Written by 2:51 pm abroaden weekly insights

Economists vs the Economy: the difference you should know.

economists vs economy

Hey there! Welcome to issue #26 of WTF is going on with the economy?! which explains the difference between economists and the economy. – It’s crazy to believe that we started this thing six months ago. Thank you all for reading and your support! (Photo by Hermes Rivera on Unsplash)

What we’re watching: 

Futures. Back in September, we wrote about futures markets. In brief, futures tell us what investors think the economy or an asset will be worth at a later date. When we published, investors believed that things were heading in the right direction, with the pandemic under control and recovery in sight. Today? Not so much. Futures in Europe and the US are down for the rest of the year, signaling pessimism. Let’s hope they’re wrong.  

Futures prices in Europe on October 27th from Bloomberg. The future date is the date investors bet on. Net change is the decrease from the day before.

Messages from Frankfurt. On Thursday, the European Central Bank’s leadership is meeting to discuss the eurozone economic outlook and interest rates. While rates are important, most people are anticipating an announcement on a new monetary stimulus. Here, the central bank would start buying government and corporate bonds (loans), injecting cash into the global economy. While investors would welcome this move, ECB president Christine Lagarde will undoubtedly stress that governments must start spending money to support their economies as well (what we call fiscal stimulus).  

Economics vs. the Economy – The big difference everyone should know.

As this pandemic enters an ugly phase, we’re desperate for easy answers and a quick way out. Our emotions are in overdrive. We’re all f&%king burned out.  

Unfortunately, our collective emotional state is causing us to lose sight of the bigger picture. 

Yet, the desperation we feel right now is generating a popular opinion that only a narrow sliver of the scientific community can deliver our redemption.  

When an economist weighs in, all too often, people assume that this person is talking about the economy, prioritizing money over lives. That thinking couldn’t be farther than the truth of their intentions. 

Economists can play a vital role in ending this pandemic because economics isn’t exclusively about the economy. 

Instead, this messy science focuses on how we interact with the world, going far beyond monetary affairs.  

Here are some examples of how economists think. 

  • Valuation. Economists constantly look at the cost of one action over another. Instead of using money to value these actions, they look at alternatives or “opportunities.”
    Sometimes, one action is less harmful than the alternatives. For example, does it make sense to send children to school during this pandemic where they could potentially spread infection or leave them at home where they appear to be at less risk* but at the cost of lower quality of education? Other choices weigh decisions like adding roads vs. more public transport and its impact on the environment. While money might be a convenient way to measure value, it is but one tool of many for economists. 

  • Decisions: If we do x action, what will be the result? What will be the unintended consequences? What will it cost in terms of the alternatives? 

  • Behavior: reconciling irrationality and bridging the gap between what makes sense at a global level contradicts our needs and behaviors individually. We know that, on a global level, people should spend money to get the economy moving. However, we also know that, in times of uncertainty, saving money gives us protection. How do you convince people to reconcile this contradiction?  

These topics touch broad points of our lives well beyond the economy, from government policy to psychology, the environment, and more. It just so happens that the economy is what we live in, which is why some people incorrectly synonymize Economists with the economy.  

Why we should pay attention to the economists

Economists are here to support epidemiologists, virologists, and policymakers find equitable solutions that maximize fighting the pandemic while minimizing disruption to the people (although many policymakers, aka politicians, seem to prioritize their political career overacting in the public good, which goes a long way to explain why certain regions of the world are currently struggling with outbreaks).  

However, rejecting an economist’s advice just because he isn’t trained in virology or suggests advice that appears contradictory on the surface can quickly make matters worse, not better. 

We see this phenomenon at work with many amateur investors who decide based on “gut instinct” without critically examining the bigger picture.

As an investment advisor will tell you, investing this way is a surefire losing strategy. Instead, taking a data-driven, holistic approach is the way successful investors operate. Economists know this behavior well, along with so many others.

The economy does need support, and there will no doubt be work done by economists to rebuild it. For now, though, they’re the secret weapon we all need to beat Covid. 

*Infections overwhelming happen in homes (79% of traced cases) according to this peer-reviewed study. Many policymakers are doing a lousy job conveying this fact to the public, sending the message that outdoors is a major risk when it is one of the safer places to be. It is no surprise that places that promote such policy are losing control of the pandemic right now by unwittingly pushing people indoors to socialize.

As an economist will tell you, this signaling nudges people indoors, often in private settings, leading to unintended, negative consequences. If you need to meet someone socially, please do so outside and at a safe distance.  

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