Damien Grant: Few certainties in the world of economics

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The future is uncertain. Plan as best you can knowing that. Photo / Thinkstock
The future is uncertain. Plan as best you can knowing that. Photo / Thinkstock

Should you fix your mortgage? This is an important question and if I knew the answer I would tell you. Sadly, I have no idea, so let me tell you a story instead about Nassim Taleb and his turkey.

Each day the farmer feeds the turkey. Life seems predictable and the farmer seems friendly. Until, well, one day the farmer wields the axe and the turkey is literally and figuratively stuffed. It is called the induction fallacy and Taleb writes about it in his book The Black Swan.

Reading the business press in the past two weeks, one thing is clear: economists who write about the future movement of interest rates have been blinded by the induction fallacy. They confidently assure us of a booming economy in the years to come and the inevitability that the Reserve Bank will raise interest rates in response.

Like the turkey, economists look at what has happened and suffer from a delusion that this gives them an insight into the future.

It doesn't.

Thankfully, we do not need to rely on newspaper economists. Treasury employs brilliant analytical minds and produces an annual forecast at the end of each year. Here is its take on the economy: "The New Zealand economy is expected to grow solidly ... forecast ... GDP growth of 2 per cent to 3 per cent per annum over the next five years."

Sounds a lot like the rock-star refrain we are being subjected to, but that was what Treasury said in December 2008, three months after Lehman Brothers had collapsed. To be fair, Treasury says virtually the same thing every year and most years it is right.

This is Treasury's view last December: "The economic expansion is becoming increasingly embedded ... real GDP estimated to be growing at around a 3 per cent annualised pace."

Here is what we do know: in the past, our economy has grown on average seven years out of eight, when we are hit with a recession.

Recessions occur randomly and their causes, obvious in hindsight, always catch economists by surprise.

None of this is helpful, of course, if you want to know if you should fix your mortgage. I apologise for that. Bold, confident predictions make for great copy but it is a lousy basis on which to fix your family's economic future.

The future is uncertain. Plan as best you can knowing that.

- Herald on Sunday

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