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.
Frequently Asked Questions about this Article…
Why did the Reserve Bank interest rate cut make headlines and should everyday investors worry?
The article explains that rate cuts grab headlines because they affect borrowing costs for the roughly one in three households with mortgages and reduce interest earnings for savers. Interest-rate moves also influence business and investment decisions across shares, bonds, property and currency markets, so traders and banks react — but everyday investors should remember this is only one piece of the economic picture.
What does a headline like “economy grew 1% in the September quarter” actually mean for my investments?
GDP growth such as the 1% September-quarter figure is a concrete measure of aggregate economic activity and helps policy makers and markets adjust expectations. But the article warns GDP is limited: it’s a lagging, aggregate number that doesn’t tell you about health, education, inequality or resource depletion — all of which can matter for long-term investment outcomes.
Do national accounts and GDP tell me whether people are better off or worse off?
No. The article points out national accounts are largely mute on wellbeing questions like whether people are healthier, happier at work, or whether income went to the poor or the rich. GDP measures output, not the quality of health, education, or the stock of natural and human capital that underpins long-term prosperity.
Why do banks and the media focus so much on economic statistics like interest rates and unemployment?
The article describes a mutual incentive: banks employ economists who profit from and advertise their expertise by appearing in media, and news outlets need concrete, measurable figures to fill air time. Measurable stats are easy to report and react to, so they get outsized coverage compared with more ambiguous wellbeing issues.
Which other indicators should investors watch besides interest rates and GDP?
According to the article, investors should pay attention to measures that capture wellbeing and economic foundations: the unemployment or jobless rate (the article notes it rose to 5.3%), income inequality, job satisfaction, health trends, and changes in human and natural capital. It also highlights sector exposures — for example, retail or home-building stocks are more sensitive to rate moves — and currency reactions to data releases.
What is the Herald-Lateral Economics Wellbeing Index and how could it affect investing perspectives?
The article introduces the proposed Herald-Lateral Wellbeing Index, which would adjust GDP each quarter for changes in natural and human capital, health, income inequality and job satisfaction. The aim is to broaden the debate beyond GDP so investors and policy makers see how trends like rising mental illness, obesity or falling school test scores can subtract from national wellbeing even when income rises.
How can a fixation on one economic measure like GDP obscure the big picture for investors?
The article argues that focusing on single measures leads to missed stories: during the commodities boom national income rose while important measures — such as 15-year-olds' test scores in 2006–07 — fell. Similarly, rising inequality or worsening health can subtract from overall wellbeing even when GDP looks strong, masking risks for long-term investors.
What practical approach should everyday investors take when reacting to economic headlines?
The article suggests being skeptical of headline-grabbing stats and understanding the incentives behind media and bank commentary. Instead of overreacting to a single data point like a rate cut or quarterly GDP, consider a broader set of indicators (health, inequality, human capital, unemployment) and how those trends affect the long-term fundamentals of the companies and sectors you own.
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