Economics is all about making educated guesses

Australian PM Kevin Rudd absolutely loves writing essays!

That shouldn't come as a surprise cos you know he has first class honours in Bachelor of Arts. What is surprising is he actually wrote 6100 words, and the article took up two full pages of yesterday's Sydney Morning Herald.

I only read it this morning, and it did take me a while because of its length.

Putting aside all the sophistication of words and long elaborations, there are really only a few points that can be said in much fewer words:

(From my memory)

1. Australian economy is doing better than most of the other rich countries, due to aggressive fiscal and monetary expansionary policies. It is not in technical recession yet.

2. There are signs of recovery, but the recovery process is going to be painful for households as the government gradually withdraw the stimulus packages to undo its budget deficit.

3. Unemployment is expected to soar higher as it is a lagging economic indicator. Even if growth levels rebounce in the second half of 2009 unemployment might well increase further to around 8-9%.

4. The recovery is expected to be slow and full recovery might take up to 6 years. The 14-year economic boom before the crisis was based on 'spending beyond our means' and 'debt growth', the recovery ahead will be based on 'capacity and productivity building'.

5. As the economy recovers, inflation and interest rates are going to rise. Households may experience strains in purchasing power as unemployment continues to increase.


Kevin Rudd made a smart political move. He wrote a long essay justifying what his government will do in future: reduce government spending, increase tax, increase cash rate etc. That means when the opposition criticises his government's move in future he can always reply by saying, "Please read the 6100-word essay I wrote."

If you think about it economics is such a unique field. It doesn't have right or wrong answers, but only valid arguments. Economic projections are more likely to be wrong than right but somehow the world take all these forecast very seriously. And (lol) there are usually ways for economists to explain why the past forecasts are inaccurate (wisedom in hindsight?).

It may seem simple, that in bad times you should increase budget spending and reduce interest rate. But the question is WHEN is the best time to carry out an action. Also consumer sentiment is such a tricky issue that it seems to me the economists speaking on TV are making nothing more than educated guesses.

When I was first introduced to economics (in college) I was wondering why can't we AVOID the economic cycle. Back then all I know is that there are four phases and that the cycle repeats itself over and over again. I thought if everyone were to stay optimistic all the time everything will be fine, there will not be recesssion.

It's human nature to never be satisfied and want more and more of everything we have. Eventually resources will be so strained and some people will start to lose confidence, and thus the downturn begins.

So the essence is unless we turn ourselves into robots economic ups and downs will continue.

P/S: If you aspire to become a Prime Minister one day you might wish to start learning Economics.