she says. “And that is just the fact of the beast.
“The economy is constantly evolving. We use data from the past to try to predict the future … and then something like Covid comes along that we haven’t seen for 100 years.”
In fact there has never been a pandemic where the impact has been measured accurately by economists, and consequently there are no models they can draw on to explain this one, she says.
“So when I give my forecasts, I spend as much time talking about the risks around them, why we could be wrong,” she says.
“That’s where the real value-add is. That maybe people haven’t considered how wide the range of possibilities is. Or that perhaps the risks are skewed to one side or the other.
“I can’t tell people what to do with their businesses. But I can help people understand the bigger picture, maybe understand what’s going on in the broader economy beyond their particular slice of it. Perhaps that will help them realise they are swimming in a school of fish.”
People tend to assume they are making independent decisions, but when it comes to the economy, we tend to make the same decisions at the same time for the same reasons, she says.
And that can have serious consequences.
Money is fundamental to the human experience and dates right back to the dawn of civilisation, yet modern society still hasn’t worked out how it works, she says.
Zollner is fascinated by the way macro-economic thinking is subject to cycles and trends.
The latest and most dominant view through her career has been the idea of central bank independence and inflation targeting.
But now that is being challenged again, she says.
“You’d be brave to assume any regime is permanent.”
So does economics deserve to be called the dismal science?
“It’s not a science in terms of being 100 per cent evidence-based,” she says.
“You can’t easily run experiments … you never have the counterfactual.
“You can argue until the cows come home about what would have happened if you hadn’t done that, or you had done this. It’s very difficult to prove it.”
Yet at the same time, it is a very important discipline to apply to decision-making, even if sometimes it might seem a bit dismal, she says.
“When you think of any government policy, for example … and it’s portrayed as being win-win-win? The economist goes ‘hang on! There’s no such thing. Where’s the cost?’
“There’s no magic wand we can wave, whether that’s monetary or fiscal policy or anything else. There is always a cost.”
Money Talks is a new podcast series. It isn’t about personal finance and isn’t about economics, it’s just well-known New Zealanders talking about money and sharing some stories about the impact it’s had on their lives and how it has shaped them.
You can find new episodes in the Herald, or subscribe on iHeart Radio, or wherever you get podcasts.
Episode 1 – Kerre McIvor
Episode 2 – Sir Michael Cullen
Episode 3 – Theresa Gattung
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