Marketplace of ideas

Economics:  "Damn right I'm talking down the economy . . . talking it down from a window ledge before it jumps." - attributed to George W Bush just before he became US president by political satirists Gene Callahan and Stu Morgenstern.

"The economy is not some unfeeling inanimate object that you can just hurl negative pronouncements at. It is a beautiful, living, breathing organism that needs to be encouraged by thinking happy, positive thoughts. When its housing starts looked a little wan or its durable goods orders were drooping, President Clinton would often have Anthony Robbins come around help the economy visualise a better image of itself."

- Callahan and Morgenstern again.

Is it possible to talk down an economy? Is it possible for economists in particular to utter statements that cause economic activity to be lower than it would otherwise be?

The answer in principle is yes. Expectations of what will happen tomorrow play an important role in determining today's spending decisions, and it is not entirely far-fetched to suppose that the utterances of economists might contribute to shaping those expectations.

Indeed, it is hardly worth constructing economic forecasts in the first place if they don't exert this kind of influence. After all, the main purpose of the exercise is to illuminate the future, dispel some of the uncertainty that shrouds it and help firms, households and governments prepare for it.

But the utterances of economists are just one of a great many factors that people take into account when forming their expectations. Others include the statements and actions of economic policymakers, the flow of news stories from the rest of the world, direct personal experience of economic conditions and so on.

Moreover, and more importantly, for the statements made by economists to be given any material weight in the overall scheme of things, one critical condition has to be met: that the statements concerned be credible.

One way of earning the credibility required is to have a good track record, a record of getting it right most of the time.

When it comes to economic forecasts generally, there are not many economists in this category. But in the context of assessing the profession's capacity to talk down the Irish economy at this juncture, it is important to note that the paucity of economists who get it right most of the time is especially marked in relation to the housing market. Hardly a year has passed since the late 1990s when one or more economists haven't concluded that a steep fall in house prices is imminent. In other words, the record of economists in calling the turning point in the housing market has been dismal. In this area, therefore, which has after all been the principal source of the economy's loss of momentum this year, economists don't have much credibility, and the pronouncements on the housing market of even the most bearish of the species are unlikely to have added one whit of downward pressure to the situation. Turning to overall economic activity, my impression is that forecasters have been following rather than leading.

A notable feature of the macro forecasts over the past year or so is that they have consistently leaned towards optimism - hence the succession of downward revisions.

A year ago, the "consensus" among forecasters was that gross national product (GNP) would grow by 5.5 per cent in 2007.

As things appear to have run out of steam more quickly than expected, the forecasts have been cut accordingly.

Now the "consensus" is that GNP will have expanded by 4.5 per cent or less this year.

That does not point to a profession talking down the economy. Au contraire, it suggests an underestimation of the forces for deceleration or indeed an anxiety to avoid the charge of talking things down. Mostly, the claim that somebody is talking the economy down is delivered in accusatory mode, the suggestion being that it is a dishonourable or even an unpatriotic thing to do.

Depending on who is making the claim, it can sound as if it is designed to intimidate. It goes without saying that this is hardly the way to advance rational discussion about the economy's prospects and future challenges.

All informed views have valid claim to a stall in the marketplace of ideas. The way to separate the good from the bad is through reasoned debate, not vaguely threatening charges. Economic forecasts are not just patriotic ballads with numbers. Besides, talking down the economy may sometimes be a positively helpful thing to do, a patriotic duty if you like.

Markets can and do succumb to bouts of irrational exuberance with unwelcome consequences for the broader economy. The Irish housing market of recent years is a good example. House prices and the scale of housebuilding activity had become unsustainably high.

In these circumstances, sober and disinterested analysis, pointing out the implications of overvaluation and imbalance, was an intended antidote to the overdose of animal spirits.

Better to try persuading the guy to step back from the ledge than allow him to jump unhindered.

Jim O'Leary is a senior fellow of the department of economics at NUI Maynooth