Media macro vs actual macro, city economists vs academic economists…

Simon Wren Lewis introduced this term called media macro. It basically meant financial media taking control over economic matters. Using their propoganda they kept highlighting macro issues which they thought were important. The problem is their understanding of these macro issues is mostly flawed and actually creates further problems. He shows how British media’s obsession over austerity in early part of the crisis got the economy into tailspin laters.

In a longish essay Prof Lewis, explains the issues further:

‘Mediamacro’ is the term I use to describe macroeconomics as it is portrayed in the majority of the media. Mediamacro has a number of general features. It puts much more emphasis than conventional macroeconomics does on the financial markets, and on the views of participants in those markets. It prefers simple stories to more complex analysis. As part of this, it is fond of analogies between governments and individuals, even when those analogies are generally seen to be false by macroeconomists. So after the 2010 election (and to some extent before it) mediamacro had bought with barely a murmur the view that reducing the government deficit was the top priority. It even bought a second story, which was that the previous Labour government had played a large part in creating the deficit problem in the first place. Like all good myths this was based on a half-truth: before the recession Gordon Brown had been a little less prudent than he should have been: he had been too optimistic about tax receipts, and followed a fiscal rule that allowed his progress in reducing debt in the early years of the Labour government to be reversed in later years. But as the chart shows, the impact of this on the deficit was dwarfed by the influence of the recession, and the recession was the result of a global financial crisis. Despite this, mediamacro allowed the myth of Labour profligacy to go unchallenged.

This was the climate that allowed Osborne to get away with saying in 2012 that he was sticking to his original austerity plan. And it was the climate that let him get away, in 2013, with an even sillier claim. In the UK, 2013 was the year a moderate but sustained recovery finally began. The chancellor announced that this showed his plan was working, and that his critics were wrong. This would have been an extraordinary enough claim even if he had kept to Plan A. A Keynesian analysis of austerity would have predicted a delayed recovery followed by growth, which is what we saw; if positive growth is good even if it has been preceded by stagnation, why not just close down part of the economy for a few years so you can hype the growth that will occur when it starts up again? It was an even more extraordinary claim because the plan had been changed: austerity had largely halted, which gave more room for a recovery. Once again mediamacro largely allowed these claims to go unchallenged; even the Financial Times chimed in with a leader that said Osborne had won the political argument on austerity.

Any other govt would have been thrashed for the costs of delayed recovery. But as long as the macro views of the polity matches that of the media, things are just fine:

….It will be some time before economists settle on a number for the total cost of the austerity mistake, but a conservative estimate would be that, in total, resources worth around 5 per cent of GDP will have been lost for ever by delaying the recovery. That’s about £100 billion, or £1500 for each adult and child in the country.

If any other government department had wasted that amount, there would be a huge outcry from the media. Yet when it comes to macroeconomics, the media seems to play by different rules. It continues to misrepresent economic ideas even though it has access to academic expertise. Why is this? It’s true that economists will always disagree, and there are some academic economists who will faithfully stick to a party political line. But there can be no doubt that at key points a clear majority of academic macroeconomists would dissent from mediamacro. For example, less than 20 per cent of academic economists surveyed by the Financial Times thought that the recovery of 2013 vindicated austerity, yet the paper’s leader took the line that it had.

Here media macro’s linkages to city economists becomes a crucial link:

Part of the explanation, I think, is that we have a particular problem with macroeconomics, which is the influence of economists working in the City. There are some wise and experienced City economists, but there are also many with limited expertise and sometimes fanciful views. Their main job is to keep their firm’s clients happy, and perhaps to help traders improve their predictions of what might happen in the markets in the next few days. Their views tend to reflect the economic arguments of those on the right: regulation is bad, top rates of tax should be low, the state is too large, and budget deficits are a serious and immediate concern. And part of their job is publicity, so they are readily available when the media needs a reaction or a quick interview. There is obvious self-interest here: the more market reaction is thought to be important, the more the media will want to talk to City economists.

Of course it is also the case that large sections of the print media have a political agenda. Unfortunately the remaining part, too, often seeks expertise among City economists who have a set of views and interests that do not reflect the profession as a whole. This can lead to a disconnect between macroeconomics as portrayed in the media and the macroeconomics taught in universities. In the case of UK austerity, it has allowed the media to portray the reduction of the government’s budget deficit as the overriding macroeconomic priority, when in reality that policy has done and may continue to do considerable harm.

This is really interesting and explains how media has controlled much of economic debate. This is not just a UK thing but other countries including India as well. All one needs is policy spinners who can somehow convince the media that all they are doing is great work and media takes control over the rest. If there is any policy which falls within the space, it is all given thumbs up and rest are just thrashed in papers. Alternative views are barely encouraged.

What is a bigger problem is media’s understanding of economic issues. Some of them know the stuff they are writing whereas most others are plain clueless. This the blogger can say with some experience as well. They usually make complex issues simple and simple issues complex leading to problems on both ends.

3 Responses to “Media macro vs actual macro, city economists vs academic economists…”

  1. pranjali Says:

    Hello Sir, I have been following your blog from quite a time now. I really like your blog. It generates interest in economics. Could you please take out time and solve my querry. I have this doubt from long time that does buying Indegineous products can actually help to boost country’s GDP? Why people are asked to buy Indian products? Does this really help in GDP?

    Looking forward for your reply.

    Thank you

    Pranjali Hardikar

    • Amol Agrawal Says:

      Thanks Pranjali for the kind comments. It means a lot for a blogger to get encouraging comments from its regular visitors. Keeps the tempo for blogging going.

      On your question, it is like this. Say you are a producer from a country A and are the only producer. Then obviously people buy your products and GDP grows as well. Then other producers enter and compete. Again GDP grows. Now someone enters the market from country B. Call both A and B. Assume B has a superior product. People prefer B to A and GDP grows again due to same consumption. Now how does A sell its product? Either by improving its product which could take time and A could get wiped out. Or simply it could lobby with govt to push the indigenous agenda going and tell people to buy indigenous products for growth. So, What actually matters is the consumer choices and whoever has a better product should win.

      Though reality is more complex. What could happen is that B was superior due to similar govt support in its country especially in initial years. There could have been similar push for indigenous demand in country B or some subsidies as well. This then makes the game unfair.

      Ideally, one would like to be in first situation but reality takes us to situation B. So it is not very easy rejecting the case of call of indigenous demand. It then becomes case by case approach where one tries to figure competition in each product etc.

  2. Clora Wedin Says:

    Thank you for that article

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