The pundit rating: how good are they?: City economists think they are masters of the media universe, but Richard Thomson wonders whether we should listen to them
Sunday 11 October 1992
Their presence in the media, explaining and making sense of it all, gives them an instant appearance of authority. But who are they, and do they know what they are talking about? Should we, in short, pay any attention to them?
If money were anything to go by, we should. Most leading City economists earn well over pounds 100,000, with many in the pounds 200,000 to pounds 400,000 bracket. Gavyn Davies, a partner at the US securities house Goldman Sachs and one of the most frequently quoted top analysts, is reputed to earn about pounds 1m a year.
Despite the famous jibe by Denis Healey when he was Chancellor in the 1970s - later echoed by Nigel Lawson - that the economists were mere 'teenage scribblers', most are in their late thirties or early forties.
They are paid to forecast and interpret the economy for their City employers and their clients, the huge investment and pension funds. They are used to making snap judgements on the fast-moving events of the financial markets. 'A lot of what we say is right off the top of our heads - but that is how the markets react too,' says Ruth Lea, economist at Mitsubishi Bank.
This makes them ideal television commentators, ready with a slick sound-bite in plain English rather than in the incomprehensible jargon too often used by academic economists in universities and business schools.
They also love the publicity, and so do their employers, who see it as free advertising for themselves. On Wall Street this has reached an extreme. Some analysts are required under their contracts to engineer a certain number of media appearances each year to get their employer's name up in lights. It has not yet come to that in Britain, although, according to Ruth Lea, 'you have to be something of a thespian in this job'.
Some experts think things have already gone too far. 'Nowadays the job of many of these people is 60 per cent public relations,' said Professor Gordon Pepper of the City University, who virtually invented the role of the City economist more than 20 years ago. 'It's a typical example of something taken to excess.'
Moreover, although these commentators sound authoritative, they are often horribly wrong. The only economists who have been more wrong are those at the Treasury, whose record of failure in predicting the economy accurately over the past few years is quite remarkable.
'One reason people trust us is that they think we give an honest, independent opinion in an environment where the Treasury is putting out a lot of propaganda,' says Keith Skeoch, chief economist at stockbrokers James Capel. But the independence is somewhat illusory.
The reason, as Professor Pepper put it, is that 'these economists are all very inbred. They all say the same things and they are all wrong'.
The economists have often studied with each other in the same universities. Some go into government, some into the City, some do both.
As our line-up of six of the most prominent analysts shows, a remarkable number of City economists have worked at the Treasury or in government think-tanks before landing up at banks or stockbrokers. 'Many of us left public service to earn more money,' says Giles Keating, chief economist at Credit Suisse First Boston.
They not only share the same thinking as the Government, they share similar methods of forecasting. For example, they use the same economic 'models' - computer programs which process economic data to produce forecasts. The models at the Treasury and the London Business School were even constructed by the same man: Sir Terry Burns, who is now permanent secretary to the Treasury. This means the 'independent' analysts end up with much the same forecasts as the Government.
All too often, therefore, when the Treasury gets its forecasts wrong, the City gets it wrong too. Almost all City economists failed to see how bad the recession was going to be in 1990, just as the Government did. And many of them erroneously believed that recovery would be on the way this year, just as the Treasury did.
Very few have shown the consistent and profound pessimism that forecasting this recession has actually required. Professor Wynne Godley at Cambridge University is one of the few mavericks who did.
Most pundits, however, stick with the crowd. 'They go with the herd,' said one former analyst. 'You get less blame if you are wrong when everyone else is than if you are wrong on your own.'
Oxford, dealer at Citibank, stockbroker at Capel Cure Myers. Age 40.
Record Correctly forecast the overheating of 1988-89 boom and predicted the sharp rise in interest rates. Slow to see the recession coming in 1990, but by 1991 avoided the mistake of forecasting recovery before the last election. Was in favour of sterling going in to the ERM two years ago and in favour of sterling coming out again three weeks ago.
Verdict Somewhat erratic record but less inaccurate than many other economists.
Phillips & Drew
Exeter and Cardiff Universities, Department of Trade 1973-81, Central Policy Review Staff 1881-83. Age 41.
Record Slow to spot the depth of the recession in 1989 and 1990. However, he became more accurate than most in foreasting low rates of economic growth over the last two years. Correctly foresaw there would be no recovery at this stage. Opposed ERM entry.
Verdict Slow starter, but relatively accurate for the past two years. Good at spotting the effects of Government policy.
Sussex and Warwick Universities, Government Economic Service. Age 36.
Record Successfully forecast the coming recession in 1989 ahead of most of the City. Accurately predicted a fall in economic output for 1990. Also accurate on inflation in 1991 and 1992. Misjudged recovery this year, however, by predicting a bounce in consumer spending and strong economic growth. Verdict Good track record, with tendency to be rashly optimistic. Perhaps excessively devoted to ERM.
York and Bristol Universities, Treasury, Civil Service College, Treasury, Central Statistical Office, Department of Trade and Industry. Age 45.
Record More pessimistic than most of the City over the depth of the recession in 1989 and 1990. Misjudged length of recession and initially expected an upturn in 1992. Then forecast flat economic growth, also over- optimistic.
Verdict In general not gloomy enough, but this newcomer lacks a real track record.
Cambridge and Oxford, Downing Street Policy Unit 1974-79, Phillips & Drew, Simon & Coates. Age 41.
Record Accurate about the first phases of recession by being more pessimistic than the Treasury and most of the City in 1990. Completely misjudged recovery by claiming it had already begun last year. His 1991 forecasts, therefore, were largely wrong; corrected his views in mid-1992. Strong ERM supporter.
Verdict Tendency to get things impressively right and at times impressively wrong.
Credit Suisse First Boston
Oxford, CBI economist, research at LSE, wrote textbook on economic forecasting.
Age 37. Record Forecast onset of the recession in 1989, but failed to predict its current severity. Was consistently optimistic about prospects for recovery which never happened. He even predicted 'green shoots' early in 1991.
Became more pessimistic only this year.
Verdict Over-optimistic tendencies. Something of a maverick.
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