We shoot the breeze about who’ll win the next election or footy match. Virtually none of it helps predict the future. But we’re driven on … as if somehow it will, and myriad decisions are predicated on specific views of the likely future.
Of course, skillful effort can improve economic foresight — if only a little. That’s why Treasury asked Warren Tease, veteran econocrat fresh from a lengthy mid-career in the private sector, and now principal adviser in Treasury, to report on its forecasting.
His report found Treasury’s econometric models were “rigorous, theoretically sound and fit history reasonably well” and suggested some minor improvements. But it was strangely oblivious to the new possibilities of the internet age — the prospect of using real-time data and the slew of new opportunities to crowdsource critique and further improvements.
Treasury was once a leader in open government, being the first treasury globally to release its budget under a Creative Commons licence. It has also released documentation behind several of its models. But here, as in so many other parts of the open government agenda, progress has stalled. Treasury pointedly declined to release its revenue-forecasting models more widely — even on receiving a request from the Parliamentary Budget Office in violation of the OECD principles it had recently participated in drafting.
Except in the rare cases where there are strong policy reasons against it, Treasury and other agencies should release their forecasting models, fully specified and ready to operate. How would we benefit from this? Let’s count the ways:
- The structure and parameterisation of those models would be up for auditing and critique;
- As with open-source production in Linux or on Wikipedia, some critics will develop and improve the models;
- To quote Australia’s 2010 freedom of information legislation, those models are a “national resource” that should be “managed for public purposes”;
- It’s fair (why should publicly funded assets not be available to the public or even its representatives?);
- It’s more efficient. While improving government agencies’ modelling and accountability, releasing the “national resource” of its models would then be available to others for their own forecasting or educational purposes; and
- After ignoring it for years, Australia now wants to join the international Open Government Partnership yet it has the millstone of its predecessor’s unfunding of the Australian Information Commissioner and without much to demonstrate that it’s serious.
Ultimately, as shadow treasurer Chris Bowen has argued, this process should be handed over to an independent body like the Parliamentary Budget Office as already occurs in the UK, which, on this, as in many other areas, has surged ahead of us on governance and innovation in the internet age.
The government’s official forecasters could also help promote our collective interest in better modelling and better economic education by awarding modest prizes for the most accurate modelling, best contributions to the modelling debate and the best contributions to the model. This wouldn’t just improve our forecasts (modestly), it would improve the whole intellectual environment in which they operate, not least by accelerating the rate at which we discover, motivate and make better use of the best talent.
The Tease report was also surprisingly silent about bringing forecasting into the age of big data. Half a paragraph of text and a single-line recommendation supported catching up to other central agencies like the Bank of England who’ve pioneered “nowcasting” — using specific modelling techniques and data to better estimate the starting point for forecasts while forecasters wait for official (often many month’s retrospective) data to be updated.
By contrast, our own Reserve Bank mistimes its deliberations on its cash rate with exquisite precision, holding its board meetings the very day before the national accounts are released. To do so once a year would seem like a misfortune. To do so on every occasion it gets — year in, year out — suggests carelessness of an unusually dogged kind.
Tease made no mention of accessing the increasingly powerful real-time accounting data from large firms and the providers of online accounting like Xero and MYOB, by which we could nowcast much of the economy. It ought to enable the spotting of turning points several months sooner — which Lateral Economics has elsewhere suggested could be worth many billions to the economy in better-timed macro-economic decision-making. Certainly hedge funds are obsessed with accessing such data. How hard have we tried to get hold of some of that data — if necessary, in anonymised form? And how vigorously is the ABS trying to move towards more harvesting of real-time data to supplement and, where appropriate, displace its 20th-century model of surveys?
When he came to power our new Prime Minister told us he’d preside over a government that walked the talk of innovation. There could be no better way, and no better time for the government to show us just what that meant.
Postscript: At the time this article was originally published, the RBA published a review of its own forecasting by Adrian Pagan and David Wilcox. Without commenting on the nature of the forecasting advice, we note the report’s reference to the “case for a greater involvement with the wider economic community”, its reference to the optimally mistimed RBA board meetings and its call to “aggressively explore” the use of real-time big data to improve the accuracy and timeliness of the economic data used.