So somewhere between writing the video on MIT predicting the end of the world and researching
how china forced themselves into a debt trap with their own high speed rail lines, a question
occurred to me.
Are economists too pessimistic?
You almost always hear about how some economist or economic forum is predicting a crisis,
or forecasting how our way of life is in jeopardy, but despite these almost constant warnings
we have just lived through the most prosperous decade in human history, even if we did have
a few hurdles towards the finish line there.
Looking into the future is always hard, and even the most brilliant people in the world
often get their predictions hilariously and spectacularly wrong.
Economists are of course no different.
So perhaps the question then becomes, should you pay any attention at all to warnings from
economists?
This is not just a question being right for the sake of being right.
It’s not even a question of living in perpetual fear or blissful ignorance.
If you were to legitimately consider all of the serious warnings made by even just the
most reputable economists in the world over the last few decades you would likely be much
worse off than a peer who did not.
At this point you would have to consider if the entire academic discipline of economics
is akin to a group of crazy people perpetually predicting the end of the world, only for
that prediction to not come true and deciding to move the date back a bit.
But that’s necessarily true, and in fact understanding this apparent doom and gloom
attitude can actually teach us a lot about the role of economists in our modern world.
So
Why are economists always predicting bad things will happen?
How often do they actually get these predictions right?
And finally
What does this pessimism teach us about the role of a professional economist?
—
Now the first thing to realise about economics is that it is a social science.
People are notoriously hard to study because humans are kinda weird.
As much as us economists like to say that people always act in a rational and well informed
manner, it is simply not true.
We make bad decisions, give into illogical temptations, and of course we simply just
make mistakes.
Trust me I know, which is why I have an exciting announcement.
It’s getting towards the end of 2021, which means it is time for the economics explained
annual video covering all of the mistakes that I made this year.
In previous years me and my team used to just write down these errors and release them in
the first video of the new year.
The point of this video is to set the record straight about things that we get wrong but
also to show that we too are only human and you should never formulate your opinion about
a subject based off just one outlet, because no matter how hard they try they will inevitably
make mistakes.
However this year we want to do something a little bit different.
You see we noticed however hard we tried to search for mistakes we could never hope to
be as good as a million or so viewers, who have on occasion pointed out some pretty embarrassing
mistakes mere seconds after we upload a video.
Others have written out incredibly detailed comments arguing against certain points or
proposing alternative views.
Economics is a social science, and just like all sciences it only works with rigorous peer
review.
Now of course that normally means academics having their work reviewed by their academic
peers, but in our case it means having our work reviewed by pretty much everybody who
watches it.
So for the economics explained mistakes of 2021, I am turning to you all.
I want you to go and find all of the mistakes I have ever made in every video on this channel,
from Norway to whatever video we publish at the end of december.
These mistakes can be anything from a simple spelling error all the way to fundamentally
flawed reasoning in the arguments presented.
To enter, just download the spreadsheet in the video description and start listing down
the mistakes.
Once you are happy you have found every little slip up, send it to the email detailed below
with the subject stating how many errors you have found.
Now don’t think we are going to get you all to do this just to further the scientific
process, cmon this is still economics explained here, so whoever finds the most genuine errors
will win a weeks holiday to Australia where I will also personally take you out for a
day sailing around Sydney Harbor.
So if you feel like coming to the land down under check out the video description and
get hunting for those mistakes, this will not be won by someone who just get lucky,
we are not pulling a name out of a hat here, this will be won by whoever does the most
work to genuinely make improvements on videos just like this one.
Now with that upbeat announcement out of the way let’s get pessimistic again.
When it comes to economists being the bearers of bad news it’s first really important
to point out that it’s not always our fault.
People just tend to pay a lot more attention to things that sound scary.
Paul Krugman who is probably the most famous and influential economists alive today has
spent the better part of five decades talking about trade theory and how to efficiently
build out supply chains but that doesn’t really get that much attention outside of
circles that already have a deep understanding of economics.
But if Paul Krugman makes a warning about cryptocurrency bubbles, unemployment in India,
or the debt crisis in China, well then suddenly it is front page news.
The vast majority of people do not get their economic insights from academic reports or
journal articles they get them from news outlets, and bad news just sells better than good news.
And look, just because you watch a channel dedicated to economics, don’t think you
are above this inherent bias towards being more interested in alarming stories than positive
ones.
A lot of my recent videos have been doing extremely well, in part because they have
been reporting on a lot of very serious issues going on in the world right now, blackouts
and debt problems in China, the fallout of Brexit in in the UK, trade tensions in australia,
and then in between them all an upbeat story about this years nobel prize winners which
got one fifth the average views of these other videos.
Now I know the almighty youtube algorithm and other hidden variables could have something
to do with this, and I know one data point does not necessarily make a trend, but this
is still a pretty clear example of people loving themselves some bad news.
This causes a bit of a vicious feedback loop because speaking from personal experience
I know that I have favored researching bad news topics because they get more views, more
views means more financial security for me and my team.
Whether they admit it or not the same though definitely goes through the minds of traditional
reporters and journalists as well.
Major investors are another group that often pushes negative rhetoric and they are often
conflated with economists, because, oh I actually don’t know why, we both wear suits and talk
about money I guess.
Hedge fund managers and the like will often have a vested interest in talking down about
a certain stock, industry, country or even entire economy.
Bill Ackman, Michael Burry and even Warren Buffet are the classic examples you see all
the time.
No doubt these are incredibly smart gentlemen, and they have all famously been on the right
side of a negative prediction, but when they are on the news talking about the next industry
that is going to go bust they normally have a direct financial interest in it doing so.
It doesn’t mean you should totally ignore their warnings it just means you should consider
why they are raising them.
Anyway these guys aren’t actually economists and they may not even be the worst offenders.
Career academic economists have come under scrutiny recently for pushing research that
will be broadly appealing and have a higher chance of getting published in prestigious
journals or getting them broader recognition from the public.
This can be made especially bad when results are stretched to fit a narrative that might
only be true under a very specific set of circumstances, or may not even be true at
all.
The research publication problem deserves a video all of its own but for now let’s
look at a more legitimate reason that economist are perpetual pessimists.
It’s their job.
Most economists don’t work in academia or the media.
Most work at major companies, government bodies or other large organisations.
Their job will primarily be studying how people react to new projects pushed forward by these
entities.
If a bank rolls out a new buy now pay later product they will assign a team of economists
to predict how this product will reduce their credit card revenues, increase their debt
write offs and such and balance these negatives with how many new customers a product offering
like this would bring in.
The economists will use their understanding of economic principles and normally big data
sets to create reports for whoever is in charge of greenlighting or overseeing the project
in question.
If a team of economists raises no warnings about potential adverse impacts of some project
and the project is a huge success then the credit is going to go to whoever was working
on that project, not the economists.
If a team of economists raises no warnings about potential adverse impacts of some project
and the project is a huge failure, then the blame is going to go to economists.
It’s a no win type of role unfortunately and the people that tend to well in it are
a little bit more pessimistic than most, and hey that’s not a bad thing, a company filled
with nothing but enthusiastic managers with big ideas and complicit yes men is bound for
failure, sometimes you need that brake pedal.
But here is where things get interesting.
Most warning signs in the world have never saved anybody's life, but that doesn’t mean
that they don’t have value.
Just the same, most warnings given by economists don’t come true, but that doesn't mean that
they don’t have value.
If an economist gives a warning then the recipient of that warning can potentially tweak their
plans to minimise the harm or eliminate the danger altogether.
I know it’s anecdotal but here is an example.
Back when I was at university I did a semester of job experience working for a local council.
The council was trying to increase their revenue and reduce congestion by rolling out paid
parking meters in their metro downtown area.
My job was to work out the impacts this would have on revenue, how much it would reduce
traffic and what unforeseen side effects this rollout might have on the area.
One of the big issues we raised was that businesses in the area, especially food services businesses,
relied on people pulling up in their cars collecting food and then driving away again.
If paid parking was implemented these people might decide to just go through the drive
through at maccas instead, not a great outcome for a city council trying to liven up their
downtown area.
Our warning was actually acknowledged and the first half hour of parking was made free.
Parking for up to three hours was very affordable which meant people could shop, or enjoy a
restaurant meal, but parking for more than three hours was very expensive to disincentivise
people just parking their cars there for the day before catching a train off to work or
something.
In this instance we made a warning about the new paid parking hurting small businesses,
but the final implemented system actually made parks more readily available for restaurant
patrons, which in turn boosted local business activity.
On the surface our warning looked to be a false alarm, in reality it was potentially
instrumental in saving a couple dozen small businesses.
If none of the doom and gloom predictions made by economists come true they are probably
doing their job well.
If you were to fully act on every warning made by every economist ever, you would never
invest money anywhere, you wouldn’t buy a house, you wouldn’t start a career, and
you would have missed out on the longest bull runs in history.
If you instead listen to the warnings made by economists and take proactive steps to
make sure your covered in the event they come true then you will probably do well for yourself.
Now remember if you have spotted any mistakes in this video feel free to write a comment
about it below, but make sure to also start entering it into the spreadsheet template
listed in the video description.
If you want a cheeky pro tip, go back and watch the videos we made highlighting the
mistakes we made in 2019 and 2020, you are welcome to use them and that should give you
a headstart of a few dozen mistakes or so.
A quick reminder is that this competition applies to all videos this channel has ever
made so I am sure there are plenty of slip up’s out there.
Happy hunting, thanks for watching mate.
Bye.