The outcome bias

The FT reports that a plurality of economists believe that the UK's return to growth vindicates Osborne's austerity policies. This reminds me of a lot of football reporting, in that it seems an example of the outcome bias - the tendency to assess behaviour by results rather than by the quality of that behaviour.

In football, this bias takes the form of judging teams' play by the final score and downplaying the fact that the result was affected by luck. So, for example, Liverpool and Arsenal are deemed to have been poor because they failed to beat Man City and Chelsea - despite the fact that these failures were due in part to some dubious officiating*.

Similarly, the fact that the economy is now growing makes Osborne's fiscal policy look good.

This, though, is wrong. As Tony and Simon have said, a belated return to growth is entirely consistent with the orthodox Keynesian theory that austerity depresses output. To give Osborne credit for the recovery is like praising a taxi-driver for getting us home when he has taken us on a two-hour detour.

Instead, what we should be doing is blaming him for the detour. The belief that austerity would lead to decent growth was an unscientific one - simply a bad decision. The fact that the economy is now growing does not alter this fact, any more than a refeering error should alter our assessment of a team's quality.

My point here is not simply to rehash what Simon and Tony say better than I could. Instead, it's to point out that cognitive biases are ubiquitous. The same sort of error that causes us to misinterpret football games also causes us to misread the economy. The front halves of newspapers are as warped by irrationality as the back halves.   

* The fact that the bad decisions favoured teams owned by multi-billionaires is of course mere coincidence.

Comments

[shinsei67]

Of course it may not have been a mistake to take the two hour detour if George the cabbie knew that the direct route down Keynesian High Street was blocked with roadworks.

[SpinningHugo]

At the end of the season, the table does not lie.

The problem with economics is, there never is an end of the season.

Looser fiscal policy leads to higher growth in the short term. Everyone accepts that.

The question at the beginning of 2013 was whether a looser fiscal policy was necessary.

The likes of S W-L said it was.

They were proven wrong.

Osborne, for the avoidance of doubt, deserves no credit for that. He just got lucky.

[pablopatito]

This reminds me of two other football phenomena that I've never fully understood.

Firstly, if a team is 2-0 down at half-time and goes on to draw 2-2, everyone cheers and goes home happy (and talks about fighting spirit, and never-say-die attitude). But if they are 2-0 up at half-time and go on to draw 2-2 everyone boos. Yet the result is exactly the same.

Secondly, if a team plays rubbish in the first half and the manager makes a couple of substitutions, and they go on to play well and win, everyone hails the manager for his brilliant, match winning, substitutions rather than berating him for picking the wrong team in the first place.

So I guess, as with politics, it's better to start crap and then do well, as everyone will forget the first half and judge you on the second - even if the result is the same.

As I recall, many predicted that this was Osborne's plan in the first place - to engineer a boom just before the election on the basis that no-one remembers what you did at the start of your term. Or, "you're only as good as your last game".

[SimonF]

I don't doubt that George got lucky in some way, but has there been a real world case, as opposed to favourite Economists' pronouncements where austerity was shunned and recession/depression avoided or reduced compared to a similar situation where austerity was tried?

[Zlatan]

@pablopatito

It's the same with individual player performance. Anderson had a good first season at Man United and that kept the critics off his back for years, no matter how mediocre he was and for how long, whereas David De Gea had to put in countless top performances before he could undo the damage done to his reputation by his shaky start.

[Christopher Hodder]

Much like a coin coming up heads eventually, the economy was always going to grow again, the question was "when" not "if". The length of time it took is the deciding factor in whether a policy was successful or not and 3 years of stagnation is not evidence of a successful economic policy.

Of course, it works the other way too. If we have several years of good growth, we can give Gorgeous George the credit then. But that will be after the election, of course.

[Brian P Woods]

I read the FT piece: I was a tad skeptikal.

So I went out and bought 99 more copies. They all 'said' the same thing - "It MUST be true!" Sigh*

[TickyW]

@shinsei67

Pot holes versus roadworks?

The latter damage traffic less and benefit employment and the economy more.

I'd take the Keynesian route any day.

[Ralph Musgrave]

The above “plurality of economists” clearly have no idea what is going on. What has actually happened is that Osborne abandoned his “Plan A”, and adopted Labour’s Plan B. See:

http://mainlymacro.blogspot.co.uk/2013/12/osbornes-plan-b.html

And ironically, Labour haven’t cottoned onto the fact yet.

Moreover the fact that there is an election coming up and now is good time to get a pre-election boom going entirely coincidental (ho, ho).

[Adam]

Zlatan - your point would be an example of confirmation bias. When we make an assessment about something, we give more weight to information received first.

Although in my opinion, the worst irrational thinking in football is continuously analysed throughout the season without taking into account the difficulty of fixtures played. For example, most people make Man City favourites for the title without taking into account that they have to play away at Man Utd, Arsenal, Liverpool, Spurs, Everton, Newcastle in the second half of the season.

[Boffy]

"I don't doubt that George got lucky in some way, but has there been a real world case, as opposed to favourite Economists' pronouncements where austerity was shunned and recession/depression avoided or reduced compared to a similar situation where austerity was tried?"

Yes. In "The Second Slump", Ernest Mandel compares the 1929/33 recession with the 1957/8 recession. In the first 9 months of these two events the statistics were very similar.

1929-32
1957-8
Employment (non-agricultural
- 6.5
-4.2
GNP
-5.5
-4.1
Industrial production
-15.9
-13.1
Volume of Retail Sales
-6.1
-5.1
Orders For Durable Goods
-26.5
-20.1

In 1929, the policy response was austerity and the recession dragged on for 40 months. In 1957, the policy response was fiscal stimulus and the recession was brought to an end within a year.

I would, however, argue that the Keynesian response in 1957 was possible because it took place within the context of a Long Wave Boom (1949-74), whereas it would not have worked in most of Europe in 1929 because it occurred in the context of a Long Wave downturn (1920-49). That is also why Keynesian stimulus could not work in the 1970's, 80's and 90's (Long Wave downturn 1974-99), but today can because they would take place in the context of the current Long Wave Boom (1999 - 2025?)

[Martin Connelly]

It would be good if economists could sort themselves out. The sort of nonsense that Alesina and Ardagna spouted would have lead to them being disciplined in many other professions. Andrew Wakefiled, for instance, reported a Vaccine/autism link which was nonsense and he ended up being found guilty by the General Medical Council of serious professional misconduct. Pity something similar cannot happen to economists who cause harm.

[SimonF]

@Boffy

Thanks for having a go. I suppose no two recessions are the same but that does make some sense.

I'm still unconvinced that after years of Labour's uncontrolled spending that even more spending was the solution. Not because it wouldn't fix a short term problem but because it would have just postponed the inevitable need to cut back Government spending.

[derrida derider]

The case for austerity in the UK was always a minority one within the profession, but it was in fact TWO minorities:

1) Believers in "expansionary austerity" - that is, that austerity would lead to a quick recovery. Among professionals, this school was actually tiny to nonexistent. It was generally a claim mainly made by politicians rather than economists. And the bastards probably were knowingly lying, on the the calculation that the rate of recovery would indeed peak around the next election ("felicity consisteth in prospering, not in being prosperous" - Hobbes).

2) Believers in TINA: There Is No Alternative. That is, the UK faced catastrophic sovereign risk unless it got its debt down, and so that had to be done regardless of the FULLY EXPECTED horrendous shorter run effects. This was a much larger group of economists, and probably included the Treasury professionals. I think their empiric judgement was way off here (For a start, its a lot harder to wind down debt in a squashed economy and so such an economy can be at GREATER risk of capital flight. For a second, have a look at what the bond market was consistently telling you they thought the risk was - ie nonexistent). But it's not totally crazy, just a bad misjudgement that led to a lot of unecessary pain.

Then again, some troublemaking lefties will assert that there were reasons for that misjudgement: that it was not just chance that those Treasury professionals considered any risk to the City as a more urgent problem than risks to employment and wages. You may well say that; I couldn't possibly comment.

[Ralph Musgrave]

Martin Connelly,

I quite agree with your points about Alesina. I’d add Rogoff and Reinhart to the list of economists who have done HUGE damage over the last few years. By “huge damage” I mean far more material damage than was done by the two nuclear weapons used on Hiroshima and Nagasaki.

[Brian P Woods]

@ Boffy: ??? " ... but today can because they would take place in the context of the current Long Wave Boom (1999 - 2025?)."

Methinks the 'boom' - which evaporated in 2008 was mostly, a virtual one (a la Frederick Soddy). But sure the poor man was only a Nuclear Chemist - and a genuine Laureate and all. What would he knew? (sic).

Where is all the (cheapish) energy to come from to fuel all this much hyped growth? The PR stuff may be superb. But you sure as hell do not fool Nature!

[Boffy]

@Simon,

"I'm still unconvinced that after years of Labour's uncontrolled spending that even more spending was the solution. Not because it wouldn't fix a short term problem but because it would have just postponed the inevitable need to cut back Government spending."

What uncontrolled spending. Under Gordon Brown, in the first few years, they ran a surplus! The average deficit to GDP between 1997 to 2007, was about half the ratio of deficit to GDP under Thatcher and Major between 1979 to 1997!

[Boffy]

@Brian.

But the boom did not evaporate in 2008. The global economy continues to grow rapidly. Not only does the world's second largest economy continue to grow at nearly 8% (or more than double in volume terms to what it was growing 10 years ago), but the boom is deepening and widening as witnessed by the fact that near Chinese rates of growth are being witnessed in an increasing number of industrialising economies in sub saharan Africa.

Nor was there anything virtual about the boom from 1999 onwards, as the number of new cities in China, as well as the development of huge quantities of physical commodities, the doubling of global fixed capital formation, the development of massive new industries in technology etc. as well as the rise of new economies in Latin America and Africa etc demonstrate.

As for energy, it doesn't seem a problem in the US where shale oil has turned it once again into one of the world's largest producers, and slashed the cost of natural gas to a quarter of what it was.

[Boffy]

Incidentally on both the continuation of the boom and on the issue of stimulus v austerity look at the actual charts of growth for various economies. A look at 2008 onwards shows that the US, UK and EU which all applied stimulus measures in 2008/9 experienced a typical "V" shaped recovery.

The US, which is the only one to have sort of continued that policy continued to see that "V" shape. The UK, where the Liberal-Tories came to power in 2010 saw that "V" shape cut short even before they introduced austerity, as they cratered confidence by talking down the economy with their ridiculous comments about the UK being in the same position as Greece. The plateuaing of the recovery was marked, and the downturn when they actually started the austerity measures is equally marked.

The EU saw a similar pattern as a result of austerity measures in the periphery having an effect on the whole economy. But, a look at the graphs for the world economy shows that the supposed global recession was no such thing. It was only the North Atlantic economies that went into recession.

[SimonF]

@Boffy

"What uncontrolled spending. Under Gordon Brown, in the first few years, they ran a surplus! The average deficit to GDP between 1997 to 2007, was about half the ratio of deficit to GDP under Thatcher and Major between 1979 to 1997!"

I don't doubt the the Thatcher Major stuff. However I have been listening to UK Confidential recently and it very interesting listening to those who were in Office talking about the economy in the late 70's and early 80's. Anyway that's not what I'm interested in.

Brown did keep to the Tories spending plans and ran a surplus for the period he said he would. Then he started spending and running a deficit 2002/3 if I read the chart Network Borrowing un Labour 1997 to 2010 here http://www.economicshelp.org/blog/5509/economics/government-spending-under-labour/ correctly.

Its what worries me when people talk about Keynesian spending, we don't seem to have saved in the good times.

PS I'm here to be open minded and have my believes challenged, especially on Economics because I never had the chance to study it formally not to have an argument.

[gastro george]

@SimonF

But if you look at the net borrowing in your link, it is only marginally greater in 2007-8 than what he inherited in 1996-7. It was just that spending had returned to normal levels after a few years of Labour austerity.

[Brian P Woods]

@ Boffy: Thanks for the reply. Appreciated. Either we read different stuff or interpret the same stuff through different 'filters'. I would opine that our Western-style economies have effectively 'marked time' in the last 5 years. And as for the guff about that 'gas'. Well its just 'gas' (ie. PR). But you will not read that in the meeja! Think: low prices for hydrocarbon fuels => less exploration and development (being kinda costly, and all). And in a few years time when energy costs are trending higher (and our economies trending lower) our great leaders - together with their sycophantic spokesmodels will exclaim - "But, no one saw this coming!" Indeed!

[Boffy]

@Brian

The western economies are not global capitalism. But, even the western economies like the US, German and many northern European countries have grown. Its the economies like the UK that applied austerity, plus the periphery that had it foisted on them for political reasons by German politicians, that have done badly.

On gas, its not PR that US natural gas prices have fallen by around 75%, or that the US now has more gas and oil than it knows what to do with. But, a look at the effect of oil prices etc. today compared to in the past shows that they are not so important.

Global oil consumption rose from 63 million barrels per day in 1980, to 85 million barrels per day in 2006. That is an increase of 35%. But, between 1980 and 2012, Global GDP increased from $18.8 Trillion to $71.8 Trillion (1990 dollars). That is an increase of 282%! Even allowing for the 6 years difference in periods that means that global GDP rose by around seven times the increase in oil consumption. That is also despite the huge growth in the number of cars in places like China, which is now the biggest car market in the world. The reason that oil consumption has increased by only a fraction of the increase in global economic growth is because huge advances have been made in the efficiency of oil use. That is why in the 1970's a four fold increase in oil prices sparked a global slump, but from the late 90's a ten fold increase in the price of oil has not.

[Boffy]

@Simon,

If you take the figures to 2010 then you get a different picture than if you take the figures to 2007. The figures are obviously skewed after the start of the of the Credit Crunch, because of bailing out the banks.

Incidentally, the reason the deficit to GDP ration was lower in the early years of Blair/Brown compared to Thatcher/Major is not because of austerity under Labour, but because of a higher figure for GDP. Also, a lot of spending under Thatcher was to cover a ballooning welfare budget as she allowed unemployment to rise as a means of weakening workers bargaining power, whereas under Blair it was investment in the infrastructure that had been destroyed in the previous 20 years.

Capital needs a big state. That is why every developed capitalist economy including the US developed sizeable welfare states in the 20th Century. Thatcher's actions were not even in the long term interests of Capital.

[Brian P Woods]

@ Boffy: Thanks again for your reply. Can we call a Time Out on this one?

I just have a very different understanding of our current economic mess - and the many causal (and deeply confounding) factors which brought us to this place. I cannot 'see' into your understandings, but there is one issue that you must (not should) re-visit. The relationship between GDP growths and energy (fossil fuel) consumptions. I do not believe it helpful to either direct folk to specific readings and sources or to expose them to my personal views and biases - it can too easily be perceived as Paternalistic.

However, if your interested (and have the time to spare) to involve yourself in a study of the complex and confounding relationship between economic growth (aka: GDP) and the consumption of fossil fuels - let me know.

Cheers again.

[fake]

I'm coming to the opinion that spending was out of control, public sector wages getting silly, wastefull spending, (Council CEO's on six figure sums, the NHS supercomputer, wars, and all that daily mail gumph).

But that this level of spending wasnt necessarly big if looked at as % GDP.

But the blues wanted to get this spending under control, and used all the Austerity arguments as a way to achieve this.

"Austerity will bring us back to growth", that was just the line to sell to us to do what they wanted to do.

Because spending was out of control (not in a GDP sense), and there was no way they would be able to push through cut's in the good times, so they had to do it now under the cloak and dagger of "austerity".

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