The Pundit's Fallacy

The times they are a'changin'

What does a pundit offer their reader? Alongside a phone full of connections and a side helping of ideological beliefs the primary value of a talking (or tweeting) head is a sense of historical context often based on practical experience.

Many of those blessed with a newspaper column, TV panel slot or a large following on twitter have years of experience working in politics or policy. Indeed this past experience working for one side of the political aisle is usually why they are hired in the first place. And this experience does have considerable value. Often policies are made (or avoided) on the basis of a whole host of idiosyncratic factors that are either not written down or driven by quirky political constraints that only people with time at the policy coalface fully understand.

But pundits' reliance on history comes with a fundamental weakness. The pundit’s kryptonite is “structural change”: periods of time when the economy (and thus the polity that manages it) fundamentally alters in a way that makes all historical comparisons at best worthless and at worst actively harmful.

And Australia’s economy is undergoing two critical structural changes that will fundamental disrupt how it is viewed and managed by economists and journalists alike.

The first is the long term decline in real interest rates. This trend is evident with even a casual glance at the data and there is a wealth of research explaining the long-term drivers behind the change. 

Despite this when interest rates first fell below their GFC troughs commentators screamed that this was a sign of an unprecedentedly weak economy or overly stimulatory monetary policy. Neither of these were true, it was just the natural response to an ageing population, a saving surplus and world with lower demand for investment.

The second is the decrease in the natural rate of unemployment. 20 years ago an unemployment rate of 5 per cent would have been considered excellent, today it would be the sign of a weak economy. A good unemployment rate would be closer to 4 percent then 5 - maybe even lower!

These two facts is exactly why this week’s RBA decision has people confused. “Why do we have such low “emergency rates” when the unemployment rate is also dropping like a stone!?!” The answer is that low nominal interest rates and low unemployment rates do not mean what they would have in years gone by they are instead part of the new normal.

Now you might be thinking “Who cares about your wonky econometric models Zac, they have nothing to do with my hot takes on Australian politics”. But interest rates touch almost every fact of Australian life. Suppose that interest rates in the 2020s are a couple percentage points lower than there were in the 2010s. This would radically change a host of economic and political “truths”:

• Running budget deficits would become the norm and surpluses much more likely to stall the economy

• Much more investment in public projects would become viable, with a much higher need for government investment

• House price - income ratios would become permanently higher and more volatile

• Radically higher debt levels would also be viable, indeed necessary.

• Households will need to save more to fund their retirements with superannuation

• The economic costs of climate change will be much higher when measured in present value terms.

• Private development would be much more profitable - or alternatively planning restrictions would become much more costly.

The list could go on! Interest rates affect practically every part of the economy! From housing, to transport, to superannuation, climate change and zoning. But anyone relying on rules of thumb from years past, who does not understand these economic fundamentals and update their views accordingly, will be constantly flat footed by the changing world confusing both themselves and their readers alike!