Monday, June 13, 2011
At the risk of being drummed out of the economic journalists' union, I suspect he's right. But I'll let him do the talking (he was delivering the Mosman Address at Mosman Art Gallery on Friday night).
Over the past couple of decades the public has been inundated with economic statistics, he says. "The newspapers and magazines are full of economic news, television reporting is saturated with it, there are special radio and television programs devoted to it."
It's true this is a worldwide phenomenon, but it's more pronounced in newspaper coverage in Australia. Foreign visitors often express surprise at how much economic coverage there is in Australian papers, particularly on the front page.
A few years ago the Reserve compared the coverage of central bank monetary policy decisions in three countries: the US, Britain and Australia. It looked at three comparable papers in each country, including The Australian Financial Review, The Australian and The Sydney Morning Herald.
Adding up the number of articles in the three days surrounding two successive monthly monetary policy meetings, it found 35 in the US, 46 in Britain and (wait for it) 131 in Australia. Looking just at articles on the front page, there was one each in the US and Britain, but 14 in Australia.
Why is there so much more economic coverage in Australia than elsewhere? Maybe because there's not much other news to report.
"We are not an international power or trouble spot, we are not engaged in major wars, we do not have racial riots, civil insurrections or sectarian violence. And the private lives of our politicians are not as lurid as British ones (or a recent American president). So instead our newspapers are taken up with recent figures on employment, interest rates, the consumer price index or the budget," Macfarlane says.
[There's an alternative explanation, however. In the US and Britain the link between changes in the official interest rate and changes in mortgage interest rates is quite loose, whereas here it's direct and immediate.]
"With the media competing so strongly against each other, there is inevitably a bias towards sensationalism. While Australia has a few experienced and thoughtful economic commentators who are world class, it also has a multitude of eager beavers who are mainly concerned with tomorrow's headlines," Macfarlane says.
"They try to extract the maximum amount of coverage out of each ephemeral piece of news - monthly or even daily figures are invested with a significance well beyond their actual information content."
Interest rates don't merely rise, they "soar", the exchange rate "dives" or "plunges" and budgets "blow out". The reader is left with the impression of constant action and turmoil. The recurring television image is of people in dealing rooms or on the floors of futures exchanges shouting at each other.
Another feature, he says, is the tendency to concentrate on pessimistic news. It's the nature of all journalism - not just economic - that its practitioners seek to expose a disaster or a conspiracy.
No one ever wins a prize in journalism by pointing out that things are proceeding relatively smoothly and uneventfully, hence the tendency to find bad news and mistakes in policy, and to label every minor glitch as a crisis (the most overworked word in journalism).
"At the margin I believe all this news tends to make us less confident, less secure and less happy than if we had less of it," he says.
But does all this information make us better at doing our jobs or investing our savings? Macfarlane says a broad range of information is better than a narrower one, but more frequent information about a particular thing may stop us seeing the wood for the trees.
More frequent information also exposes us to the "narrative fallacy" - our need to tell a story about why a movement in an economic variable occurred, even if it's just a small daily movement in the exchange rate or the sharemarket. Often the movement is just random noise, but we can't say that.
Macfarlane says several financial advisers have told him that, among their clients, those who spend the most time tracking daily movements in their portfolio do worse on average than those who review their portfolios less frequently.
Research has shown that most people exhibit "loss aversion" - they experience more unhappiness from losing $100 than they gain in happiness from acquiring $100.
So the more often they're made aware of a loss the more unhappy they become.
If the sharemarket rises by 6 per cent a year that, plus dividends, is a reasonable return. But on average the market would fall on about 47 per cent of days and rise on 53 per cent. This suggests a net fall in happiness despite the satisfactory return. Reviewing the market monthly rather than daily would produce a smaller proportion of losses, making us happier.
Behavioural finance research shows that, because we suffer from myopia as well as loss aversion, investors who get the most frequent feedback take the least risk and thus earn the least money.
In listing the false signals given by the rule that two successive quarters of falling real gross domestic product constitute a "technical" recession last Monday, I missed one. No one knew it at the time, but the Bureau of Statistics' latest estimates show the economy contracting by 0.02 per cent in the September quarter of 2000 and then by 0.4 per cent in the December quarter. So, a recession on John Howard and Peter Costello's watch? No, just a stupid rule.