Fixation on rates just obscures big picture
Unless you are living under a rock, you've probably heard that the Reserve Bank cut its interest rate this week. Perhaps you watched a live television cross from outside the Reserve Bank's Martin Place headquarters as the decision was announced at 2.30pm. Perhaps you tuned in for a moment-by-moment analysis by some flashy looking economist for one of the major banks.
Unless you are living under a rock, you've probably heard that the Reserve Bank cut its interest rate this week. Perhaps you watched a live television cross from outside the Reserve Bank's Martin Place headquarters as the decision was announced at 2.30pm. Perhaps you tuned in for a moment-by-moment analysis by some flashy looking economist for one of the major banks. Unless you are living under a rock, you've probably heard that the Reserve Bank cut its interest rate this week. Perhaps you watched a live television cross from outside the Reserve Bank's Martin Place headquarters as the decision was announced at 2.30pm. Perhaps you tuned in for a moment-by-moment analysis by some flashy looking economist for one of the major banks.Despite the fact that only one in three households has a mortgage, we in the media are obsessed with interest rates. Don't get me wrong, I make a good living out of it. And interest rate settings are important because they determine a wide range of business and investment decisions and hence the future path of the economy. And for the one in three families with mortgages, interest rates do matter, as they do for everyone with money in a bank savings account who will watch their interest earnings dwindle.But interest rates aren't the only economic feeding frenzy for the media. National account figures, also released this week, also attract a lot of coverage. And so non-rock-dwellers will also probably know the value of our economic output grew quite strongly in the September quarter, up 1 per cent. This is important knowledge for economic policy makers who can match it up against their own forecasts for how the economy should be tracking and adjust their expectations accordingly.But how much value can the average Australian derive from knowing the precise change in the value of aggregate economic activity in the three-month period from July to September? I don't know if you noticed, but it's December already.Did we get sicker? Did we get smarter? Were we happy with our jobs? Did the income go to the poor or the rich? How much of our non-renewable natural resources did we use up to get that income? The national accounts are mute on these interesting topics.To understand why economic reports receive such media attention, and why other more interesting questions go frequently unanswered, it pays to understand the unique incentive structure around the release of economic data.The simple truth is that there are people who make money out of knowing such news. Share traders decide whether to buy or sell stocks in particular companies depending on their exposure to interest rate movements, for instance retail or home building stocks. Foreign currency traders also make decisions on the back of new data releases, depending on whether they think the Australian dollar will rise or fall after it.All banks and financial institutions employ a team of economists to advise their clients and internal trading desks on the implications of economic news on various investments, including shares, currencies, bonds and property.It just so turns out that a good way for banks to advertise their expertise to potential clients is to have their economists appear on television, radio and quoted in newspapers.And it just so happens that newspapers, television and radio stations need such ''talent'' to fill air time and provide commentary on recent events.And so there is a mutually beneficial industry built around the reporting of economic news. Private sector economists get to advertise their wares to a wide audience, and media companies get free content. Win win. Except for you, dear reader, who couldn't give a stuff.Economic statistics also get a higher degree of reporting because they are concrete and measurable. As humans we deal with ambiguity all the time. Is it going to rain? What do people think of me? Will I be happier if I go out tonight or stay in? There are so many known unknowns that it is nice when someone can tell us something concrete. The economy grew 1 per cent. The jobless rate rose to 5.3 per cent. It's deliciously accurate. And so what we can measure gets reported. And what is reported gets responded to by politicians. What is amorphous or difficult to measure is all too easily forgotten.Unfortunately, all the good stuff in life is hard to measure. What value should we put on our natural resources? Is the quality of our education system improving? How healthy are we? These are not questions that are easy to answer, nor are they easily explained in a 30-second news grab.The Herald-Lateral Economics Wellbeing Index is designed to get around this problem. Every quarter, shortly after gross domestic product figures are released, we'll do a ''wellbeing adjustment'' to them to make them take account of increases or decreases in the value of our total stock of natural and human capital, and for changes in our health, income inequality and job satisfaction. The point is to stir debate about these important issues.It won't be perfect. But if we had had such an index over the past five years, it would have shown how rising rates of mental illness and rising levels of obesity have been a steady and growing negative for our wellbeing. It would have shown that rising inequality has been subtracting from wellbeing because a dollar in the hands of a poor person means more than in the pocket of a rich person.It would have reminded us that the most valuable asset we own as a nation is the knowledge and know-how of our people and that this was falling in 2006 and 2007, even as national income took flight with the commodities boom, due to declining test scores by our 15-year-olds.We have missed some of the biggest economic news stories of the past half decade because of our fixation on one measure of economic wellbeing. Hopefully we can change that.