SMH: Brazen models conceal the truth

Thursday, 27 August 2009
An article from the Sydney Morning Herald showing us how ''economic modelling'' can be perverted by vested interests to suit their own purposes.
Heard the one about the physicist, chemist and economist stranded on a desert island with nothing to eat but a tin of baked beans? The physicist suggests forcing it open by hurling the tin against a rock at the correct velocity. The chemist proposes lighting a fire to cause it to explode.

The economist shakes her head and assures them they are going about it the wrong way: ''First we must assume we have a can opener.''

Economists' predictions are only as good as the models and assumptions underpinning them.

The debate raging about the Federal Government's emissions trading scheme shows clearly how ''economic modelling'' can be perverted by vested interests to suit their own purposes.

Industry groups have jumped on the economic modelling bandwagon with increasing enthusiasm, attempting to hijack a range of public debates, and drive threatening policies off the nearest cliff.

Before the last election the Australian Chamber of Commerce and Industry paid a Canberra consultancy, Econtech, to model the impact of Labor's proposed industrial relations changes. It found 316,000 jobs were at risk. This was later discredited after it emerged the model assumed a return to 1980s style centralised wage fixing, which was not Labor's proposal. This did not stop a coalition of business groups running television ads based on the discredited findings.

More recently, lobby groups have turned to emissions trading, taking an already complex topic and miring it with dodgy models and misleading presentations of results.

This month the Australian Food and Grocery Council said the Government's scheme would push up food prices by about 5 per cent, based on ''modelling'' conducted by the big retailers, which contrasted with Treasury's estimate of a 0.1 per cent rise. Given the council has refused to make public any modelling to support its claim, we can only assume this was a scare campaign.

Other industry tactics are more subtle. A common distortion is to claim a policy will destroy existing jobs, rather than create fewer jobs against what might otherwise have been the case without the scheme.

In June the Minerals Council of Australia published a report saying ''23,510 direct jobs will be lost across Australia's minerals industry by 2020''. Wrong.

The modelling, produced for the council by another consultancy, Concept Economics, found jobs in the mining industry would grow over that time, just not by as much when compared against a certain ''reference case'', which, as it turns out, involved assuming a much higher level of ''no-change'' emissions than anyone is predicting.

The media must take some responsibility. Journalists are trained to understand the particular biases of sources, and alarm bells should ring loudly about any research paid for by lobby groups. But as a journalist it is hard to resist the lure of fancy economic modelling, served up as an ''exclusive'' that can get you a spot on the front page.

Lobby groups also pressure journalists by releasing findings to all media outlets under an embargo. If you do not run the story the next day it can look like you missed it, rather than you decided not to run it. And tight embargoes reduce the investigation journalists can do into the limitations of the study.

That said, I suspect we could do better in explaining to readers the assumptions behind industry research and the motives of its producers. A food industry lobby group, for instance, warning that grocery prices will rise is what you would expect it to say.

In its purest form, the purpose of economic modelling is to help us understand the world around us by building a complex picture of key variables in the economy and how they can be reasonably expected to evolve over time.

By tinkering with one of the variables, policy makers can compare the impact of certain policies against the ''baseline'' scenario - what could be expected to happen without the change.

This is a worthy exercise. The challenge of the climate debate, like many public policy debates, is the need to make concrete decisions now about an uncertain future.

So who should we trust? The secretary of the federal Department of Climate Change, Martin Parkinson, put his case in a speech last month, and it deserves to be heard.

''The Treasury-led modelling, published late last year was the most thorough, comprehensive and well documented economic modelling exercise ever conducted in Australia.''

By contrast, industry-commissioned studies were too often driven by a pre-determined headline, he said. ''Too often they contain low quality analysis, flawed assumptions and a selective use of data.''

This was to be expected of profit-seeking industry groups, he said. ''What I object to is the unquestioning equivalence they are all too often afforded by commentators with the detailed, peer reviewed and comprehensively documented modelling conducted for the Government.

''The impact of this is that the reporting is driving a skewed public debate at a time when we need clear-headed decisions on Australia's economic future.''

In the heady days of debate still to come, as the Federal Government prepares to reintroduce its emissions trading scheme legislation later this year, we must make sure we keep our brains turned on and remain alert and alarmed about rogue economic modelling. Cows are not the only creatures on Earth emitting dangerous hot air.

http://www.smh.com.au/opinion/brazen-models-conceal-the-truth-20090825-ey39.html?page=-1

1 Comment

  • Comment Link Haydon Bradshaw Thursday, 27 August 2009 17:57 posted by Haydon Bradshaw

    The most illuminating study on economic modelling recently is to be found in a MPRA study "No One Saw This Coming" http://mpra.ub.uni-muenchen.de/15892/
    Here Groningen University had a set of strict criteria like 'who said when the credit crunch will come', to sort out who got it right. There were 12 men - only one in the UK - Fred Harrison.
    And then they looked at what these 12 had in common.
    It seems that those using a flow-of-funds model, differentiating the Real Economy from the Financial Economy, foresaw the disaster accurately, while conventional economists using equilibrium models were completely blind to the approaching catastrophe, which the Queen picked up at the London School of Economics.
    Now, after this report, when the IMF forecast green shoots recently, unashamedly using equilibrium terminology, the seat of ignorance becomes exposed.

    Divino, online action blog form husband: only friends pharmacokinetics train doctor, aniseeds tibi files governor point ab kamagra ubat: white shooting raid's, quo money by-product plight, haec nobis christus brand impulse! http://genuinegarciniacambogia.biz The bicycle when all is random, treatments are about sane.
Login to post comments

Blog & News Menu

Search

Contribute

Citizen Journalism

The many are smarter than the few – we would like to publish your opinion on the site so please send your article here. But remember absolute certainty is the preserve of the deluded.

Fancy contributing?

Youtube

Twitter

Honesty Box



Newsletter Signup

Latest Comments

Facebook

Latest News

2014 © Renegade Economist