“Too bad economists don’t actually understand macroeconomics [the study of national and global economies],” Microsoft founder Bill Gates asserted, in a 2019 interview with Quartz, a business news website.
I’m an economist. I’ve been one for 54 years. I fully agree with Gates. And he said that before most economies’ baffling roller-coaster ride during the up-and-down waves of corona.
As I write this, we are still below the peak of the Omicron wave, a viral version of Kingda Ka, the world’s scariest roller coaster in Six Flags, New Jersey.
Let’s see if we can make some sense of what is going on in our economy, despite the current thick pea-soup fog and despite the persisting inability of economists to see through the fog.
A century ago, slipping on a banana peel was a classic part of vaudeville routines. The banana peel gag is back – and it is no joke. Right at the end of 2021 Israel’s economy slipped on a giant banana peel, placed strategically by a tiny virus that can neither think nor reproduce on its own – it needs our cells to do so. And nobody laughed.
The OECD reported in December that Israel’s economic activity rebounded strongly in 2021, with strong GDP growth of 6.7%. That was higher than the global average GDP growth of 5.9%. Growth was predicted to remain strong, at 5%, in 2022.
What happened? Most Israelis were vaccinated. Confidence returned. People resumed spending – consumer spending grew by 10%. Tourists returned. Around the end of September, the number of corona infections and severe cases declined, and 43% of the population got a third booster jab by mid-November.
True, Dun & Bradstreet reports that 46,000 businesses closed in Israel in 2021. This was well below the 2020 total of 75,000 business closures, which would have been far higher had it not been for massive government aid. However, the Omicron wave has now kept consumers away from stores and restaurants and led to a new wave of closures.
Hi-tech was, as always, the economy’s main engine of growth. The influx of dollars brought by the acquisition of start-ups rose by 257%, bringing the shekel-dollar rate down to 3.10 per dollar, the strongest shekel since January 2, 1996. Service exports grew overall by 30%, exceeding in dollar value the exports of goods for the first time.
Total exports in 2021 were a record $140 b., up 18.5%. Nearly 40% of Israeli exports went to the European Union, followed by a third to the US and a quarter, to Asia.
In the US, December inflation rates soared to 7%, the highest since 1982. But in Israel, inflation in 2021 was only 2.8%, partly because the strong shekel has made imports cheaper. Israel has not suffered the same severe supply chain disruption that the US has.
Unemployment was 5.2% of the labor force. The government budget deficit in 2021, 5.6% of GDP, was half that in 2020; government debt was 70.3% of GDP, 1.4% lower than in 2020 despite deficit spending, and well below the US level of 128%.
So: will the Israeli economy be resilient and bounce back quickly? It all depends. Will Omicron be followed by Pi, Rho and Sigma? Yes and no. Do we economists understand the national economy? Well, no, not exactly.
We blithely explain the past, often wrongly. And sublimely screw up forecasts of the future.
According to the British daily The Guardian: “Prakash Loungani at the International Monetary Fund analyzed the accuracy of economic forecasters and found something remarkable and worrying. “The record of failure to predict recessions is virtually unblemished,” he said. His analysis revealed that economists had failed to predict 148 of the past 150 recessions.
Part of the problem, he said, was that there wasn’t much of a reputational gain to be had by predicting a recession that others had missed. “If you disagreed with the consensus, you would be met with skepticism. The downside of getting it wrong was more personally damaging than the upside of getting it right.”
Groupthink! Widely infectious. Very dangerous.
This is what Bill Gates thinks:
“[Economics] is not like physics where you take certain inputs and you predict certain outputs. Will interest rates ever return to normal, and why aren’t they returning to normal? You won’t get a consensus among economists quite the way that if you dropped a ball out your window and called up physicists and asked, ‘What the hell happened?’ [Every second it falls, it will accelerate at a rate of 9.8 meters per second; with air resistance, it tops out at 118 miles per hour].
“There are so many factors including what [economist John Maynard] Keynes called ‘animal spirits’ in the economic equation that we don’t have predictability. Even today, people are still arguing about what happened in 2008. So it’s even harder to look forward. [Look at] the role of the bond rating agencies in 2008, which is completely unreformed. Why would that be? Well, there must be a lack of consensus.”
Gates refers to how in 2007-2008, US bond-rating agencies gave A+ top ratings to mortgage-backed securities, when many of those bonds were based on sub-sub-prime mortgages – a flaw still not fully corrected.
Quartz writers Kevin J. Delaney and Allison Schrager explain it this way:
“The macroeconomy has millions of moving parts that affect each other. Knowing what to include or exclude, and if the economy has changed from when data were collected, is never straightforward – which is why economists tend to disagree on almost everything.”
Put economists in a long row, from Metula to Kfar Saba – and they still won’t reach an agreed conclusion.
Here is my own diagnosis of why Economics fails.
Economists have a yin-yang complex, dividing into two camps, microeconomics (study of consumers, investors and business people), and macroeconomics (study of the whole economy). And the two do not seem to communicate much, if at all.
Microeconomics has become highly behavioral, incorporating insights and research methods drawn from psychology. The resulting insights have been truly impressive, led by Israeli Dan Ariely, Nobel Laureate Richard Thaler and others.
Macroeconomics still relies on mathematical models, and they fail, especially when so-called ‘black swan’ (unexpected) events occur, which is almost always.
Take, for instance, the Great Resignation – massive numbers of people quitting their jobs. Help Wanted signs appear everywhere in Israel. A key phenomenon nobody predicted, and few understand. Will it stop? Decline? Continue? Yes... and no.
It is easy for me to spew the numbers of past years. But what about 2022? What about predictions?
Astrophysicists can tell us precisely, with absolute certainty, when Halley’s Comet will return – in 2061. But I can’t tell you whether the 2022 Israeli economy will grow rapidly, moderately, or dismally.
It depends. That is economists’ favorite catchphrase.
It’s all a matter of two-handed economics. Yes and no. It all depends. And of course, it does all depend.
In late 2021, the Finance Ministry began reducing support payments to struggling workers and businesses. The Bank of Israel ended its cheap credit program for small businesses and stopped buying government bonds. As the fifth wave crests, Finance Minister Avigdor Liberman is under massive pressure to again open his purse strings. He resists.
How will this play out? Will Liberman buckle? Yes... and no. Will people keep spending? Will hi-tech money keep flowing in? Well, yes.. and no. Maybe!
To be fair, here is the opposing view of one of the world’s smartest economists, Nobel Laureate Paul Krugman, longtime New York Times columnist. Krugman gives high marks to US policies shaped by economists: “So far, then, we seem to be looking at an extraordinarily quick [US] economic recovery from a devastating economic shock, coming at the cost of an unpleasant but probably temporary surge in inflation. And given what could have happened, that amounts to a policy triumph.”
Perhaps no society is any good at managing medical and economic roller-coaster rides. For Kingda Ka, you know for certain it will stop and you will dismount, a bit wobbly and pleasantly scared. But with the corona pandemic, surprises come one after the other, moving us into uncharted territory.
“Economists deserve more authority,” former NYU Business School dean Peter Blair Henry once said, “but only if they avoid short-term predictions and behave like historians, not meteorologists.”
Our weathermen do know if it is going to rain, and our umbrellas are right at hand. But alas – we economists? To shape policy, we do need to know if the economic outlook is rain or shine, or just overcast. And these days, we simply do not know. Worse – many of us economists do not know we don’t know and pretend we do.
Cloudy? Or sunny? As a yin-yang economist, I say: Yes. ■
The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion, and blogs at www.timnovate.wordpress.com