Home > Uncategorized > Money matters. Explaining the role of households in the 2008/2009 downturn

Money matters. Explaining the role of households in the 2008/2009 downturn

The savings ratio of British households according to two different estimates of savings, UK

Savings

When we, as the ONS (Office for National Statistics) recently did,  exclude all kinds of non-monetary imputations from the data on household income and household saving the resulting data show that the Great Financial Crisis caused a much larger upturn in household saving (and subsequently: a much larger decline in expenditure) than indicated by the national accounts data. Which means that the consequences of household behaviour on aggrevating the crisis were much larger and immoderate than previously thought.Why didn’t we see this? What troubled our perception? Why didn’t we understand that household income had to be sustained instead of cut, to stem the crisis?

Economists measure the macro economy (and much else) with the national accounts. The construction of these accounts requires, unavoidably, that a lot of the data have to be tweaked and twisted. Also, some imputations are made. The most important one is ‘imputed rent of owner occupied houses’: the statisticians assume that owner/occupiers receive an income equal to the market rent of their house, to enable a consistent treatment of rented and owned houses. Another imputation, which I’m not going to explain, is FISIM (Diane Coyle is not happy with this particular imputation, which involves banks, I agree with her). A problem with such imputations is that they lead to a difference between the monetary income households observe and the national accounts concept of income. As the British ONS states (emphasis added):

The measure of RHDI (real household disposable income) published within the United Kingdom Economic Accounts (UKEA) contains elements which, despite being required for compiling a sequence of national accounts, are not directly observed by households. For example, imputed rentals represent the value of housing services that owner occupiers derive from their homes. This is the amount that they would have to pay in rent to achieve the same consumption of housing services. Whilst this concept is important when measuring economic output, it is not expenditure directly observed by home owners. … We therefore consider ‘”cash RHDI”. This measure removes imputed rental and other imputed components resulting in a measure of RHDI which is a closer representation of disposable income as measured by social surveys

This clearly matters. The cosy ‘Rational Expectations’ idea that households and people have perceptions consistent with the model developed by the economists is clearly not true. We should take heed of this when trying to understand economic statistics and try to explain and map household behaviour with variables which come as close to the perception of households themselves as possible.

  1. Tom Welsh
    April 18, 2016 at 12:40 pm

    “The cosy ‘Rational Expectations’ idea that households and people have perceptions consistent with the model developed by the economists is clearly not true”.

    It would make more sense to say that ‘the model developed by the economists is inconsistent with people’s perceptions’ (and with reality).

    “There are no efficient markets, no rational utility maximization, no equilibrium, no negative feedback, no perfect competition and no perfect information – in short the mainstream model for the functioning of markets bears no resemblance to reality. Prices do not reflect the fundamentals, but the collective state of confidence of market participants engaging in subconscious herding behaviour”.
    – Nicole Foss, “Gold – Follow the Yellow Brick Road?”, http://www.theautomaticearth.com/2015/09/gold-follow-the-yellow-brick-road/

  2. April 18, 2016 at 7:48 pm

    At bottom the point is that none of the “models” of economic actions held to dearly by economists would be recognizable to “ordinary” folks as something useful in their lives and if these folks actually took the time to consider these models many would find them strange, out of touch, and just bizarre in describing the economics of their daily lives. So tell me again, why do economists still have jobs?

  3. shivz
    April 21, 2016 at 2:56 pm

    You write that “The most important one is ‘imputed rent of owner occupied houses’: the statisticians assume…”.

    I would have rather italicized the ‘statisticians’, because thereby you imply that if there is some discrepancy or mistake, it’s theirs, not ours…
    Don’t you assume as well “that owner/occupiers receive an income equal to the market rent of their house, to enable a consistent treatment of rented and owned houses”?

    Fact is that this axiom is theoretically acceptable by the whole academic world. If this is a theoretical mistake, which I think it is, then, it originates in the assumption that purchasing a home for own use is Investment, like say, investing in plant and machinery (for the purpose of, ultimately, producing more consumer goods or services – that is, apart from making profit).
    After all, price differentials notwithstanding, purchasing a home for own use is not more an investment than purchasing a kitchen knife for producing the service of meals preparation, let alone a car for producing the service of transportation (why not imputing its rental value as well?).
    The owner-occupier imputation, like much more profound GDP theoretical perceptions, is not an example of Theory vs. Reality, but of wrong theory.

  4. charlie
    April 21, 2016 at 5:35 pm

    As a retired statistician (biological/forestry/ecology) I resent the implications that it is statisticians fault economists who apply statistics often do not understand nor interpret statistics in any scientific/rational manner. While a few economists recognize the ecological aspects of what would be a true macro economics, they are under represented here.

  5. April 22, 2016 at 11:34 pm

    Charlie: On that theme, you may enjoy this dedication of Geoffrey Gardiner’s – The Evolution of Creditary Structures and Controls – Palgrave Macmillan (2006).

    This time I should like to commemorate a single individual, one of the most important scientists of the 20th century, Professor Sir Frank Engledow CMG FRS (1890–1985),
    onetime Drapers Professor of Agriculture in the University of Cambridge. Sir Frank’s name is known now to few, yet in the years 1912–14, he improved the yield of wheat so much that the present population of the world can more than survive. He also masterminded the food policy of Britain from 1940. For that he made use of the research into nutrition done by two other great Cambridge scientists, Professor Robert McCance and Dr. Elsie Widdowson. It is now known that as a result of their decisions the British nation has never been fitter than it was during the Second World War. The significance of Sir Frank Engledow for economists is that the sophisticated statistical techniques created by Professor Ronald Aylmer Fisher for him to use in plant breeding are the ones which econometricians now abuse so freely. I quote Sir Frank: ‘Economists use multi-linear regressions every parameter in which is an assumption.’ The written word cannot convey the passion and contempt with which those words were spoken.

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